Change is coming to estate and gift tax laws. Should you consider a Spousal Lifetime Access Trust (a SLAT)?
You may be asking yourself what steps you could take in light of the anticipated reduction in the estate tax exemption and the possible limitation of the annual gift tax exclusion to a total of $20,000 per year per donor, meaning that you could not make more than a total of $20,000 of gifts that do not have to be reported. Gone would be the days of making $15,000 gifts to grandchildren every year, or large contributions to life insurance trusts with Crummey powers to pay for premiums. The anticipated changes will impact many existing estate plans. If yours may be affected, are there any planning strategies you should consider?
Estate planners have many tools at their disposition. I would like to describe one of those, since it is drawing a lot of interest at this time, due to the nature of the anticipated tax law changes. That powerful planning tool is a trust, that could be added to an existing estate plan to lock in the currently high estate tax exemption and, it could also provide the resources to cover insurance policy premiums in excess of $20,000 a year.
Let’s look at a Spousal Lifetime Access Trust.
It is an irrevocable Trust, set up by a Grantor for the benefit of the Grantor’s spouse. Assets are protected from the spouse’s creditors, the spouse can choose the investments and the trustees, and if the transfer to the trust is a complete transfer, the assets are not part of the taxable estate of either spouse. The idea is to fund such a trust with assets of a value up to the current estate tax exemption.
In the case of a married Grantor, the spouse is the beneficiary, and as such, the spouse could share distributed property with the Grantor in the event he or she runs out of assets. That gives a sense of comfort. For the unmarried Grantor, the trust could include provisions for a potential future spouse, often referred to as a “floating spouse”, and children could be named as beneficiaries.
Some other attractive features of a SLAT are that the Spouse could have a lifetime and a testamentary limited power of appointment; meaning that the spouse could appoint funds back to the Grantor. For those who have purchased life insurance in an Irrevocable Life Insurance Trust, to shelter the proceeds from estate taxes, any annual premiums in excess of the new $20,000 gift tax limit, could be paid for with trust property.
The bottomline is that a SLAT has the potential of providing significant estate and gift tax savings making it worthwhile to consider. We are here to advise and explore if a SLAT is a good fit for your family.
One means by which the budget and taxation bill that recently cleared the Maryland Legislature will increase state tax revenues is by substantially restricting the utility of indemnity deeds of trust (“IDOTs”) as a legally sanctioned means to avoid the current payment of mortgage recordation taxes on commercial real estate loans. Under current law, the owner of commercial property can establish a separate business entity to act as the borrower on a commercial real estate loan, and the owner can guaranty the loan and secure the guaranty with an IDOT. The separate entity that is established to borrow the funds can be a subsidiary of the property owner. When this structure is used to have separate entities serve as borrower and guarantor on a loan, no current recordation tax is owed on the IDOT. Once the new law goes into effect on July 1, 2012, it will be applicable to all IDOTs over one million dollars recorded on or after July 1, 2010, and will make IDOTs unattractive for most commercial deals. Although state tax revenues will thereby increase, so will the costs of commercial real estate financing in Maryland.