By FPA member Eric S. Toya, CFP®
Last Updated: March 5, 2012
In December 2010, Congress acted in the 11th hour to prevent the estate tax exclusion amount (the amount that you can pass on at death without owing estate taxes) from reverting to $1 million at the start of 2011. The exclusion amount was raised to $5 million for 2011 and 2102. This was considered big news, and along with the extension of the Bush tax cuts, received wide media attention. But the really big news was that the gift tax lifetime exemption, which had previously remained at $1 million, even as the estate tax exemption increased to $2 million and $3.5 million, was also increased to $5 million.
The increased gift tax lifetime exclusion effectively gave wealthy couples the ability to create a $10 million dollar living dynasty, allowing those assets to grow during their lifetime outside of their estate. In order to take advantage of the gift tax exemption, most strategies require that you give the assets away, either outright or via a trust that is irrevocable and without a retained interest. Not an attractive idea for many who are concerned that they may someday need the gifted funds. A strategy that will allow you to take advantage of the gift tax exemption, while retaining some access to the funds is the Spousal Lifetime Access Trust, or SLAT. The SLAT is an irrevocable trust that one spouse creates for the benefit of the other spouse.
Most commonly, this would mean a husband creating a SLAT for the benefit of his wife (you want the beneficiary spouse to be the one with the longer life expectancy), funding it with his $5 million gift tax exemption and naming the wife the trustee of the trust. The trustee may make distributions for the health, education, maintenance and support of the beneficiaries, including the wife herself! Thus, the couple (even if technically, just the wife) retains access to the funds in the trust. Upon the eventual death of the wife, the appreciated value of the trust can pass estate tax free to the remaining beneficiaries, usually the children.
A drawback of this type of trust is that if the wife dies first, the trust assets will generally become inaccessible to the husband. A possible strategy is to purchase life insurance on the life of the beneficiary.
There are some pitfalls that you have to avoid in order to receive the full benefit of this type of trust. In order to avoid inclusion of the SLAT assets in the estate of the beneficial spouse, the trust should be funded with separate property of the grantor spouse. This may mean splitting community property into separate property prior to gifting assets into the trust.
Keep in mind that everyone's situation is different. The amount and nature of your assets, as well as your tax status and goals are all important considerations. As with any advanced estate planning technique, you should seek the advice of tax, legal and financial planning professionals before making any decisions.
FPA member Eric S. Toya, CFP®, is Vice President of Wealth Management for Trovena, LLC in Redondo Beach, Calif. Eric graduated from the University of Southern California with a BS in Finance and Accounting. Eric has been quoted in national publications, including The Wall Street Journal, Money Magazine and the Los Angeles Times.