Read more about the article Who Needs a SLAT Trust? – Annapolis and Towson Estate Planning

Who Needs a SLAT Trust? – Annapolis and Towson Estate Planning

The most common estate planning technique used in 2020-2021, according to a recent article from Think Advisor, was the Spousal Lifetime Access Trust (SLAT). The SLAT has become increasingly popular for married couples at or above the current estate planning exemption level, as described in the article “9 Reasons This Popular Trust Isn’t Just for the Super-Wealthy.”

SLATs allow couples to move assets out of their estates and, in most cases, out of the reach of both creditors and claimants. Each spouse can still access the assets, making the SLAT a valuable tool for retirement.

In the past, SLATs were not used as often for clients with $1 million to $10 million in net worth. However, the SLAT accomplishes several objectives: optimizing taxes, protecting assets from creditors and addressing concerns related to aging.

Lock in Estate Tax Exemptions Among Uncertainty. SLATs are a good way to secure estate tax exemptions. Various proposals to slash the current estate tax exemptions before the sunset date (see below) makes SLATs an attractive solution.

Potential Restrictions to Grantor Trusts. There has been some talk in Washington and the Treasury about restricting Grantor Trusts. The SLAT eliminates concern about any future changes to these trusts.

Upcoming Change in Estate, Gift and GST Exemptions. When the 2017 tax overhaul expires in 2026, the gift, estate and generation skipping trust exemption will be cut in half. Now is the time to maximize those exemptions.

A Possible Planning Tidal Wave. There may be a big movement to act as 2026 draws closer and SLATs become a tool of choice. Before the wave hits and Congress reacts, it would be better to have assets protected in advance.

SLATs Work Well for Married Couples. Each spouse contributes assets to a SLAT. The other spouse is named as a beneficiary. The assets are removed from the taxable estate, securing the exemption before 2026 and assets are protected from claimants and creditors.

You Might Meet the Estate Tax Threshold in the Future. Even if your current estate doesn’t meet the high threshold of today, if it might reach $6 million in 2026, having a SLAT will add protection for the future.

Income Tax Benefits. A trustee can distribute funds and income to a beneficiary in a no-tax state, saving state tax income tax, or if the trust may be formed in a no-tax state and possibly avoid the grantor’s high home state income tax.

Asset Protection Planning. Many people don’t think about asset protection until it’s too late. By starting now, when assets are below $10 million, the asset protection can grow as wealth grows.

Shrinking the Need for Other Trusts. Depending on their financial situation, a couple may be able to use a SLAT trust and avoid the need for other trusts requiring annual gifts and Crummey powers. The SLAT may also eliminate the need to have a trust for their children.

Speak with your estate planning attorney to learn if a SLAT is appropriate for your family, now and in the near and distant future. These are complex legal instruments, requiring skilled professional help in assessing their value to your estate.

Reference: Think Advisor (Nov. 16, 2022) “9 Reasons This Popular Trust Isn’t Just for the Super-Wealthy”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Don’t Miss Out on Estate Planning Opportunities – Annapolis and Towson Estate Planning

Don’t Miss Out on Estate Planning Opportunities – Annapolis and Towson Estate Planning

The recent article, “Rooting Out Estate Planning Opportunities,” from Financial Advisor offers a number of frequently missed opportunities in estate planning. Chief among them is failing to update estate plans, as changes to tax laws could mean that strategies used when your estate plan was initially created may no longer be relevant.

Before these opportunities can be discovered, it’s important to have a clear accounting of all of your assets, including a balance sheet of each “bucket” of resources: personal assets, trust assets, qualified plan assets, etc. The secret to success: meeting with your estate planning attorney every few years to review this entire picture to identify potential opportunities.

Once you have a sense of the whole picture, it’s easier to spot opportunities. For instance:

A Spousal Lifetime Access Trust, or SLAT, is an irrevocable trust used when a grantor wants to transfer part of their spousal exclusion into a SLAT to provide for their spouse and descendants. The SLAT keeps assets out of the donor’s estate and authorizes the trustee to make distributions to the grantor’s spouse, while at the same time it allows children or other heirs to be named as beneficiaries. Many couples use these trusts to protect assets from lawsuits.

There are some drawbacks to keep in mind. If one spouse is the beneficiary of the other spouse, all is well while both are living. However, if one spouse dies or becomes incapacitated and all assets are in the trust, the other may lose access to the trust created for the now deceased spouse.

The loss of access and the restrictions on SLAT distribution could be addressed by having both spouses purchase life insurance policies to fill the gap. At the same time, the couple would be well advised to look into disability and long-term care insurance.

Another situation is the use of a credit shelter trust, often called a bypass trust because it bypasses the surviving spouse’s estate. They are not as advantageous as they used to be because of today’s high estate tax exemption. They were also popular when the surviving spouse wasn’t able to use their deceased spouse’s estate tax exemption.

With the federal estate tax exemption up to more than $12 million, many who still have credit shelter trusts may find they don’t make sense in the short term. However, for now the federal estate exemption is set to drop down to $6 million when the Jobs and Tax Act sunsets. Depending upon your circumstances, it may be worthwhile to maintain this trust. Your estate planning attorney will be able to guide you.

Merging old trusts into new ones, or “decanting” them, makes sense in some situations. A new trust can be better crafted to align with the latest in tax laws and serve the same beneficiaries for as long as your state’s laws permit.

The two important takeaways here:

  • Estate planning requires a complete look at all of your assets and liabilities to make the best decisions on how to structure any estate and tax strategies; and
  • Estate plans need to be reviewed on a regular basis—every three to five years at a minimum—to ensure the strategies still work, despite any changes in tax laws and your situation.

If you believe your estate plan may need to be updated, contact us to schedule an appointment to review your current estate plan with one of our experienced estate planning attorneys.

