Discussing Spousal Lifetime Access Trusts (SLATs) and how they can be a great idea for clients considering making a large gift.

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On today's episode, probably the hottest of the hot topics in the estate planning world, slats,

Spousal lifetime access trusts.

It's a popular thing that even non planners are talking about and I'm sure that the CPAs and financial planners listening to this get this question just as frequently as we do. People hear about it, you know, on Forbes and in the news and they say, what is this and do I need it?

And I think it's key to just go ahead and look back at those words. That's what it is. It's a spousal lifetime access trust. So it's a trust for the benefit of a spouse and maybe others the spouse is a beneficiary of, and it's a trust. So it's inevitably used in gift planning.

And I think now the reason why it's so popular for people to have this on the top of their minds is because of the legislation that we're currently benefiting from the Tax Cuts and Jobs Act that has changed the tax landscape.

Yeah, the exemptions at a another all-time high in 2023, the exemption is now $12,920,000. So clients are thinking about ways to use that. Why? Because that exemption is slated to sunset on January 1st, 2026 and it'll be halved. So if we, just for my own simplicity sake, call today's exemption 13 million, if it stays there, it won't. It will go up. But the exemption in 2026 will be half that six and a half to $7 million. So clients are thinking about using this slat structure. A lot of clients are thinking about making a gift and a lot of advisors talk about the slat structure has the way to make that gift. Want me to run through the numbers of the gift?

Yeah, I think that would make a lot of sense.

And I think this helps a lot when thinking about slash we take a client, a married co client, the couple is a net worth of 25 million and we say, we think you should gift 13 million to a trust... And that's right. That laugh right there is often the reaction because you're saying we should give over half of our net worth to a trust. And I say yes, we run through those numbers and show if you gave 13 away today when the exemption goes down, let's make my math easy to seven in 2026, you would've gifted six more than you could have in 2026. And if we live in Connecticut, so we'll use our basic 50% easy calculation rate. So you saved 3 million to your family by making that gift. You saved $3 million by making that gift. So a lot of clients are going to be thinking about making big gifts over the next couple of years and since it may be such a large portion of their actual net worth, cause anyone between that 10 to 30 million range may benefit from making such a big gift that the slat has. We've heard so much about in recent times

And that touches on such an important point that I think we sometimes take for granted that people understand really the mechanics of how the exemption works. So if we're going from 13 million to 7 million, it doesn't necessarily benefit a client for this planning to create a trust now and make a gift of 7 million because that doesn't go beyond what they would already have. So it cuts in to the bottom portion of the exemption first and you don't get the benefit from the expanded exemption until you get to above where it'll sunset to.

So it requires that big gift.

It does.

You've just explained to me, and I've explained as well why a big gift may be appropriate for a client. That client reacts and says, no way, no way can I give away that much and not have access

To it. And that is why the slat tends to be an option that I like to call a safety valve because the purpose is obviously to remove these assets from the client's taxable estate. So the goal will be to make this big gift, save potentially three to 4 million in transfer taxes, but then not have the spouse actually take distributions. That seems to defeat the purpose of transferring these assets out. But I like clients to think of it just like that, a safety valve, that by having the spouse as a beneficiary, they can be assured that if the trust is drafted correctly, that they could potentially have access to that money later on if they need it.

Yeah, historically with slats we were thinking about making a gift to a trust using the exemption, capturing the exemption and getting the clients into the strategy and we would say, we're going to put assets into this trust that we think you're not going to need. You're not going to need these assets, we're going to let these assets grow. That growth is outside of the estate tax system. But I think as we hit these clients where let's say 10 to 40 million range, the ranges aren't perfect, but it gives you an idea if you fit in that range, they, they want the access to it. So for these clients, I think it's okay to think about possibly using the trust later on because they wouldn't have gifted it if they didn't have that access. Historically we might have no, we don't want to touch these assets last, but if you wouldn't have gifted, if, if I convinced you to gift to save that money and you're sitting there and you're like, I know I'm going to need some of it, well at least we still did the planning, I'm still going to push you to use your own assets first. But you have that safety valve sitting there,

Right? And you've still removed the value of the asset. You've used that exemption amount. So hopefully if you are accessing some of the funds, you're accessing appreciation from it. Now that leads into a really interesting point that I have a lot of clients that want to take advantage of this exemption amount but aren't really ready to part with liquid assets that they are living off of they're taking the income from. So they think that their parcels of real property would be the perfect asset to give. What's your reaction if people come to you and say, Michael, this vacation property, it seems like the perfect value to remove from my estate.

