The “Spousal Lifetime Access Trust”

After 33 years of Estate Planning, there remains as much uncertainty today as there has ever been over the future of the Estate Tax and the implications for a spousal trust. 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.

Impact on a Smaller Segment of Clients

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 potential estate planning clients.

Who This Article is For

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. To make it a bright new sunrise, we also got an unexpected increase in the Gift Tax Exemption to $5,000,000 as well.

The Birth of the SLAT

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 floodgates 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 Popularity of SLATs

The most prevalent tax strategy in 2012 was the Spousal Gift Trust (many practitioners call it a 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 or spousal trust 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 or spousal trust now.

How a SLAT Works

Locking in your Estate Tax Exemption isn’t a new strategy, but it became extremely popular a second time in history when President Trump increased the Estate Tax Exemption to $11 million. With the changes 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, while still having the assets available to benefit the client economically. It’s like giving a “gift” to your spouse.

The Benefits of a SLAT

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 best answer? The SLAT (“Spousal Lifetime Annuity Trust”). That’s why this article is directed to married couples.

The Evolution of the SLAT

The B Trust, in its simplest form, was created by one spouse, for the benefit of the other spouse. 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 than you could for yourself.

SLAT vs. B Trust

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, 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, retain control over it, and have the income from it, and let the spouse have the ability to access the principle from it, and yet, those assets would no longer be includable in the client’s estate when he dies, or in his wife’s estate when she dies.

Advantages of Creating a SLAT Now

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.

Protecting Against Divorce

Now, you have been reading this for 10 to 15 minutes, and you’re a smart client. You can see the only downside to this strategy: 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’s easy: create a Trust B for your wife this year, and next year have your wife create a Trust B for you.

Considerations for the Future

So, the SLAT was born, which is the big brother to the B Trust and a form of spousal trust. It is the exact strategy 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 and spousal trusts. This isn’t a new idea, and it isn’t my idea. But it is a great idea, and you should embrace it. Why take a chance or risk what Congress may or may not do? Lock in the Exemptions today, and increase your asset protection.

Get Expert Guidance from Dana Whiting Law

Navigating the complexities of Estate Planning, including strategies like spousal trusts, requires expert guidance. At Dana Whiting Law, our experienced team is ready to help you understand the best options for protecting your assets and securing your family’s future. Whether you’re looking to take advantage of the current Estate Tax Exemptions or need advice on creating a spousal trust, contact Dana Whiting Law today to ensure your plan is as strong and effective as possible.