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$12,060,000 per person. That’s the Federal Estate and Gift Tax Exemption for 2022, and you have until 2025 to take advantage of it. In three years, the exemption will drop to $5 million per person, so the clock is winding down if you plan to use the higher rate. The Spousal Lifetime Access Trust (SLAT) is an effective estate planning strategy and pairs well with this particular tax exemption.

A SLAT gives you a way to keep control of your assets within the family while preserving that exemption. As the grantor, you would retain indirect control over the assets through your spouse — or your children if you pick them as beneficiaries — while allowing your spouse or children to inherit the assets without paying higher estate taxes than necessary.

It’s a tax-free, legal, and entirely appropriate way to manage your affairs. Moreover, a SLAT has a few other important advantages, such as:

  • It’s not subject to income tax. You, as the grantor, would continue to pay annual income tax on the income earned by the assets you transfer to the trust, not the trust. The assets continue to appreciate in the trust.
  • That also means when the beneficiaries (such as your spouse or kids) receive those assets, they can do so without those assets depreciating in value because of income taxation.
  • A SLAT can be paired with the Generation Skipping Transfer Tax to maximize its benefits for multiple generations of your family (e.g., grandchildren).
  • You can fund the SLAT continuously using the property you already own.
  • Creditors can have no claim on those assets after they’re part of a SLAT. For all intents and purposes, the assets leave the grantor’s possession and transfer to the beneficiary.

Once you’ve decided to create a SLAT, it’s actually better for you not to wait to transfer in assets. Remember, the trust does not need to use its assets to pay income taxes. So the longer those assets are held by the trust and not the grantor, the longer they can appreciate without the drag of income taxes. And the appreciation in value of the assets is removed from the future estate of the grantor.

Can both spouses create a SLAT?

Just as you can create a SLAT for your family, your spouse can make one of their own for your family too, and that way, both of you can use the Federal Estate and Gift Tax Exemption — right?

Partially. While it is true that you can do that, the IRS will insist that the two SLATs be different enough — their provisions cannot be exactly alike, their goals cannot just be mirror images of each other — to keep from being mere arrangements to exempt household assets from taxation. This is called the Reciprocal Trust Doctrine, and running afoul of it can be a headache if you’re found to be just circumventing the rules.

This delicate area of law demands a unique skillset to navigate effectively. Having a lawyer who’s also an accountant and a tax preparer at your side would be an excellent idea if you’re thinking about using a SLAT with the Federal Estate and Gift Tax Exemption. Call me today and we’ll discuss a financial plan that’s a perfect fit for your unique circumstances.