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Estate Planning Strategies: Pros and Cons of SLATS

Only the wealthiest individuals and couples have to worry about their heirs having to pay estate taxes after they die. Currently, the estate tax exclusion is $12.06 million per person, or $24.12 million for a married couple. In other words, this much of an individual’s or couple’s assets is shielded from estate tax.

However, this exclusion is scheduled to be cut in half in 2026 to just $6.2 million per person, or $12.4 million per couple, unless new legislation is passed before then. So in just a few years, many more families could find themselves having to pay estate taxes.

One common strategy for avoiding estate taxes is to transfer assets into an irrevocable trust. These are designed to withhold distributions to beneficiaries until one or both spouses has died. However, irrevocable trusts can’t be changed once they’ve been set up, and couples sometimes don’t want to relinquish control of their assets until after they die in case they might unexpectedly need them.

How SLATs Work

Fortunately, there’s a solution for couples in this situation. It’s called a spousal lifetime access trust, or a SLAT. A SLAT removes assets from a couple’s taxable estate while allowing one spouse to make a gift that benefits the other spouse even while both spouses are still alive. Here’s how a SLAT works:

One spouse, referred to as the grantor or donor, will set up the trust and gift property to it for the other spouse’s benefit. Many types of assets can be placed in a SLAT including securities like stocks and bonds, cash and life insurance policies. The non-donor spouse can be the sole beneficiary of the SLAT while he or she is still alive with children and grandchildren becoming beneficiaries after death. Or everyone can be beneficiaries at the same time.

Important note: Only assets that are owned solely by the donor spouse can be transferred into a SLAT. Assets that are jointly owned by both spouses cannot be transferred into a SLAT.

Pros and Cons of SLATs

One of the biggest benefits of a SLAT is that the non-donor spouse can request distributions of principal or income if he or she needs it to maintain a certain standard of living. Another benefit is that the SLAT won’t owe income tax if it’s set up as a grantor trust, which is how most SLATs are structured. This enables trust assets to grow without being encumbered by taxes.

Also, if your state assesses estate tax, the SLAT will help reduce this tax — even if you’re not subject to the federal estate tax.

However, there are some potential drawbacks to SLATs that you should also be aware of. One of the biggest is the fact that if the non-donor spouse dies before the donor spouse, the donor spouse will no longer have indirect access to the assets in the trust. The assets will continue to benefit other family members either by being distributed to them or remaining in the trust.

Non-donor spouses can serve as a SLAT’s trustee and authorize their own distributions from the trust, but these distributions are limited. Any distributions beyond what would be considered reasonable to pay for education, healthcare or support would result in assets being included in the non-donor spouse’s taxable estate. These distributions are less restrictive if the non-donor spouse doesn’t serve as the SLAT’s trustee.

Divorce presents another potential drawback to a SLAT. For this reason, language is usually included in the trust documents that terminates the non-donor spouse’s beneficial interest in the SLAT if a divorce occurs.

Given the uncertainty of estate tax law and family circumstances, SLATs are sometimes drafted to allow the SLAT provisions to be removed at some point in the future if necessary. For example, a trust protector might be empowered to make this change.

Is a SLAT Right for You?

SLATs are complex estate planning tools so it can be hard to know if establishing a SLAT is the right strategy for your circumstances. Give us a call if you’d like to discuss your situation in more detail. We can help you weigh the pros and cons of this strategy for you and your family.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.