Prepare for an Uncertain Taxing Future with Trusts

The potential sunsetting of current high gift and estate tax lifetime exemptions and proposed tax plans could dramatically reduce future estate tax exemptions. With these possibilities looming soon, taxpayers are turning to trusts, including Spousal Lifetime Access Trusts (SLATs), to make the most of the current tax exemptions. An article appearing in The National Law Review, “2025: SLATs on the Brink of a Rapid Rise in Popularity?” explains how these and other trusts may be used as an effective estate planning tool.

While SLATs are emerging as a highly popular strategy, other trusts to consider include:

• Grantor Retained Annuity Trust (GRAT), where asset appreciation is transferred to heirs with minimal gift tax. The grantor retains an annuity for a set period, and the remaining assets are passed on to beneficiaries.
• The Irrevocable Life Insurance Trust (ILIT) excludes life insurance proceeds from the taxable estate. The Trust owns and controls the life insurance policy, so the proceeds are not included in the estate.
• Charitable Remainder Trust (CRT) provides an income stream to both the grantor and the charity. At the end of the trust, the remainder goes to the charity. Note that this is an irrevocable trust.
• A Qualified Personal Residence Trust (QPRT) transfers a primary or vacation home out of the estate. The grantor retains the right to live in the home for a set period. After they die, the home passes to heirs, freezing its value and reducing the estate tax.

SLATs work by having one spouse—the donor spouse—transfer assets into an irrevocable trust for the benefit of the other spouse, known as the beneficiary spouse. The transfer uses the donor spouse’s lifetime exclusion amount, which removes the assets from the taxable estate, including any future appreciation. The beneficiary has access to the assets, and the donor spouse can use the assets via the beneficiary.

There are some pitfalls to be considered. If the couple divorces, the donor could lose access to the assets in the SLAT. While there is a way of preparing for this (identifying the beneficiary as “the person to whom the settlor is currently married” rather than naming a specific person), divorce proceedings could put the SLAT at risk. The donor spouse could also lose access, if the beneficiary spouse predeceases them.

A SLAT must be prepared by an experienced estate planning attorney. If the donor spouse retains certain powers over the trust, the SLAT's assets may be included in the donor spouse’s estate. Contributions are considered “completed gifts,” so if the gift exceeds the annual gift tax exclusion, it will reduce the donor spouse’s lifetime exemption.

If the SLAT is not drafted properly, it could result in the trusts being included in each other’s estate because of the Reciprocal Trust Doctrine. This allows a court to “uncross” the trust, usually at the IRS's request. The rule prohibits tax avoidance through interrelated trusts that place spouses in the same economic position as if they’d each created trusts naming themselves as beneficiaries.

At The Werner Law Firm, we understand the importance of taking proactive steps to secure your estate and maximize current tax exemptions. Our estate planning attorneys are experienced in creating Spousal Lifetime Access Trusts (SLATs) and other trusts that can help you protect your wealth and ensure it passes on to your beneficiaries in the most tax-efficient way. We can help you evaluate the benefits of SLATs, GRATs, ILITs, and more, so you can make the best decision for your financial future.

If you have any questions, schedule a free appointment with us through our online appointment page.

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Reference: The National Law Review (Aug. 25, 2024) “2025: SLATs on the Brink of a Rapid Rise in Popularity?”