Reference: Financial Advisor (Nov. 1, 2022) “Rooting Out Estate Planning Opportunities”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Are You Ready for 2026? – Annapolis and Towson Estate Planning

You may not be thinking about Jan. 1, 2026. Any New Year’s Eve celebrations being planned now are more likely to concern Jan. 1, 2023. However, if your estate is worth $5 million or more when the first day of 2026 arrives, your estate planning should begin now. According to a recent article from Forbes, “Is 2026 An Important Year For Your Wealth?,” the reduction in the estate tax exemption will revert to the 2010 level of $5 million adjusted for inflation. It could go even lower. With federal tax rates on estates over the exemption level set at 40%, plus any state estate or inheritance taxes, planning needs to be done in advance.

Considering the record levels of national debt and government spending, it’s unlikely these exemptions will remain the same. Now is the time to maximize today’s high estate tax exemption levels to minimize federal estate taxes and maximize what will be left to heirs.

Your estate planning attorney will have many different strategies and tools to achieve these goals. One is the Spousal Lifetime Access Trust (SLAT). This is an irrevocable trust created by each spouse, known as the grantors, for the benefit of the other spouse. Important note: to avoid scrutiny, the trusts must not be identical.

Each trust is funded by the grantor in an amount up to the current available tax exemption. Today, this is $12.06 million each (or a total of $24.12 million) without incurring a gift tax.

This serves several purposes. One is removing the gifted assets from the grantor’s estate. The assets and their future growth are protected from estate taxes.

The spousal beneficiary has access to the trust income and/or principal, depending upon how the trust is created, if they need to tap the trust.

The trust income may be taxed back to the grantor instead of the trust. This allows the assets in the trust to grow tax-free.

Remainder beneficiaries, who are typically the grantor’s children, receive the assets at the termination of the SLAT, usually when the beneficiary spouse passes away.

The SLAT can be used as a generation-skipping trust, if this is the goal.

The SLAT is a useful tool for blended families to avoid accidentally disinheriting children from first (or subsequent) marriage. Remainder assets can be distributed to named beneficiaries upon the death of the spouse.

The SLAT is an irrevocable trust, so some control needs to be given up when the SLATs are created. Couples using this strategy need to have enough assets to live comfortably after funding the SLATS.

Why do this now, when 2026 is so far away? The SLAT strategy takes time to implement, and it also takes time for people to get comfortable with the idea of taking a significant amount of wealth out of their control to place in an irrevocable trust. For a large SLAT, estate planning attorneys, CPAs and financial advisors generally need to work together to create the proper structure. Executing this estate planning strategy takes time and should not be left for the year before this large change in federal estate taxes occurs.

Contact us to begin planning your SLAT strategy with one of our experienced estate planning attorneys today.

Reference: Forbes (Oct. 4, 2022) “Is 2026 An Important Year For Your Wealth?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How to Plan in a Time of Uncertainty – Annapolis and Towson Estate Planning

There’s a saying in estate planning circles that the only people who pay estate taxes are those who don’t plan not to pay estate taxes. While this does not cover every situation, there is a lot of truth to it. A recent article from Financial Advisor entitled “Estate Planning In This Particular Time of Uncertainty” offers strategies and estate planning techniques to be considered during these volatile times.

Gifting Assets into Irrevocable Trusts to Benefit Family Members. If done correctly, this serves to remove the current value and all future appreciation of these assets from your estate. With the federal estate tax exemption ending at the end of 2025, the exemption will drop from $12.06 million per person to nearly half that amount.

Combine this with a time of volatile asset prices and it becomes fairly obvious: this would be a good time to take investments with a lowered value out of the individual owner’s hands and gift them into an irrevocable trust. The lower the value of the asset at the time of the gift, the less the amount of the lifetime exemption that needs to be used. If assets are expected to recover and appreciate, this strategy makes even more sense.

Spousal Limited Access Trust (SLAT). This may be a good time for a related technique, the SLAT, an irrevocable trust created by one spouse to benefit the other and often, the couple’s children. Access to income and principal is created during the spouse’s lifetime. It can even be drafted as a dynasty trust. Assets can be gifted out of the estate to the trust and while the grantor (the person creating the trust) cannot be a beneficiary, their family can. Couples may also create reciprocating SLATs, where each is the beneficiary of the other’s trust, as long as they are careful not to create duplicate trusts, which have been found invalid by courts. Talk with an experienced estate planning attorney about how a SLAT may work for you and your spouse.

What about interest rates? A Grantor Retained Annuity Trust (GRAT), where the grantor contributes assets and enjoys a fixed annuity stream for the life of the trust, may be advantageous now. At the end of the trust term, remaining assets are distributed to family members or a trust for their benefit. To avoid a gift tax on the calculated remainder, due when the trust is created, most GRATs are “zeroed out,” that is, the present value of the annuity stream to the grantor is equal to the amount of the initial funding of the trust. Since you get back what’s been put in, no taxable gift occurs. The lower the interest rate, the higher the value of the income stream. The grantor can take a lower annuity amount and with decent appreciation of assets in the trust, there will be a larger amount as a remainder for heirs. Interest rates need to be considered when looking into GRATs.

Qualified Personal Residence Trust (QPRT) is a trust used to transfer a primary residence to beneficiaries with minimal gift tax consequences. The grantor retains the right to live in the house at no charge for a certain period of time. After the time period ends, the property and any appreciation in value passes to beneficiaries. The valuation for the value of the initial transfer into the trust for gift tax purposes is determined by a calculation relying heavily on interest rates. In this case, a higher interest rate results in a lower present value of the remainder and a lower gift value when the trust is created.

Reference: Financial Advisor (July 8, 2022) “Estate Planning In This Particular Time of Uncertainty”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys