After 33 years of Estate Planning, there remains as much uncertainty today as there has ever
been over the future of the Estate Tax. With the recent election under our belt, we are certainly on
the heels of a major Tax Act that will decrease the Estate Tax Exemption from $11 million to $6
million. We saw this similar threat of change take place back in 2010 thru 2012.
The big difference in today’s uncertainty is that it impacts a much smaller segment of clients
than the estate tax uncertainty did almost 20 years ago when Al Gore squared off against George W.
Bush over the hot tax issue of “estate tax repeal”. At that point the Estate Tax Exemption was
$1,000,000 and the prospect of “repeal” favorably impacted a greater percentage of taxpayers.
Today, under Trump, we still have estate tax uncertainty, yet the difference today is that the Estate
Tax Exemption is $11,000,000 per person impacting far less than one-quarter of one percent of the
potential estate planning client. Quite frankly, for virtually the entire US population, the Estate Tax
was already repealed in 2012 when we saw the Exemption increase from $3,500,000 to $5,000,000.
So as not to waste anyone’s time here, this article is directed to the married couple client
who has a combined net worth of $11,000,000 or more. This is perhaps the same married couple
that faced uncertainty as recently as 2010 when the Estate Tax Exemption was going to “sunset”
back to 2001 figures of $1,000,000. Instead of a “sunset” we actually got a “sunrise” and the Estate
Tax Exemption was increased to $5,000,000. And to make it a bright new sunrise, we also got an
unexpected increase in the Gift Tax Exemption to $5,000,000 as well. Before this historic day, the
Gift Tax Exemption was always capped at $1,000,000 even though the Estate Tax Exemption
continued to regularly increase to $3,500,000.
In the blessed day that the Exemption was increased to $5 million, tax attorneys and CPAs
around the country rejoiced. Their clients just received two beautiful tax presents, wrapped in a
pretty bow, an increase in the Estate Tax Exemption, and a huge increase in the Gift Tax Exemption.
These two presents, coupled with the prospect that the Grinch could still show up again and steal
Christmas, meaning another “sunset” in these gifts, opened the flood gates of planning opportunities.
Statistics show a huge increase in Gift Tax Returns during the two tax seasons following 2012.
Many of those gifts were made to SLATs.
The most prevalent tax strategy in 2012 was the Spousal Gift Trust (many practitioners call
it a SLAT, and much has been written on the internet about the SLAT). We find ourselves today in
the same stormy sea of estate planning uncertainty that we found ourselves in the years following 2010. We have a new major tax act that doubled down on the two Christmas presents of 2012. An
increased Estate Tax Exemption to $11,000,000 and an increased Gift Tax Exemption of
$11,000,000. As such, those clients that embraced the SLAT in 2012, should do the exact same
strategy again with these two new gifts. And those clients that missed the tax boat in 2012, can
jump aboard now and do a SLAT now.
Locking in your Estate Tax Exemption isn’t a new strategy, but it became extremely popular
a 2nd time in history when President Trump increased the Estate Tax Exemption to $11 million. And
now with the changes that are happening in Washington, there is a real threat that the $11 million
Exemption will go back to $6 million long before the scheduled reduction in 2026. A SLAT is again
an extremely popular way to have a client lock in his or her $11 million Exemption, but still have
the assets available to benefit the client economically. It is like many a “gift” to your spouse.
So, how does a SLAT work and what makes it so great? In Estate Planning, and more
importantly in Estate Tax Planning, there has always been a tradeoff between shrinking the Taxable
Estate with different strategies and maintaining control over those assets and reaping the benefits of
those assets. The IRS has always imposed strict code sections and regulations that maintain that in
order to remove assets from ones Taxable Estate a client must give up two things dear to the client.
Control over those assets and the use of the income from those assets while the client is alive. In
other words, tax attorneys were paid dearly to come up with techniques that allows a client to “gift”
those assets out of his estate, to shrink taxes, but still maintain control over those assets and the use
of the income to support the client during his or her life. The best answer, the SLAT (“Spousal
Lifetime Annuity Trust”). That’s why this article is directed to married couples.