That's great. I mean, at the end of the day, if it makes sense for tax purposes to get clients to make a big gift, I've gotten them past one hurdle and picking the right assets is simply the next hurdle. If the only way they're going to do it is by taking, you know, a vacation home and putting it into a trust, we'll go with it. I think residential property inside a irrevocable trust creates additional concerns or issues that we have to highlight. One is, how are we going to pay for the maintenance of that house? Cause houses require maintenance and that hits cash flow, right? So you may have a lease or you may fund it so that it can, I think that if it's the only way I can get them to make that gift, we're going to go with it. But at the end of the day, I, I want to pick assets that we think are great growth assets to sit in this trust and sometimes that negative pull on the real estate can impact that.

When you're helping then to identify the right assets to gift, what else are you looking at beyond appreciation potential? Is it necessarily a lot of income producing or just growth potential?

We're going to look at their statement of net worth and go from there. Growth is phenomenal. If they're going to rely upon certain assets to create dividends for their lifestyle, I'd rather keep that on their side of the fence, right? So we're not taking distributions out of the trust for the spouse. So it comes to the goal of how do we get them to make the gift we've convinced them to do it. If we have assets that are high appreciating that we don't think they're going to need, great. If they have assets that they think they're going to rely upon, keep them on their side of the equation. When we're looking at a slat and a trust in general, we're going to have a trustee. So what are some of the options of who can serve as trustee of a slat.

In our ideal estate planning world? I would love for the client to identify a completely disinterested third party that isn't necessarily always in line with what the client wants. So we discuss some alternatives that potentially make the trust a little bit weaker in terms of i r s challenge, but it's very common for a spouse, the beneficiary spouse to serve as the initial trustee of the trust. So you have one spouse who is the grantor of the trust agreement donating property from his or her own name. We never want it to come from a jointly owned asset. And then we have the other spouse serving as trustee and the beneficiary who can potentially receive distributions if need be. Now I know we've occasionally had clients who've asked about serving as trustee of their own slat. We can get closer to something that looks like that in jurisdictions that allow directed trusts and at this point there are quite a few, Connecticut being one of them. So it is something that we could offer that bifurcation of trustee roles that allows the donor grantor spouse to be involved typically in the investment of the trust assets, which can be especially important to clients who've identified potentially business assets as something they're going to gift.

If we're looking today and we're looking at that client who we're trying to convince to make the gift, it's a big portion of their net worth. So the slat makes sense. So one spouse creates the trust, the other spouse is the beneficiary, the other spouse may be one, may be the only trustee may be a co-trustee with an independent third party. And then that's going to push towards the terms. What are the terms of the trust? Often, especially if the spouse is going to be a trustee, they'll be able to make distributions to themselves under the health education, maintenance and support standard, which will allow the spouse to service as trustee and make distributions to themselves under that standard. If we want a larger standard, would that complete discretion? We would use the independent trustee there to be able to do that. So all's fine. We've made a gift, spouse is a trustee, they have some limited access to it. They don't have complete control of the assets anymore because it's in a trust, has a trustee, they have a fiduciary standard to distributions and investments. But what happens when life moves on? For example, what could happen at the death of the beneficiary spouse? We've explained how the family has access to it. Husband and wife maybe have access to it because a spouse is a beneficiary, but if that spouse beneficiary dies, you may no longer have access to it. Right?

And it's interesting cause that's not something that I get asked about a lot. I think typically clients are thinking about these inter vivo gifts. They're not contemplating death and everyone's just going to live forever and be happily married. And unfortunately that's not the case. I have had a couple that was older looking to gift to take advantage of these laws before 2026 and really looking at their health to figure out which spouse was more likely to survive the other because the one with the longer life expectancy would ideally be the beneficiary spouse. So that that access continued, the beneficiary spouse dies first. There would potentially, unless you've planned creatively, there would not be any access for the donor spouse and the only beneficiaries remaining would be likely descendants if that's the way the trust was drafted. But there's no easy way for that donor to have access otherwise.

Yeah, so often these slats are grantor trusts for income tax purposes. So we may built into that strategy from on the drafting side. We may have some ability to get liquidity to the surviving spouse through maybe a alone to the surviving spouse, which could give them some liquidity. In some jurisdictions we might be able to, and you'll hear like a hybrid slat where maybe you bring the grant or the person who's created the trust and made the gift, bring them back in to be a beneficiary of the trust. But that's very sophisticated and advanced planning and can only be done in certain jurisdictions.

