One picture that is becoming clearer each day is the upcoming 2025 Tax sunset landscape and expiration of provisions of the 2018 Tax Cuts and Jobs Act, which will include the reduction of individuals unified credit for federal estate/gift tax planning purposes on January 1, 2026, from approximately 13.99mm to approximately 7mm. A Spousal Lifetime Access Trust (SLAT) is a valuable tool for advanced estate planning, particularly in light of the pending sunset of the federal estate tax provisions.
Here are several reasons why using a SLAT can be beneficial:
Avoid Probate
Firstly, assets placed in a SLAT avoid probate. Since the assets are held by a trustee for the benefit of the trust’s beneficiaries, they are not subject to probate, which can simplify the estate administration process and reduce associated costs and delays.
Creditor Protection
SLATs offer asset protection from creditors’ claims. The structure of the SLAT can also prevent a child’s spouse from accessing trust assets in the event of a divorce, providing an extra layer of security for the family’s wealth.
Spouse Access and Avoid Inclusion
Moreover, SLATs provide flexibility to adapt to changes in federal tax law while ensuring that the donor spouse’s assets are available if needed. This flexibility is particularly important given the potential changes to the federal estate tax laws.
Irrevocable Life Insurance Trust (ILIT) Options
SLATs can serve as effective life insurance trusts. Life insurance policies on the life of the donor spouse that are transferred into the SLAT are removed from the donor spouse’s estate, similar to the benefits provided by an irrevocable life insurance trust (ILIT).
Advanced Planning Solutions
SLATs can also be combined with other advanced estate planning techniques. For instance, they can include long-term trusts for children and descendants, leveraging the generation-skipping transfer (GST) tax exemption to allow the trusts to continue for several generations. Additionally, for business owners, SLATs can be funded with assets that may receive a discounted valuation under federal tax law, such as non-controlling and non-voting interests in a closely-held business, thereby removing post-gift appreciation from the donor’s estate.
May qualify as a Sole Use Trust for Pennsylvania Inheritance Tax Purposes: Under 72 Pa. Stat. Ann. 9113(a), a trust must qualify as a sole use trust for the benefit of the surviving spouse to be eligible for the zero tax rate on transfers to spouses . This means that during the spouse’s lifetime, no one else can be entitled to any benefits from the trust.
In summary, SLATs offer numerous benefits, including probate avoidance, death/gift tax-free growth of assets, effective use as life insurance trusts, asset protection, and flexibility to adapt to changing tax laws. These features make SLATs a compelling option for individuals looking to optimize their estate planning strategies in light of the pending sunset of the federal estate tax provisions that are looming to occur on January 1, 2026, absent action from Congress.
If you would like to learn more about a SLAT or its pros/cons for consideration as a tool in your estate plan, please contact Charles B. Hadad, Esquire of The Lynch Law Group at 724-776-8000 or chadad@lynchlaw-group.com.
