Here’s how it works: One spouse, called the grantor, transfers her individually-owned assets from her estate into the SLAT for the benefit of her spouse, called the beneficiary. Once removed from the grantor’s estate, the future appreciation of the assets is also removed, meaning those gains won’t be taxed.
But the couple isn’t cut off from the money: the beneficiary spouse can access the assets in the SLAT for health, education, maintenance, and support for both him and his spouse, says Bob Peterson, senior wealth advisor at Crescent Grove Advisors. “Some would say you are having your cake and eating it too.”
The primary purpose of a SLAT is to move future asset growth out of the estate, says Peterson. He gives the example of moving $5 million into the SLAT. If it eventually grows to $15 million, the $10 million appreciation is not subject to estate taxes upon the grantor’s death. Establishing a SLAT can also be a good way to safeguard assets from creditors or claims against either spouse.
“It should be remembered that SLATs are an estate tax strategy, not necessarily an income tax strategy,” says Peterson. “SLATs are typically structured as grantor trusts, so the grantor continues to pay income taxes on the trust earnings.”
This is an especially beneficial arrangement to some couples because many irrevocable trusts don’t allow beneficiaries to take distributions until after the death of the grantor. With a SLAT, however, beneficiaries are able to withdraw the income or principal to maintain the couple’s standard of living.
Grantors should be sure, then, that they can continue to live their lifestyle if they lose access to those funds in the future, for whatever reason. If the beneficiary spouse dies before the grantor, the remaining assets will pass to that spouse’s beneficiaries, typically children, without estate taxes.
“By making a gift now, you can use the full $13.99 million, versus waiting until 2026 and only having the ability to gift around $7 million without gift tax consequences,” says Peterson.
But again, couples will want to be careful. The expanded exemption could easily be extended, and then they may have put limits on how they can access their funds for no reason.
