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Gregory S. DuPont, JD, CFP Feb. 22, 2023

No one wants to pay more taxes than they have to. To complete this objective, many people use unique estate planning tools. If you have researched tax-saving strategies in the past, chances are you've come across the Spousal Lifetime Access Trust (SLAT). Here are some important things you should know before settling on this estate planning solution.

What is a spousal lifetime access trust?

A SLAT is a type of irrevocable trust created by one spouse (the trustmaker) for the benefit of the other spouse (the beneficiary). The trust is used to transfer money and property out of the trustmaker's estate.

The trustmaker spouse makes sizable, permanent gifts to the SLAT that decrease the value of the estate. This strategy allows married couples to take advantage of their lifetime gift and estate tax exclusion amounts. The great thing about this type of trust is that the trustmaker can still maintain limited access to the money and property in the trust.

How does a S.L.A.T. work in Ohio?

The trustmaker spouse gifts money or property (of which they are the sole owner) to the SLAT for the benefit of the beneficiary spouse. The trustmaker spouse then reports the gift on a gift tax return. The beneficiary can receive distributions from the trust, from which the trustmaker may also indirectly benefit.

Upon the death of the beneficiary spouse, the trust assets are transferred to the remaining trust beneficiaries, usually children and/or grandchildren of the couple.

Pros and Cons of a Spousal Lifetime Access Trust

SLATs offer several advantages:

  • Decrease the value of your estate for tax purposes

  • All future appreciation of trust assets is removed from the trustmaker's estate

  • Trust property is excluded from the beneficiary spouse's estate, even though they may receive distributions from the trust

  • All the trust's taxable income is taxed to the trustmaker spouse, further reducing their estate. (This only applies if the SLAT is structured as a grantor trust)

  • You don't have to file a separate tax return for the trust while the trustmaker is still living. (This only applies if the SLAT is structured as a grantor trust).

In summary, SLATs provide couples a way to "have their cake and eat it too". Many of our clients worry about losing control over assets they place in a trust. A SLAT addresses those concerns. The trustmaker spouse can have indirect access to trust assets through the beneficiary spouse.

While SLATs are a great estate planning solution for many couples, they also have some drawbacks:

  • Gifts made to a SLAT are final and cannot be undone.

  • If the beneficiary spouse dies before the trustmaker, the trustmaker loses access to money and property in the SLAT.

  • If the couple divorces, the trustmaker loses access to money and property in the SLAT.

  • Property gifted to a SLAT won't receive a step up in basis at the death of the trustmaker. However, this drawback could be minimized with a few provisions. We can include language in your trust that allows the trustmaker to swap trust property, giving you the ability to substitute low-basis property with high-basis property of equal value.

  • SLATs require careful tax planning. If a couple is looking to create SLATs for eachother, they may run into the Reciprocal Trust Doctrine. If the IRS interprets the two trusts as being too similar, it can essentially undo the trusts and include trust property in the spouses' taxable estates. This drawback can be avoided by working with a knowledgeable estate planning attorney and tax professional. You may have to create the SLATs at different times, use different trustees, choose different beneficiaries, etc.

Why Have S.L.A.Ts becomes so popular?

Right now, the estate tax exemption amount is extremely high. For 2023, the estate tax exemption is $12.92 million ($25.84 million per married couple). This means that estates over that amount will have to pay tax to the federal government. As you can see, the average American won't have to pay this.

But, under current law, the estate tax exemption amount is slated to shrink to $5 million (adjusted for inflation) on January 1, 2026. This could happen even sooner if Congress decides to change it. In 2021, the House Ways and Means Committee proposed cutting the gift and estate tax exemption in half.

Because the law could change at any time, the window of opportunity to take advantage of this estate planning technique is shrinking.

Contact our Estate Planning Attorneys in Dublin, OH to Create a S.L.A.T

Married couples who are considering creating a SLAT should contact an estate planning lawyer as soon as possible. Our attorneys in Dublin, Ohio are experienced in tax law and financial planning. We can help talk you through the pros and cons of using a SLAT and whether this technique makes sense for your situation.

Call 614-389-9711 to schedule an appointment.