SLAT: An important estate planning strategy for physicians to lower President Biden’s estate tax

For married physicians looking into estate planning strategies, one thing to keep in mind is how to make best use of spousal benefits in reducing taxes or providing for a surviving spouse or other beneficiaries. For wealthy physicians, a spousal lifetime access trust, or SLAT, may provide a viable vehicle for avoiding estate taxes for both spouses and protecting assets from creditors while at the same time providing distributions that will benefit the beneficiary spouse.

So how does this work?

First of all, what is a SLAT (Spousal Lifetime Access Trust)?

A SLAT is an irrevocable trust established by one spouse during his or her lifetime for the benefit of the other spouse. While the donor spouse gives up control of the assets that have been assigned to the trust as they are transferred outside of the combined estate, the beneficiary spouse can access the assets immediately. These assets can be varied, even including life insurance, though the assets transferred into the trust must only be only owned by the donor spouse. A properly drafted SLAT can be very specific about the use of the funds, suiting the beneficiary spouse’s needs (or those of other beneficiaries, such as children or grandchildren) in a narrow or broad sense depending on what is written into the trust.

What are the advantages of SLAT?

The strategy of making large, permanent gifts to reduce the size of a joint estate is often accompanied by some concern over the necessary loss of control during the donors’ lifetimes that those irrevocable trusts require. The uncertainty of the future might cause some worry that those assets could be needed in the future. A SLAT can reduce some of that concern, as the donor spouse may still indirectly benefit from those gifts, as the beneficiary spouse can request distributions from the SLAT during his or her lifetime. These distributions should be considered carefully, as those distributed assets will again be part of the taxable estate.

There are current tax exemptions that can make establishing a SLAT now particularly beneficial. Federal tax laws impose estate taxes on assets in an estate at the time of death as well as gift taxes on lifetime asset gifts. However, the ‘unified credit’ exemption in effect now permits every individual to transfer $11.58 (in 2020) million in assets tax-free during his or her life or at death ($23.16 million per couple). This historically high exclusion will sunset on December 31, 2025, so this may be the best time to take advantage of a SLAT in one’s estate plan. For married couples, the opportunity exists for each spouse to establish a SLAT for the other as beneficiary, maximizing the gift tax exemption for their combined estate by removing those assets from consideration.

What are the disadvantages of SLAT?

One disadvantage of a SLAT is that upon death or divorce, the donor spouse no longer has any access to the assets inside the trust, even the previous indirect access. In the case of a divorce, the beneficiary spouse maintains his or her control over the trust just as it was before, but the donor spouse has no method of benefiting at all. In the event of the death of the beneficiary spouse, as mentioned, the trust will either terminate and be distributed to other beneficiaries or continue on in trust for them. Again, the donor spouse does not have any access at all.

Another consideration that applies particularly when both spouses create SLATs for the benefit of the other in order to fully utilize their tax exclusions is to ensure that their creation does not run afoul of the reciprocal trust doctrine. This can occur if the IRS determines that two trusts are interrelated or too similar; in this case, both trusts could be dissolved and the assets returned to the taxable estate. To avoid this, each SLAT should be established with differences in mind, which may include creating them at different times or granting beneficiaries different rights or withdrawal terms.

In terms of tax filings, SLATs are generally structured as grantor trusts, meaning they do not require annual trust tax returns while the donor spouse is still living. However, the transfer of assets into the SLAT will require a gift tax return in the year that the transfer occurred.

So, is SLAT suitable for me?

Altogether, SLATs are complex strategies that can be good methods of wealth transference for high-income couples looking to reduce their taxable estates, particularly while the gift tax exemption is so high. However, because the assets being moved into the trusts are a permanent gift, it is important to discuss any plans with experienced financial professionals to ensure that the SLATs are established in a way that analyzes each situation as unique and in a way that best benefits the donors and beneficiaries.

Securities are offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate companies. You should continue to rely on confirmations and statements received from the custodian(s) of your assets. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.

Syed Nishat is a partner, Wall Street Alliance Group. He can be reached on LinkedIn and on Twitter @syedmnishat. He holds the FINRA Series 7, FINRA Series 63, and FINRA Series 66 licenses, along with licenses for life, disability, and long-term care insurance.