17 June 2022
Harris Beach
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Spousal Lifetime Access Trusts, or “SLATs,” may be the
ideal vehicle for clients interested in pursuing wealth-transfer
tax planning.
A SLAT is an irrevocable trust created by one spouse for the
primary benefit of the other spouse and, to the extent desired, the
descendants of either or both spouses. The donor-spouse makes a
completed gift to the SLAT but maintains continued access to the
transferred assets indirectly through the beneficiary-spouse’s
beneficial interest in the SLAT. The powers retained by the
donor-spouse and the beneficial interest of the beneficiary-spouse
are tailored so that the assets of the SLAT are not included in
either spouse’s estate for estate tax purposes.
But before deciding whether SLATs may be the right fit, it’s
important to review certain fundamentals of the wealth transfer tax
system.
Background
The federal wealth transfer tax system consists of three
different taxes: 1) estate tax; 2) gift tax; and 3)
generation-skipping transfer tax. The centerpiece of the federal
wealth transfer tax system is the “basic exclusion
amount” (commonly referred to as the “exemption”)
which exempts assets up to a certain value from the imposition of
gift or estate tax.
Taxable gifts made during an individual’s lifetime use up a
donor’s the basic exclusion amount. Any basic exclusion amount
remaining upon the individual’s death is converted into a
credit and applied against the estate tax imposed on the
decedent’s taxable estate. To the extent any amount of the
applicable credit remains unused after reducing the federal estate
tax to zero, such amount is converted back to the basic exclusion
amount and is portable and can be “acquired” by the
surviving spouse for the surviving spouse’s use during lifetime
or at death.
Making substantial gifts now may be beneficial from a wealth
transfer tax planning perspective especially considering current
federal tax law which provides each individual with $12,060,000 of
basic exclusion amount in 2022. However, the basic exclusion amount
will “sunset” back to its 2017 level (approximately
$6,000,000) beginning January 1, 2026. In other words, about
$6,000,000 of tax exemption will be lost if unused prior to 2026!
SLATs are a way to use the basic exclusion amount now without the
donor-spouse relinquishing indirect access to the assets
contributed to the SLAT. Many donors may be understandably
reluctant to make large gifts directly to a spouse, children, and
grandchildren. Outright transfers result in the immediate
relinquishment of control by a donor to the recipient. Once
controlled by the recipient, the assets are subject to the spending
habits and lifestyle choices of the recipient and the assets may be
accessible to the recipient’s creditors including a spouse in
the context of divorce.
Advantages of SLATs
- Transferring assets to a trust, specifically a SLAT, not only
allows the donor to dictate the terms governing the transferred
assets, it also allows the donor to protect the assets from the
potential creditors of the beneficiaries and from the beneficiaries
themselves. Uniquely, a SLAT provides continued access to the
transferred assets to the donor’s spouse such that assets
remain within the reach of the marital unit and can be accessed if
needed in the future. - The transfer to a SLAT is a taxable gift that uses the
donor-spouse’s basic exclusion amount and removes the assets
(and the appreciation on the assets) from the federal taxable
estate of the donor-spouse and, provided the transfer occurs more
than three years prior to death, from the donor-spouse’s New
York state gross estate. If the donor-spouse desires to benefit
grandchildren and future generations, the GST exemption can be
applied to accomplish this goal as well making the SLAT a
dynasty-type trust. - Planning with SLATs can be done by each spouse for the primary
benefit of the other spouse thereby providing each spouse with
continued access to the assets of the SLAT created for his or her
respective benefit.
Considerations for SLATs
- Lifetime gifting to a SLAT is complex and not without
drawbacks. For example, where both spouses make transfers to SLATs,
the trust agreements must be sufficiently different and should
occur at different times so the Internal Revenue Service does not
unwind the transactions under the “Reciprocal Trust
Doctrine” thereby eliminating the beneficial tax
planning. - From a tax perspective, since assets transferred to the SLAT
will not be includible in the donor-spouse’s estate for estate
tax purposes, the assets transferred to the SLAT will similarly not
receive an income tax basis adjustment (a “step-up”) upon
the death of the donor-spouse. - The trust agreement will provide an independent trustee with
the ability to cause SLAT assets to be included in the gross estate
of the beneficiary-spouse if it is desirable, because it will
reduce overall taxes to do so. - Issues of continued control and governance arise in the context
of transferring closely-held business interests to a SLAT, as with
any irrevocable trust. Reorganizing or recapitalizing the
closely-held business to change the voting structure may be
necessary. - The donor-spouse’s indirect access to the SLAT via the
beneficiary-spouse’s interest ceases to exist upon the
beneficiary-spouse’s death or if the spouses divorce. - In most cases, a valuation report prepared by a valuation
expert will be required, and in all cases, a gift tax return will
be required to be filed.
Bottom line:
The decision to pursue SLATs as a vehicle for transferring
wealth depends on various considerations. To review your estate
planning and discuss SLATs or other wealth transfer tax planning,
please contact our Wills, Trusts and Estates team.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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