I hope you are enjoying some beautiful spring weather.
While further estate and gift tax planning may not be required, or even appropriate, for some of you, I wanted to provide an outline of a transfer tax savings strategy which is one of the less complex, yet very effective, mechanisms for lifetime gifting in minimizing estate taxes at your death. I am going to discuss the “SLAT,” an acronym which refers to an irrevocable Spousal Lifetime Access Trust.
Background - Estate and Gift Taxation. As you may be aware, in 2024 each individual has an estate tax, gift tax and generation-skipping transfer tax exemption amount of $13.61 million. Basically, the estate, gift tax and generation-skipping transfer tax are all “transfer taxes” which the federal government seeks to impose if you make transfers above your exemption amount. The exemption amount has been increasing steadily for the last 15 years. However, the current law requires that the exemption amount be reduced by half on Jan. 1, 2026. Any transfers made above the exemption amount are taxed at the rate of 40%, with an additional generation-skipping transfer tax on gifts made to “direct skip” persons. Also worth noting, while there is a "portability[1]" of the unused estate exemption between spouses, the generation-skipping transfer tax exemption (GST exemption) is not portable. For example, if the unused exemption amount of the deceased spouse is $3 million, that amount can be utilized by the surviving spouse on lifetime gifts and/or on estate taxes. However, if the deceased spouse fails to utilize his or her GST exemption during their lifetime or at death, that unused GST exemption is lost and cannot be used by the surviving spouse.
Purpose of a SLAT. If your combined assets exceed the exemption amount for each of you, you may wish to consider incorporating a SLAT into your planning. The assets transferred to the SLAT, if properly structured and administered, will be outside of the gross taxable estate (GTE) for both spouses.
Structure of a SLAT[2]. While some of the nuances of a SLAT can be slightly different to comport with the individual’s planning goals, these are the basic requirements and recommendations:
One spouse creates the SLAT (Settlor Spouse) and gifts assets to the SLAT from his or her own separate account. The gift to the SLAT can be in the form of real estate, securities, cash and other intangible assets, such as LLC interests.
The other spouse is the beneficiary of the SLAT (Beneficiary Spouse) and is granted access to the SLAT’s assets. The SLAT provisions could require mandatory income to the Beneficiary Spouse, or the distributions of income and principal can be wholly discretionary for the Beneficiary Spouse’s health, maintenance and support (also known as the HEMS standard).
The Beneficiary Spouse may serve as trustee, or a third party may serve as trustee. It is not recommended that the Settlor Spouse serve as trustee, but it is not prohibited. If distributions to the Beneficiary Spouse will be outside of the “HEMS” standard, then an independent trustee will be required.
Upon the death of the Beneficiary Spouse, the remaining assets in the SLAT will distribute to the next level of beneficiaries and will not revert back to the Settlor Spouse.
Benefits of SLAT
The income (and, if necessary, some principal) of the SLAT is still available to the “family unit” of both spouses. This creates a comfort zone if you are looking to transfer and gift all of your exemption amount in 2024 or 2025. Note that you must still make certain to leave sufficient assets outside of the SLAT for your day-to-day expenses according to your lifestyle.
The gift to this trust would shelter the spouses’ gross taxable estate from taxation of these assets transferred and the appreciation on the assets, if the SLAT is properly administered in compliance with federal and Florida trust law.
Risks of SLAT
The greatest risk of incorporating a SLAT into your planning is the possibility of an untimely death of the Beneficiary Spouse, which then leaves the Settlor Spouse without any access to income from the assets transferred to the SLAT. It is imperative that the SLAT only be considered if the assets remaining outside of the SLAT will be amply sufficient to meet your lifestyle as a family, for the duration of both lives. While all assets remaining in the SLAT after the death of the Beneficiary Spouse will follow your estate plan, this premature distribution to your descendants or other beneficiaries is a risk that needs to be understood and that sufficient assets outside of the SLAT are available to the Settlor Spouse in the event of this occurrence.
In conclusion, the above is an option to further shelter your estate from transfer taxes without creating too much complexity in your estate plan. I hope you found this brief note worthwhile. Please do not hesitate to contact me if you have any questions regarding the foregoing.
Happy Spring!
[1] There are certain parameters which must be met for the portability application. For example, the surviving spouse wishing to benefit from portability cannot remarry and then use the first spouse’s un-used exemption amount.
[2] There are different types of SLATs. The SLAT referenced and outlined here is the less risky approach to creating a transfer of assets that will be outside of the spouses’ GTE.
