Dear Clients and Friends:
Ever wonder what the wealthy are doing today to reduce their tax burden? Keep reading.
What is the concept of a SLAT in estate planning and what are the pros and cons.
A SLAT has become the estate planning tool of choice for the married wealthy. I will explain, but first some background with an example.
Assume you are a couple with $23.4 million. The current federal gift and estate tax exemption is $11.7 million, per person. Therefore, you can exclude from federal gift and estate tax your entire $23.4 million at this moment. YAY! However, there are serious proposals to reduce the federal gift and estate tax exemption to $3.5 million, meaning you would only be able to exclude $7 million from tax. BOO! The excess of $16.4 million would be taxed at about $40% at the second death. Do the math. OUCH!
What are wealthy couples doing about this? They are each giving away $11.7 million now, tax-free, before they change the law. If they were to die after the gift there would be no tax.
Wait a minute! What couple with $23.4 million dollars would simply give away everything they have to their children? How would they eat?
Enter the concept of the SLAT. A SLAT is a SPOUSAL LIMITED ACCESS TRUST. In the example above, the husband would gift $11.7 million to a trust with his wife as beneficiary. She would be a trustee, together with a co-trustee. All the money in the trust will be available to the wife for the rest of her life and will not be taxed at either death, even if the federal exemption is reduced. The wife will also set up a SLAT for the benefit of the husband. In this way, they have reduced their taxable estate by $23.4 million but they still have access to the entire amount. If the wife dies first, the husband’s trust for her benefit will go to the next beneficiaries (i.e., children, grandchildren) or can stay in trust for these same people, but the husband will have no access to it. However, the husband can still live on the $11.7 million that the wife put in her trust for his benefit.
There are a lot of fancy rules, the trusts have to be somewhat different (they cannot be a complete mirror of each other, and the timing of the creation of these trusts matters) and there are some capital gain disadvantages (loss of step-up in tax basis at death) but this is the cost of attempting to preserve today’s very generous tax exemptions that are being threatened.
We do these every day for our wealthy clients, led by the head of our high-end estate planning practice, my partner, LARRY SIEGEL.
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Until next time…
peace, health and happiness,
Lawrence Eric Davidow