With the current record-high US$12.92 million per-person lifetime gift and estate tax exemption scheduled to expire at the end of 2025 and fall back to around US$7 million, estate planners are encouraging wealthy individuals to put sophisticated strategies in place to use the exemption before they lose it.
But shifting a massive amount of wealth out of reach and under someone else’s ownership or control can understandably give many people pause.
“Especially if you’re on the younger side with a lot of years left where anything can happen, the hesitation is, ‘What if I need that money down the line?’” says Jere Doyle, an estate-planning strategist at BNY Mellon Wealth Management.
There may be an ideal solution for these folks: a trust that removes assets from an estate but allows for the possibility of accessing the assets in the future. Designed for married couples, the estate planning tool is called a spousal lifetime access trust, known as a SLAT.
This is an irrevocable trust that an individual can set up with their spouse as the primary beneficiary, and typically children or grandchildren as beneficiaries of the remaining assets in the trust once the primary beneficiary dies.
“You’re not supposed to benefit from assets you have gifted away, but lo and behold, if my spouse is the beneficiary of my SLAT, if needed she can take a principal distribution and fold it back into the family’s economics,” says Jason Thompson, chief of wealth strategies at Rockefeller Global Family Office. “It allays a lot of clients’ concerns to have backdoor access to assets they have gifted away.”
When you set up a SLAT, it must be funded with assets that are in your name only. In community property states, which deem all assets to be jointly owned by married couples, a partition agreement is required before setting up a SLAT to divide ownership of the assets that will be designated to the trust, says Belinda Herzig, national senior wealth strategist at BNY Mellon Wealth Management.
By taking advantage of the trust, you remove not only the assets, but all future growth on the assets from your estate. Furthermore, a SLAT is typically established as a grantor trust, which means that the creator of the trust is liable for the taxes that accrue on earnings inside the trust.
“For people trying to remove assets from their estate, that’s a good thing because by paying the taxes, it is like making an extra gift to the trust that the IRS doesn’t deem to be a gift, and you allow the trust assets to stay intact and grow,” Thompson says.
The downsides of SLATs are if the married couple divorces or the spousal beneficiary dies. In the case of divorce, the trust typically can’t be easily unwound. By definition it is irrevocable.
“The SLAT continues for the benefit of the ex-spouse, but the grantor (the creator of the trust), continues to pay the tax on the income in the trust,” Herzig says.
Increasingly, newer SLATs are being created with language to address what happens in the case of a divorce, she says. For example, trust instructions can be included to release the grantor from the obligation of paying trust taxes after a divorce.
If your spouse whom you have named beneficiary dies before you, you lose access to the assets in the trust. They pass to the remainder beneficiaries.
Couples can each create SLATs with the other named as primary beneficiary, but do so with care, Doyle says. The trusts can’t be reciprocal, meaning, they can’t have the same terms with different primary beneficiaries.
“I have to make sure that the trust I set up for my wife, and the trust my wife sets up for my benefit, are not exactly the same,” he says. “You have to have materially different provisions so when the government sits down and looks at the trusts side by side, they aren’t deemed to be reciprocal.”
Among ways to ensure they are different is to name different powers of attorney or remainder beneficiaries for each trust. “Maybe one remainder interest goes to charity, and the other to children,” Doyle says. “Maybe one has mandatory income for the spouse, and the other has discretionary income.”
Also, a couple could set the trusts up at different times, with years in between, he says.
The goal, of course, is to leave the trust assets intact so they can grow for the benefit of beneficiaries, Herzig says. These trusts are best suited for people who have looked at what they need to live on for the rest of their lives to be comfortable and maintain their lifestyles.
“We run the number out to age 100, and then plan with the excess they won’t need.” Herzig says. “The clients we work with almost never touch the income or principal of their SLATs. If you run a model with a very conservative growth projection, putting almost US$13 million in a trust and investing it without distribution over a 30-year period or more, the growth makes this a very palatable strategy.”
Assuming a 5% average annual growth rate, after 30 years a US$13 million investment will accrue to US$58 million.
The nearly-US$13 million exemption expires at the end of 2025 according to a provision in the Tax Cuts and Jobs Act, passed in late 2017. The exemption is scheduled to rise to US$13.61 million in 2024, and will likely top US$14 million in its final lofty year in 2025.
“Absent congressional action, that exemption will be about cut in half, and people with taxable estates who don’t use up the current exemption may expose about US$7 million of their assets to the estate tax,” Herzig says. “At a 40% rate, that’s significant. That’s almost US$3 million per person.”
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