I hope you are enjoying some beautiful spring weather.
While further estate and gift tax planning may not be required, or even appropriate, for some of you, I wanted to provide an outline of a transfer tax savings strategy which is one of the less complex, yet very effective, mechanisms for lifetime gifting in minimizing estate taxes at your death. I am going to discuss the “SLAT,” an acronym which refers to an irrevocable Spousal Lifetime Access Trust.
Background - Estate and Gift Taxation. As you may be aware, in 2024 each individual has an estate tax, gift tax and generation-skipping transfer tax exemption amount of $13.61 million. Basically, the estate, gift tax and generation-skipping transfer tax are all “transfer taxes” which the federal government seeks to impose if you make transfers above your exemption amount. The exemption amount has been increasing steadily for the last 15 years. However, the current law requires that the exemption amount be reduced by half on Jan. 1, 2026. Any transfers made above the exemption amount are taxed at the rate of 40%, with an additional generation-skipping transfer tax on gifts made to “direct skip” persons. Also worth noting, while there is a "portability[1]" of the unused estate exemption between spouses, the generation-skipping transfer tax exemption (GST exemption) is not portable. For example, if the unused exemption amount of the deceased spouse is $3 million, that amount can be utilized by the surviving spouse on lifetime gifts and/or on estate taxes. However, if the deceased spouse fails to utilize his or her GST exemption during their lifetime or at death, that unused GST exemption is lost and cannot be used by the surviving spouse.
Purpose of a SLAT. If your combined assets exceed the exemption amount for each of you, you may wish to consider incorporating a SLAT into your planning. The assets transferred to the SLAT, if properly structured and administered, will be outside of the gross taxable estate (GTE) for both spouses.
Structure of a SLAT[2]. While some of the nuances of a SLAT can be slightly different to comport with the individual’s planning goals, these are the basic requirements and recommendations:
One spouse creates the SLAT (Settlor Spouse) and gifts assets to the SLAT from his or her own separate account. The gift to the SLAT can be in the form of real estate, securities, cash and other intangible assets, such as LLC interests.
The other spouse is the beneficiary of the SLAT (Beneficiary Spouse) and is granted access to the SLAT’s assets. The SLAT provisions could require mandatory income to the Beneficiary Spouse, or the distributions of income and principal can be wholly discretionary for the Beneficiary Spouse’s health, maintenance and support (also known as the HEMS standard).
The Beneficiary Spouse may serve as trustee, or a third party may serve as trustee. It is not recommended that the Settlor Spouse serve as trustee, but it is not prohibited. If distributions to the Beneficiary Spouse will be outside of the “HEMS” standard, then an independent trustee will be required.
Upon the death of the Beneficiary Spouse, the remaining assets in the SLAT will distribute to the next level of beneficiaries and will not revert back to the Settlor Spouse.
Benefits of SLAT
The income (and, if necessary, some principal) of the SLAT is still available to the “family unit” of both spouses. This creates a comfort zone if you are looking to transfer and gift all of your exemption amount in 2024 or 2025. Note that you must still make certain to leave sufficient assets outside of the SLAT for your day-to-day expenses according to your lifestyle.
The gift to this trust would shelter the spouses’ gross taxable estate from taxation of these assets transferred and the appreciation on the assets, if the SLAT is properly administered in compliance with federal and Florida trust law.
Risks of SLAT
The greatest risk of incorporating a SLAT into your planning is the possibility of an untimely death of the Beneficiary Spouse, which then leaves the Settlor Spouse without any access to income from the assets transferred to the SLAT. It is imperative that the SLAT only be considered if the assets remaining outside of the SLAT will be amply sufficient to meet your lifestyle as a family, for the duration of both lives. While all assets remaining in the SLAT after the death of the Beneficiary Spouse will follow your estate plan, this premature distribution to your descendants or other beneficiaries is a risk that needs to be understood and that sufficient assets outside of the SLAT are available to the Settlor Spouse in the event of this occurrence.
In conclusion, the above is an option to further shelter your estate from transfer taxes without creating too much complexity in your estate plan. I hope you found this brief note worthwhile. Please do not hesitate to contact me if you have any questions regarding the foregoing.
Happy Spring!
[1] There are certain parameters which must be met for the portability application. For example, the surviving spouse wishing to benefit from portability cannot remarry and then use the first spouse’s un-used exemption amount.
[2] There are different types of SLATs. The SLAT referenced and outlined here is the less risky approach to creating a transfer of assets that will be outside of the spouses’ GTE.
