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“All failure is failure to adapt, all success is successful adaptation.”
Max McKeown,Adaptability: The Art of Winning in an Age of Uncertainty.
This quote from the English writer and researcher of innovation strategy, Max McKeown, applies ironically well to modern day trust structures. While ‘innovative estate planning’ may seem like an oxymoron, a good estate plan should indeed be innovative and designed to adjust to a family’s evolving financial circumstances. Within an estate plan, a truly successful trust is one that will adapt.
A Spousal Lifetime Access Trust (SLAT) is such a trust. The SLAT is an ideal vehicle to embed flexibility into a family’s estate plan, while allowing for significant multi-generational estate tax savings.
Typically a SLAT is funded during life by one spouse for the benefit of the other spouse, as well as potentially children, grandchildren and even future descendants. The SLAT removes the assets from both the grantor’s and the beneficiary spouse’s estates, providing an estate ‘freeze’ because the gifted assets grow outside the taxable estate.
A key advantage of a SLAT is that the beneficiary spouse may still receive income and distributions from the trust, providing the couple with contingent access to trust assets during their lives. For SLATs structured properly and utilizing the laws of key ‘trust friendly’ states, an independent Trust Protector may later add additional contingent beneficiaries which may include the grantor as well.
As such, a SLAT is a good option for families who would like to make lifetime gifts to utilize at least one (or both) of their gift/estate and, perhaps, generation-skipping transfer (GST) tax exemptions, but are concerned about losing all access to the trust assets or depleting their current or future income.
Tax reform doubled the federal gift/estate and GST exsemptions to $11.4 million per person for 2019. This increased exemption, however, is due to expire December 31, 2025 and is also vulnerable to further tax law changes. A SLAT is ideal for families concerned they may lose the opportunity to make larger gifts should the exemption levels be reduced in the future.
WHICH ASSETS ARE RIGHT FOR A SLAT?
As a general rule, a SLAT should be funded with assets that are expected to appreciate significantly over time, thereby enhancing the growth of wealth in the tax-advantaged SLAT and not in the taxable estate.
A SLAT is also an ideal vehicle to hold life insurance on the grantor’s life. During the grantor’s lifetime, the trustee can take a loan or cash withdrawals from the policy to provide the trust with liquidity for distributions to supplement income or to fund other financial goals.
Upon the grantor’s death, the death benefit and other SLAT assets continue to provide for the beneficiary spouse and family and are kept outside of the grantor’s taxable estate. Upon the beneficiary spouse’s passing, proceeds can enhance legacy wealth and provide for future generations, and can be used to lend money to the grantor’s estate to offset estate tax.
THE DYNASTY SLAT
A SLAT can also be designed as a Dynasty Trust when created in a jurisdiction that allows trusts to extend in perpetuity. A Dynasty SLAT is designed to benefit the family as well as multiple future generations, providing an effective way to utilize the GST tax exemption.
With this type of trust, the couple captures the use of their GST tax exemptions along with all of the other advantages of a traditional SLAT.
MAXIMIZING TAX AND FLEXIBILITY PROVISIONS
A SLAT provides families with an opportunity to take advantage of the current larger exemption amounts while leaving a window open for access to the trust assets to meet the income needs of the family. This adaptable tool in the planner’s toolbox requires the thoughtful input of the family’s entire team of advisors. Your Oxford advisor will work with your team to coordinate the optimal solution for your family.
The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.Print