“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 exemptions to $13.61 million per person for 2024. 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

1. Estate Tax Advantage: The SLAT is structured as an irrevocable trust. As such, upon funding (with assets held in the individual name of the grantor), the assets are removed from the grantor’s estate and are also not included in the spouse’s taxable estate. Note, the transfer of assets to a SLAT is a gift and will utilize the grantor’s gift/estate exemption. Also, spouses may not create ‘identical’ SLATs or assets will be taxed in their respective estates.
2. Spousal and Beneficiary Provisions: The spouse has a lifetime interest which can be designed as either required or discretionary income or income/principal distributions, or as unitrust payments. Children and grandchildren may also be named as current beneficiaries, or their interest may begin at the spouse’s death as remainder beneficiaries.
3. Maximizing Tax Impact: Adding a power to substitute assets enables ‘basis planning’ to mitigate capital gain tax and also ensures that the most rapidly appreciating assets are held in the tax-advantaged SLAT, thereby maximizing the estate tax savings.
4. Flexibility Provisions: The beneficiary spouse can be given a limited power of appointment to redirect assets among a class of recipients, generally descendants, in order to create flexibility for unknown future circumstances.
5. Favorable Grantor Trust Status: The trust will be taxed as a grantor trust as long as the beneficiary spouse is living, thereby protecting the trust assets from being depleted by taxes and allowing the grantor to make tax payments on behalf of the trust without being considered a taxable gift. Certain provisions can be included to allow ongoing grantor trust status even if the beneficiary spouse predeceases the grantor.
6. Trustee: The grantor may not serve as Trustee, but the spouse may, provided the power to make distributions to him or herself are restricted to an ascertainable standard, i.e., amounts needed for health, education, maintenance and support.
7. Divorce or Death of Spouse: To mitigate concerns, the SLAT can be drafted to include only a ‘current’ spouse and can be established in a jurisdiction that enables a Trust Protector to have the power to add beneficiaries, including a future spouse.

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.

Oxford Financial Group, Ltd. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Oxford Financial Group’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal or investment advice. Tax and legal counsel should be engaged before taking any action. OFG-2404-66