Co-written by:
- Jason D Smolen, JD – Founding Principal, SmolenPlevy
- Ryan Bartholomew, JD, LLM – Principal & Counselor, GW & Wade
- Sherman Moore – Vice President, Client Development, GW & Wade
One of the most discussed trust and estate tools worth considering in 2021 is the Spousal Limited Access Trusts (SLAT). A properly drafted SLAT can give you the ability to accelerate gift and estate planning while providing your spouse with the flexibility to use the assets if you are concerned about giving away “too much too soon.” This might be a powerful tool if you think future estate tax rules will be less generous than today’s exemption amounts and tax rates.
What is a Spousal Limited Access Trust (SLAT)?
So, what is a SLAT? It is a trust that one spouse, whom we will call the “Grantor,” creates for the benefit of the other spouse, the “Beneficiary.” The trust must be irrevocable, meaning the terms and beneficiaries may not be modified and everything the Grantor puts in this trust is deemed an irrevocable gift to the beneficiaries, out of the grasp of the Grantor. An irrevocable trust is not unusual, but what makes a SLAT a SLAT is that the primary beneficiary is the Grantor’s spouse. If the couple remains married during the term of the trust, the Grantor is likely to indirectly benefit from distributions made to the Beneficiary (though we note that there are some limitations on how the Beneficiary may use trust proceeds).
How asset transfers work without a SLAT
Absent a SLAT, spouses are free to transfer assets back and forth to each other without gift taxation. The gifts do not remove the assets from their respective estates; rather, the assets are simply shifted from one column to another. When the second spouse dies, those assets will be included in their estates for estate tax purposes. This is important to remember since the current tax exemption for gifts and estates (i.e., the amount that will not be taxed) is currently $11.70 million. There are proposals to reduce that amount dramatically.
How asset transfers work with a SLAT
If the Grantor transfers to the Beneficiary an amount between $1 million and $11.70 million via a SLAT and applies the gift and estate tax credit to the transfer, the money (or other asset) is now out of the Grantor’s estate. Since the gift is in a properly drafted SLAT, the money is also excluded from the estate of the Beneficiary, meaning that the gifted assets are no longer part of the Grantor’s estate and never were part of the Beneficiary’s estate. In this case, no estate tax will be charged, even if the statutory gift exemption is later reduced. Any growth on those assets is also out of the purview of estate and gift taxation.
As an example, Grantor gives $11.7 million to a SLAT for the benefit of their spouse. Beneficiary has use of the trust assets to use as needed, including for minor children, and Grantor indirectly benefits if the Grantor is still married to the beneficiary. If the current exemption is reduced to $5 million, then you protected $6.7 million from estate taxation at 40% or more. This would amount to a savings of at least $2.68 million.
By using a SLAT, you may be able to take advantage of current law and hedge against future reductions in the estate and gift tax exemption. However, as noted above, there are some limits on how the Beneficiary may use trust proceeds and the Grantor should not give to a SLAT assets that would impoverish the Grantor. Further, should the Beneficiary die before the Grantor or divorce the Grantor, the money does not revert back to the Grantor.
When to speak with an attorney
If you wish to learn more or explore whether a SLAT is right for your particular circumstances, please contact us:
| Ryan Bartholomew, Principal & Counselor, GW & Wade, LLC |
Jason D Smolen, Founding Principal, SmolenPlevy |
| 571-325-5888 | 703.790.1900 |
| rbartholomew@gwwade.com | jdsmolen@smolenplevy.com |
| www.gwwade.com | www.smolenplevy.com |
