By Andrea S. Lawrence, J.D., LL.M., Senior Wealth Advisor, Bryn Mawr Trust
The Spousal Limited Access Trust (SLAT) is mostly used to transfer assets out of the donor’s taxable estate yet provide “limited” access to the donor’s spouse and other beneficiaries. Not just for the super-wealthy, the SLAT also affords hefty asset protection benefits. Consider this technique if you feel the need to set aside a nest egg, free from the claims of creditors.
SLATs have gained popularity recently, to shift wealth out of the taxable estate. What is the big deal about the estate tax? The big deal is that estates above the exemption are subject to federal estate tax at 40%. The 2017 tax-cut law significantly raised the exemption, now approximately $13.6 million per person in 2024. Thus, a married couple can transfer over $27 million to the next generation without triggering the 40% tax. Unless Congress makes the change permanent, the exemption will sunset back to approximately $7 million at midnight on December 31, 2025.
The future of the exemption and other provisions of the 2017 tax-cut law hinges on the 2024 election.
The good news is that in 2019, the IRS clarified that individuals could utilize the lifetime exemption now, by making gifts (either outright or in a trust) and not be penalized later if the amount sunsets. Hence, the popularity of the SLAT.
The SLAT works as follows:
- Donor gifts assets to a trust.
- Beneficiaries typically include the donor’s spouse and children.
- Trustees have discretion to make distributions to the beneficiaries.
- Often, a trust protector is appointed as a check on the trustees’ discretion.
The primary benefit of a SLAT is that the donor gives assets away in use of his or her remaining exemption, yet the spouse and/or other beneficiaries still have access to the funds through the trustees. In addition, a carefully drafted trust following the basic SLAT structure above can provide significant protection from the claims of creditors.
To the extent a beneficiary has a right to receive income or principal, the beneficiary’s creditors have a better chance of accessing the funds, but the donor’s creditors are no longer in play (unless the donor’s gift to the trust is considered a fraudulent transfer). Thus, the best protection is afforded by a purely discretionary trust wherein the trustees have unlimited discretion to make distributions, or not. Therein lies the importance of selecting independent but friendly trustees and naming a trust protector to oversee the trustees.
The SLAT is not only an effective tool to utilize one’s lifetime exemption, but it can also be an effective “domestic” asset protection trust that can be created in any state. State laws vary, and always seek the advice of a qualified estate planning attorney.
About the Author – Andrea S. Lawrence, J.D., LL.M.
Andrea Lawrence is a Senior Wealth Advisor with Bryn Mawr Trust. She provides comprehensive wealth advisory services to Clients working collaboratively with all divisions of the Bank to achieve each Client’s goals and objectives.
A former CPA and practicing attorney, Andrea has helped UHNW clients navigate the many disciplines involved in achieving their objectives for over 25 years. Andrea received a B.S. in Accounting from the McIntire School of Commerce at the University of Virginia. She also has a J.D. and LL.M. in Tax from Villanova University.
This communication is provided by Bryn Mawr Trust for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that Bryn Mawr Trust believes to be reliable; however, Bryn Mawr Trust does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
