by Verena Meiser

Estate Attorney, Verena MeiserFebruary 26, 20210 comments

How to Plan for Upcoming Changes in Estate Tax Law

Can a Spousal Lifetime Access Trust (a SLAT) capture the current estate tax exemption? And could it help maintain an expensive life insurance policy?  The answer to both questions is Yes.

You may be asking yourself what steps you could take in light of the anticipated drop in the estate tax exemption?  If you already have an estate plan, how will these tax law changes affect your current estate plan?  Is there anything else you need to do to avoid exposure to estate tax and preserve your property?

And what about that Irrevocable Life Insurance Trust aka ILIT, that you set up to shelter the life insurance proceeds from estate tax?  Are the annual premiums greater than $20,000?  What if the rumored changes to the annual gift tax exclusion become law, so that each of us will be limited to a total of $20,000 of excluded gifts each year?  If that was the case, the excess premium above $20,000 would have to be reported on a gift tax return.  And lifetime gifts erode the available estate tax exemption at the time of death.

These are only some of the questions our concerned clients are asking at this time.

We would like to describe a powerful planning tool, a trust, that you could incorporate into your existing estate plan that gives you a shot at trying to lock in the current estate tax exemption and, if you need to can provide the funds for those expensive life insurance premiums, all while continuing to keep the policy out of your taxable estate.

Meet the Spousal Lifetime Access Trust, also known by its acronym as SLAT.  What is a SLAT?

It is an irrevocable Trust, set up by one spouse for the benefit of the other spouse.  Assets are protected from the other spouse’s creditors, the other spouse chooses the investments and the trustees, and if the transfer to the trust is a completed gift, the assets are not part of the taxable estate of either spouse.  A transfer of property to such a trust in an amount that is greater than the anticipated new estate tax exemption (anywhere from 3 to 6.8 Million) can be covered by the current unified gift and estate tax exemption.  Current tax law provides that there will not be a claw back.  No claw back means that the use of the exemption will not be undone if the exemption is smaller in the year the donor spouse dies.  However, tax laws can be changed and even be made retroactively effective.  Caution must be taken include provisions that allow for a flexible response to any estate and gift tax law changes that become the law quicker than anticipated.

How is a SLAT different from another irrevocable trust you may already have?  Why would someone consider such a trust aside from the creditor and estate tax benefits?

Since the other spouse is the beneficiary of the trust, that spouse could share distributed property with the first spouse in the event the first spouse runs out of assets.  That gives a sense of comfort.  Children could also be added as beneficiaries, and for the unmarried individual, the trust could include provisions for a potential future spouse, often referred to as the so-called “floating spouse”.  In addition, the children could be named as beneficiaries.

Some other attractive features of a SLAT are that the Spouse could have a lifetime and testamentary limited power of appointment.  That means the spouse could appoint funds back to the first spouse who set up the trust.

Bottomline is that a SLAT can provide 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.

Verena Meiser is an Estate Planning attorney with Lewicky, O’Connor, Hunt & Meiser, LLC. She can be contacted at (410) 489-1996 or [email protected].