On November 16, 2017, Congress passed the Tax Cuts and Jobs Act of 2017 (the “Act”) (Source: Pub. L. No. 115-97). This Act increased the unified credit amount from $5.49 million in 2017 to $11.18 million in 2018 (currently $11.58 million in 2020). In 2020, an individual can give up to $11.58 million away during his or her life and not have to pay any federal estate or gift tax on that amount. This increase is set to expire on December 31, 2025, at which point the unified credit amount will “sunset” back to the pre-2018 levels (indexed for inflation). This would bring the unified credit per person down to approximately $6 million.

Due to this known rollback of tax exemption, plus the potential for tax increases as the federal government needs to raise funds, now is a great time to reduce one’s estate by making gifts, directly to individuals or in trust for their benefit; especially since Congress has stated that individuals who take advantage of the current exemption while it is in place will still be able to maintain that advantage if the tax exemption sunsets (Source: Treas. Reg. §20.2010-1(c)). Once a gift is completed, the value of the asset is no longer included in the Donor’s estate, including any future appreciation attributed to that asset.

To that end, spousal lifetime access trusts (SLATs) have become a popular tax savings tool to utilize the benefit of lifetime gifts while maintaining some access to the funds.

What Is A Gift?
This may seem like a silly place to start, because everyone knows what constitutes a gift, but the technicalities of a gift from a legal perspective are important when dealing with gifts made to irrevocable trusts, especially a SLAT. The definition of a gift is simple, i.e. a voluntary, gratuitous transfer of property or interest in property made by one individual (the “Donor”) to a recipient (the “Donee”). However, there are three requirements that a transfer must have to be considered a gift: 1) delivery of the property, 2) donative intent by the Donor, and 3) acceptance by the Donee.

Donative intent and acceptance are important elements, but for a transfer to an irrevocable trust, delivery is the most crucial element when determining if a gift has been made, and therefore, the property has been removed from the Donor’s estate. At its basic level, delivery is just the transfer from the Donor to the Donee, but for the delivery to be complete, the Donor must relinquish control of the property. For instance, if the Donor transfers a vacation home to her children, but then lives in the home year-round without paying rent and maintains all decisions about the maintenance and improvements regarding the home, the transfer will likely not be deemed a gift by the IRS. The home, plus any appreciation, will be included in the Donor’s estate for estate tax purposes.

It is important to remember with any gift that once the transfer is made, it is no longer the Donor’s property and he or she needs to relinquish control. In the context of a transfer to a trust, the more control the Donor maintains over the administration of the trust and the more access the Donor maintains over the trust property, the less likely the value of the trust will escape the Donor’s estate tax. This is particularly important for a SLAT, whereby definition, some indirect access to the funds and some control over the administration of the trust is the goal.

What Is A SLAT?
A SLAT is an irrevocable trust created by one spouse (the “donor spouse”) for the benefit of a group of beneficiaries that includes the other spouse (the “beneficiary spouse”). The trust is funded while both spouses are alive. The donor spouse will make a gift to the trust, which will use all or part of the donor spouse’s unified credit instead of the marital deduction.

Once the SLAT is funded, it operates similar to any other irrevocable trust. The trust will generally include provisions during the lifetime of the donor spouse and/or the beneficiary spouse, which allow the trustee to make income and principal distributions to a group of beneficiaries that includes the beneficiary spouse and family members. Upon the death of the survivor of the donor spouse and the beneficiary spouse, the trust property can then continue on for the other beneficiaries or be distributed outright to the beneficiaries without application of estate tax.

Why Is A SLAT A Good Tax Planning Tool?
The use of a SLAT can be an effective tax planning tool for individuals who are concerned with paying federal and state estate tax upon the surviving spouse’s death. One benefit of creating a SLAT is that the funds in the trust and any increase in value will escape federal and state estate tax in both the donor spouse and the beneficiary spouse’s estates.

This trust can also provide some creditor protection for the donor spouse and the beneficiary spouse. If the trustee has complete discretion as to whether or not to provide income and principal to the beneficiary spouse, the funds will likely not be available to creditors. The donor spouse can also use the SLAT as a tool to allocate his or her generation-skipping transfer tax exemption to the trust funds.

Lastly, the main advantage of a SLAT versus any other irrevocable trust is that there is some level of access to the trust property for the donor spouse, via distributions to the beneficiary spouse, should a need for funds arise in the future.

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