The 2017 Tax Cuts and Jobs Act greatly expanded certain tax exemptions. Since the Act passed, Tennessee taxpayers have been searching for new ways to take advantage of these exemptions, leading to the development of innovative wealth management strategies.
Of the many cutting-edge techniques inspired by the law, the Spousal Lifetime Access Trust (SLAT) is perhaps the most creative.
The SLAT’s appeal rests in the fact that it builds off already common tax avoidance tactics; it’s particularly similar to the “credit shelter” trust, according to PNC Insights.
In simple terms, a SLAT is established when a donor spouse “gifts” money or assets to an irrevocable trust for the benefit of a beneficiary spouse. Unlike other trusts, the SLAT is created when both donor and beneficiary are still alive.
The assets are less than the donor spouse’s federal tax exemption and not subject to the gift tax; they’re also not considered part of the donor spouse’s gross estate and not subject to the estate tax.
“If structured properly, the gift permanently removes the assets, as well as future appreciation on the assets, from the donor’s taxable estate. Even though the non-donor spouse is a beneficiary of the SLAT, the trust is excluded from the non-donor’s taxable estate as well,” according to Fidelity.
Other SLAT considerations
The SLAT is ideal for Tennessee couples looking to take advantage of the expanded gift and estate tax exemptions; however, there are other considerations.
For example, it should be noted that the donor spouse cannot be the trustee of the SLAT, and the beneficiary should only be the trustee if certain conditions are met.
Furthermore, the trusts should be drafted in such a way as to avoid the reciprocal trust doctrine if both spouses plan on creating SLATS.
Of course, an experienced estate planning attorney should be consulted before any tax avoidance strategy is undertaken. They understand the nuances of the law and can foresee implications beyond the grasp of non-professionals.