Now, what exactly is a SLAT. Well, it’s younger brother has always been a big part of estate
planning, the Credit Shelter Trust. (Some attorneys may call it an Exemption Trust, or a Family
Trust, or a Decedent’s Trust (in my firm we simply call it a B Trust). Every married couple who
has some net worth and has done their Estate Plan should certainly be familiar with the “A/B Trust”.
It is the most common Trust for married couples. It is a Trust that the couple creates during their
lifetime, and then it subsequently converts into two Sub Trusts, the A Trust and the B Trust when
the first client passes away. I have been setting up this Trust for my clients since I crawled out of
law school 34 years ago. I have created thousands of them as have all the other estate planning
lawyers. It was, back in its day, the solution to most clients’ estate planning needs. If you want to
understand all of the reasons we created them back then, then you will need to do your own research
on that on your time. I am not going to go backwards and discuss why they were so popular. I am
going to spend my time on “big brother”, the SLAT and why it is so popular now.
The B Trust, in its simplest form, was created by one spouse, for the benefit of the other
spouse. It was contained in a Revocable Trust the client created, that became Irrevocable and funded
when the client passed away. It was designed to remove those assets from the estate of the surviving
spouse when she subsequently passed away, yet, give her the ability to “control” those assets during
her lifetime, and receive the benefits of the “income” from this Trust as well. Estate Planning
kindergarten taught us that you can create more favorable trusts for your own spouse then you could
From the above discussion, if a client created a trust for himself, and was the trustee and
retained control over that trust, as well as kept all of the income from that trust, we already have
learned that those assets would not be removed from his Taxable Estate for Estate Tax purposes.
But, and this is a big but, that same client could create a trust for his spouse, and let that spouse be
the trustee over it, and let the spouse retain control over it, and let the spouse have the income from
it, and let the spouse have the ability to access the principle from it, and let the spouse direct thru a beneficiary designation who receives it when the spouse dies, and yet, and yet, those assets would
no longer be includable in the clients estate when he dies, or in his wife’s estate when she dies and
thus the magic. A trust where the person who has the control over the trust, and, receives the
financial benefits of the trust does not have to include the assets in anyone’s estate when the client
dies, or when the spouse dies. And in fact, if you include “generation skipping” provisions, the
children could inherit and control the assets for their lifetime, and you wouldn’t have to include the
assets in the child’s estate when the child dies. And, to make it that much better, all of the assets
for all of the time that it is inside of this B Trust, would be beyond the reach of any creditors of the
spouse and the children and the client. Wow, winner. Tax benefits coupled with Estate Planning
benefits. Now you are seeing why it was and is such a powerful Estate Planning strategy.
Now, although this B Trust has been popular since my career began, it differed from a SLAT
in one huge regard. The B Trust is essentially created and funded at the death of the client by
including it as a “Sub Trust” inside of the client’s master Revocable Trust. It was funded using the
clients Federal Estate Tax Exemption available at his death. Over the years, as the death tax
exemption increased, the Gift Tax Exemption (for lifetime transfers) was always capped at
$1,000,000. Thus, it wasn’t popular, or maybe even contemplated to fund the B Trust during the
client’s lifetime by making a Taxable Gift into it, and, applying his Gift Tax Exemption. Then
bingo, in 2012 Congress gave us those two marvelous gifts. The increase in the Estate Tax
Exemption and an equal increase in the Gift Tax Exemption. So, for the first time in history, a client
could create the B Trust during his lifetime for the benefit of his spouse and fully fund it at that time
using his Gift Tax Exemption, which is for the first time equal to his Estate Tax Exemption. The
“SLAT” was born.
Now, to be clear, you don’t get both the Estate Tax Exemption and the Gift Tax Exemption.
You have one exemption of $11,000,000 that you can use partially during life or all during life.
Whatever you don’t use during your life, you get to use at death. But, the big advantage to using it
during life is two-fold. First, if you use it, Congress can’t take it away. And, second, you also get
to remove the future appreciation in the value of the assets from the Taxable Estate as well.