Right? These are the topics that we love to talk about. It gets to the fun stuff of estate planning, but certainly back to your grantor trust point, I think we can hammer home the fact that of course, being a grantor trust, it's taxable to the donor. So those loans are not recognizable for income tax purposes. So no one's having to report interest income and you're not having to track that as carefully on your 10 40. Another benefit of the grantor trust that could provide liquidity in a different way is the common substitution power. So there are certainly clients who have illiquid assets that they might think of as a generational asset, a piece of property perhaps, or something they want to pass on to their kids, but they're not able to take advantage of. Now we can sit with them and look about the possibility of substituting that e-liquid asset into the trust in exchange for something more liquid that can provide them with income and resources to fund their life.

So let's look at that next scenario that we have to at least think about, which is what happens if the spouses get divorced? So we've made a gift to a trust and the spouses end up being divorced. I think there what becomes important is how you've defined spouse in the document.

So typically I think that people are expecting that whomever serves as the beneficiary at the start of the trust will continue to be the beneficiary. So I at least see that as the common assumption. Clients come in, you're the beneficiary spouse. Yeah, maybe if there's a divorce, you're no longer serving as co-trustee, but there's this feeling that the assets that have been put in the trust are sort of vested there. For the beneficiary spouse, that's actually in our experience, I think typically not the case much more often we see trust agreements that essentially disinherit the spouse as soon as a divorce action is filed, it treats the spouse as having died on the date of filing or on the date of the divorce decree. And that is something that I think is often overlooked that is absolutely crucial to the whole point of this plan, right? The access to the trust. We need to contemplate that divorce.

It's an important planning feature, right? How are we going to define the spouse and that divorce situation hits it right on its head. If we're looking at that 25 million couple who we've made gift half of their net worth, it probably doesn't make sense to have the spouse die at divorce because then the couple only has half of the money left, right? And all of the other money is going for the kids. If you have a client with a hundred million dollars, it might not be as relevant to the overall scheme, but kind of having that conversation during the planning process is important, albeit uncomfortable. I think the third option, though you don't see as often, it's at least fun to talk about, is the idea of a floating spouse. The floating spouse definition is simply, you know, I've created a trust for the benefit of my spouse and the spouse is defined as whomever I am married to at the time. It's a third possible definition that depending on the facts and circumstances may be appropriate. I think what we're not going to focus on today, but we have to at least acknowledge, is that sometimes clients want to do two slats

Reciprocal trusts.

If I create a trust for my spouse and my spouse creates a trust for me, the I r s argues

That they were created in consideration for each other. So the I R S does not like any attempt or what they think is an attempt to do and run around their tax structure. So if they see both spouses giving to trust that look a lot alike for the benefit of the other spouse, they're going to say, you never really gifted it. It was in consideration for the other. And all of those assets can still be included in their respective taxable estates, which I think might be an overlooked doctrine within our estate planning community. But it's certainly something that we are always talking about with clients because we're often planning with two slats and we need to talk about ways to differentiate the trust enough so that they don't come under the purview of that doctrine.

Right? We'll spend another episode talking about specific ways of doing two slats and avoiding that doctrine and the spouse idea of having different definitions and spouses or different results of what happens on divorce or death plays into that role. So there we have it. We have our clients who should be thinking about making gifts. So we have until December 31st, 2025 to make those gifts. I would encourage anyone to do that before then. If this law is in fact going to sunset. Access to your estate planning lawyer in 2025 is going to be hard

Valuation firms as well.

Valuation firms as well. The other piece there is gifting at a time when assets are low. So if you view us at a situation where you have an asset that's undervalued or you think the stock market's undervalued, makes now a great time to make the gift. Let's say you put in an asset today worth 12 million and then in 2025 that asset's worth 15 million. You couldn't have put that same asset in if you had waited two years to make that gift. So thinking about making those gifts now if it makes sense and using the slat strategy is often a way for clients to grasp around the safety of doing it.

Absolutely. And that is a great hook for the financial planners listening to talk about the bear market with their clients and get them on board with what is an important topic. So we certainly appreciate everyone that listened to this. Our hope is that you follow us on LinkedIn and you subscribe to our podcast because we have a lot of good content coming your way.

Thanks, sir.

Thank you for listening to Future focused sophisticated estate planning, hosted by Erin Nichols and Michael Clear partners of the private client services department at Wiggin and Dana. Our aim is preserving the wealth that a family has worked so hard to create and pride ourselves in offering value driven solutions and results. Subscribe to the show on your favorite podcast platform, share episodes with your clients and follow our highly talented, creative and experienced lawyers on LinkedIn for even more Great insight. We'll see you next time on future focused sophisticated estate planning.