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Daniel F. Rahill, LL.M, CPA, J.D.
Managing Director
Wintrust Wealth Management

The 2021 estate tax exemption threshold is $11.7 million per individual (indexed for inflation) with a top tax rate of 40 percent. After 2025, this amount will revert to the pre-2018 exemption, which is an indexed amount that would equate to approximately $5.8 million in current dollars. President Biden’s campaign platform proposed to accelerate the reduction of the exemption to $3.5 million with a top tax rate of 45 percent, most likely in 2022.

In his “For the 99.5 Percent Act”, Senator Bernie Sanders goes even further, proposing to reduce the estate tax exemption amount to $3.5 million, not indexed for inflation. The Sanders’ plan would reduce the gift tax exemption to $1 million from $11.7 million, and would increase estate and gift tax rates to as high as 65 percent.

Spousal Lifetime Access Trusts
Given the proposed changes with respect to the federal estate and gift tax laws, and knowing the estate tax exemption will be reduced in half after 2025 in any event, many married clients are entering into estate planning trust arrangements known as a “Spousal Lifetime Access Trusts” or SLATs. A SLAT offers married clients flexibility in making gifts while making use of what might be a vanishing lifetime gifting exclusion.

A SLAT is an irrevocable trust created by one spouse (referred to as the grantor spouse) for the current benefit of the other spouse (referred to as the beneficiary spouse), typically with the remainder interest in the trust passing to the grantor’s children upon the death of the beneficiary spouse. The phrase “spousal lifetime access” reflects what for many clients is the chief advantage of a SLAT, namely that the beneficiary spouse can receive distributions from the SLAT. Thus, for example, if the couple’s financial situation deteriorates after a gift is made, distributions can be made to the beneficiary spouse from the SLAT.

Ten Features of SLATs to Consider

  1. A SLAT can make distributions to the primary beneficiary as needed for his or her health, education, maintenance, or support (HEMS). The primary beneficiary is generally the grantor’s spouse, with siblings, children, grandchildren, or other descendants being named as remainder beneficiaries.
  2. A beneficiary spouse may serve as trustee but would be limited to making distributions to themselves under the HEMS standard.
  3. A trustee other than the beneficiary spouse may have the power to distribute the assets from the trust to the beneficiary beyond what is needed form HEMS, so long as there is not an understanding between the beneficiary and the trustee that the trustee will make such distributions in excess of what is allowed for HEMS.
  4. The assets of a SLAT will not be included in the estate of either the grantor spouse or the beneficiary spouse upon death. Gifts from the grantor spouse to the SLAT count against the $11.7 million 2021 lifetime transfer tax exemption if the plan is to utilize this exemption in this “use it or lose it” environment.
  5. Any appreciation on the transferred assets between the date of the transfer and the date of death escapes estate taxation at death. Further, if the generation-skipping transfer tax exemption is allocated to a SLAT, it can be structured to create a dynasty trust for children and grandchildren upon the death of the beneficiary spouse, meaning these trust assets will not be includible in their estates.
  6. Transferring assets to a SLAT can also provide protection from creditor claims for both the donor spouse and the beneficiary spouse, assuming no fraudulent conveyance and that the trust has an independent trustee.
  7. For income tax purposes, a SLAT is treated as a “grantor trust” which means that all items of income, deduction, and credit are attributed to the grantor spouse, rather than to the trust itself. The grantor’s payment of the income tax liability for the SLAT is not considered a taxable gift, which effectively allows the grantor to make further transfers to the trust beneficiaries without using any transfer tax exemption. The SLAT can loan money to the grantor and family members at arm’s length, or exchange or sell assets to the trust.
  8. A discount can currently be taken in determining the value of a minority or non-voting interest in an LLC or other entity in a sale or transfer.
  9. If a vacation home owned by the grantor spouse is transferred into the SLAT, the donor spouse has the option to pay rent to the trust. This would have no income tax consequences to the grantor since the SLAT is a grantor trust, enabling the grantor to make additional gift-tax free transfers to the trust.
  10. An independent trustee has the ability to undo the trust by transferring all assets in the SLAT to the beneficiary spouse.

Spouses wishing to set up reciprocal SLATs need to be aware of the reciprocal trust doctrine which suggests that if the two trusts are too similar, the assets of both trusts could be included in their respective estates upon exam, and also they could be subject to creditor claims. Therefore, trusts should not be created as mirror images of each other.

Given the proposed tax law changes on the horizon (some which would impact the benefits of SLATs), now is the time to reach out to your advisor to discuss tax-saving strategies for you and your family.