So, when the uncertainty hit in 2012, with the two new presents from Congress, and still the
threat that there would be a sunset or a repeal of these gifts, tax attorneys around the country created
SLATS for their clients by the thousands. Why? Simple, the client could use his exemptions now,
while he was alive, and Congress couldn’t take them away if they were used. And, not only did he
remove assets from his taxable estate, but he also achieved creditor protection. And, assuming he
funded it with his $5,000,000 of increased Gift Tax Exemption, he would also receive the benefit of
removing the capital appreciation on those assets during all the years he remained alive. Thus, a
gift of $5,000,000 could be worth over $10,000,000 by the time that he dies. In Estate Planning,
capital appreciation is as valuable as compound interest is to a wall street baron. It is the 8th wonder
of the tax world. In 34 years I learned two things. If Congress gives you an increased exemption
use it, and, use it now. The exemption always has the most value today.
So, the client creates a B Trust for his wife, and funds it with a gift of securities or real estate
equal to his new increased Gift Tax Exemption ($11,000,000 if he hasn’t already used the first
$5,000,000 in 2012). And, as stated above, he can make his wife the Trustee, and give her man powers and strings over this Trust. The ability to withdraw all the income. The ability to invade
principle if it is needed for the “health, education, support or maintenance” of the spouse and the
children. And, he can give the spouse the power to amend and change the remainder beneficiaries
thru out her lifetime if circumstances change within the family dynamics. And, as already
mentioned, client dies, no estate tax. Wife dies, no estate taxes, and children die, and no estate taxes.
And, to top it off, unbelievable creditor protection for the client, spouse and the children. Why
wouldn’t you do that?
Now, you have been reading this now for 10 to 15 minutes or so, and you are a smart client.
You can see the only downside to this strategy. There is only one. Can you guess, assuming you
haven’t already been thinking about it during your read? Divorce. That’s it. Divorce. How do you
protect against divorce? Two things. First, if your marriage is already on the rocks, this strategy is
not for you. Second, if you want to hedge your bet, it is easy, you create a Trust B for your wife
this year. And, next year you have your wife create a Trust B for you. Now, IRS is on to this
“reciprocal Trust” and takes the position that essentially if you each create a B Trust for the other,
it is the same as creating a B Trust for yourself and wife is creating for herself, and both trusts are
collapsed. But tax attorneys know all the rules, and how to play the game. There are many simple
ways around this “reciprocal trust doctrine”. If done correctly, and with some passage of time
between the events, you can each create a Trust B for your spouse.
Ok, you are still smart, and you are now thinking sounds great, but what if I create this B
Trust for my wife and my kids, and then my wife dies before me? I can never get any direct benefit
from the B Trust. I just lost the income and control over $11,000,000 in assets. Well, two things
again. First, it would be easy to purchase a life insurance policy on your wife, and, have that payable
to a Life Insurance Trust for you. And, now that I am thinking about it, a “life insurance trust” is
really just another B Trust that is created by your wife for you, but, funded with a life insurance
policy payable on her death. And, in fact, if wife has created a B Trust for you, it should be the
beneficiary of the life insurance policy that you purchase on your wife’s life. No need to create a
separate Life Insurance Trust. And if you have life insurance, you should name your wife’s B Trust
as beneficiaries of those policies. And Second, with some careful drafting and planning, and once
again with the passage of time, perhaps the wife’s power to name a beneficiary of the trust if she
dies could include the power and the right to name you as the beneficiary.
So, the SLAT was born, which is the big brother to the B Trust. It is exactly the identical
strategy, the SLAT, that most smart clients took advantage of in 2012. Sounds too good to be true?
It isn’t. There is a lot written on the internet about SLATS. This isn’t a new idea and it isn’t my
idea. But, it is a great idea and you should embrace. I am just the one who is packaging it up for
you and delivering it to your doorstep. Why take a chance or risk what Congress may or may not
do. Lock in the Exemptions today, and, increase your asset protection.