SLATs: Navigating the Future of Estate Planning with Strategic Adaptability

By: Randall A. Denha, J.D., LL.M.

Amidst the fluctuating landscape of federal estate tax regulations, the Spousal Lifetime Access Trust (SLAT) emerges as a prominent tool for affluent individuals aiming to enhance their estate planning with a degree of adaptability. A SLAT represents an irrevocable trust instituted by one spouse (termed as the grantor) for the benefit of the other (termed as the beneficiary). Its cardinal benefit lies in its ability to exclude assets from the grantor’s estate liable for taxation, concurrently permitting indirect beneficiary access to these assets. Following its establishment, the beneficiary spouse is empowered to solicit both principal and income distributions for personal benefit, indirectly favoring the grantor spouse.

This discussion delves into the reasons behind the growing preference for SLATs as a strategic estate planning measure and the potential advantages prompting consideration of their usage.

Principal Advantages of a SLAT

SLATs embody several appealing features:

Asset Transfer: By allocating assets into a SLAT, grantors might significantly mitigate or altogether bypass estate taxes at the time of death. Engaging a SLAT enables the grantor to allocate a portion or entirety of their lifetime gift tax exemption, which, as projected for 2024, stands at $13.61 million per individual. This strategy is particularly vital for individuals of substantial net worth who face significant estate tax burdens, with the prevailing estate tax rate at 40%. Moreover, as the assets are relocated out of the grantor’s taxable estate, any asset appreciation within the trust also unfolds outside the taxable estate ambit, potentially amplifying the financial heritage for the grantor’s descendants.

Creditor Protection: Given its irrevocable nature, a SLAT generally safeguards assets against claims by the grantor’s creditors. This protection is crucial for individuals in high-risk professional or personal scenarios susceptible to legal challenges.

Enhanced Flexibility: Despite the grantor’s inability to directly access trust assets, the beneficiary spouse’s entitlement to trust distributions ensures that the couple retains asset accessibility.

The Rising Popularity of SLATs

As the demographic ages and anticipates a substantial wealth transition in forthcoming decades, estate planning is ascending as a priority for numerous families. SLATs provide an innovative solution for this transition, guaranteeing asset protection and efficient transference to successive generations, particularly under the current volatile political and economic conditions.

The looming uncertainty concerning potential amendments to the Internal Revenue Code, especially regarding estate and gift taxes, further accentuates the attractiveness of SLATs. The anticipated expiry of the 2017 Tax Cuts and Jobs Act by the end of 2025 could halve the current individual exemption amount from $13.61 million to approximately $6.5 million. Amidst these speculative legislative modifications, many opt to secure current tax advantages through SLAT formation before potential legal alterations, thereby capitalizing on the “use or lose” nature of the prevailing higher exemption amounts as confirmed by the IRS.

SLATs embody financial prudence in uncertain economic times, offering a balanced approach to asset transfer while maintaining indirect access via a spouse. This strategy is particularly appealing for those desirous of safeguarding their financial future without severing ties with their assets. Additionally, SLATs can be structured to leverage the generation-skipping transfer tax exemption, facilitating asset benefits across multiple generations without incurring extra transfer taxes.

Optimizing SLAT Design

For optimal SLAT utilization, engaging with a seasoned estate planning attorney is imperative. Such collaboration ensures trust customization to align with specific needs and situations.

Critical considerations for SLAT establishment include:

Trustee Selection: Opting for a trustee who aligns with the grantor’s objectives and can proficiently administer the trust is vital. Frequently, a professional or independent trustee is preferred over the beneficiary spouse to enhance trust flexibility among other considerations.

Trust Funding: Identifying suitable assets for transfer into the SLAT is crucial, with a preference for high-growth assets to maximize outside-estate appreciation. Distribution Terms Definition: The trust document must explicitly specify conditions under which the beneficiary spouse is entitled to distributions, ensuring clarity and alignment with the grantor’s intentions.