By the end of 2025, the rules about estate planning most likely will be considerably different. That’s because the 2017 Tax Cuts and Jobs Act, commonly known as the Trump Tax Law, will most likely expire.
Included in that is a significant reduction in the estate tax exemption, reducing the amount one can pass on to heirs by nearly $7 million.
Plus, depending on who is in the White House and who controls Congress, the exemption could be much lower.
That said, there are steps you can take now to significantly lower the tax burden on your estate when you pass away. One item you should be looking at is the creation of the Spousal Lifetime Asset Trust or SLAT.
By creating these types of trusts, you can help shield significant assets from the Internal Revenue Service while still utilizing these assets.
The attorneys at The Orlando Law Group can work with you to find ways to limit your estate’s tax liabilities, regardless of who is in office.
Why should we act now?
We’ve discussed this in other articles, but it will be very difficult to extend the estate tax exemption past 2025. That is because the exemption is not something easily overturned. After all, the law was written with sunset provisions in place.
To overturn the exemption, a new law must be passed by Congress, a virtually impossible task considering how close the majorities are in the Senate and the House of Representatives.
Many groups are working hard to show how the Tax and Job Cuts Act of 2017 helped spur the economy and to convince Congress to eliminate the sunset provisions that were part of that act.
Still, don’t bet millions on that being successful.
The time to act on your estate plan and the transfer of any wealth accumulated must happen soon to ensure you are protected.
What is a SLAT?
Think of trusts as creating a separate bank account for your assets, although it is one that you will not have direct control over. There are very specific types of trusts, each with contractual rules on distributions, taxes, beneficiaries and more.
A SLAT is a type of trust that is designated to have a spouse as the controlling interest of the account. All types of assets can be put into the trust, from cash to insurance policies to real estate.
Once it is set up, the beneficiary spouse can have regular payouts from the SLAT that can be used for nearly anything.
The assets in the SLAT also continue to earn interest, allowing for your assets to grow and not be taxed when you pass away, creating even more transfer of wealth.
Charles Schwalb gave a great example of how SLATs work in this article.
Say Sarah and Neil have joint and separate assets totaling $35 million, which are likely to further appreciate while they’re still alive.
Were they to transfer $13.61 million each into two SLATs benefiting each other, they would be able to exclude the full $27.22 million—plus any future appreciation and income—from their taxable estates while still benefiting from those assets.
They would then have available their remaining $7.78 million in shared assets, plus their SLAT distributions, to support their ongoing income needs.
The earlier you can establish SLATs for your assets the bigger the advantage!
Can we have two SLATs for our assets?
As referenced in the article, a husband and a wife can establish a SLAT for their spouse. However, this can be extremely complicated to avoid specific IRS rules.
One of the best things to do is stagger the establishment of a SLAT. Create a SLAT this month for one spouse and then create the other one six months later.
Then, you can make them different by putting different trustees in charge of the trusts. You can set up different beneficiaries when you die, for instance, one goes to your son and the other to your daughter.
The key here is that you cannot have two trusts that are similar to each other. The IRS will cancel them out, but our attorneys can help set up unique trusts for you and your spouse.
What happens if we divorce?
No one likes to think about the unthinkable when setting up an estate plan. We like to think we will be together forever.
The reality is that when creating a SLAT, you need to take steps to protect any assets in the event of a divorce. One of the toughest aspects of divorcing with a SLAT is the tax implications.
Without taking proper steps to deal with divorce, the spouse who set up the trust continues paying income tax on interest in the SLAT. That’s even if only your ex-spouse can access the funds.
Yes, you can put the procedures into the SLAT’s documents in the event of a divorce, but that is not always easy and may need separate attorneys. And, if each spouse has a unique SLAT of equal value, there may not be an issue.
However, when dealing with a SLAT, it may make sense to draft a postnuptial agreement that clearly defines what happens to all trusts – not just your SLATs – when you divorce.
For instance, you could set up a third-party trustee who can distribute all assets of the SLAT to be divided up as marital assets.
Of course, that wipes out all the tax advantages for your children.
When do I need an attorney?
SLATs and all trusts are extremely complicated legal documents. A wrong step along the way or a poorly worded contract that doesn’t fit your unique situation can cost you and your beneficiaries millions in taxes.
Estate planning is truly a team effort with your financial planner, your accountant and your attorney. Each of those three has very specific roles and responsibilities that come with estate planning.
At The Orlando Law Group, our team of attorneys and advisors can work with your team to handle all legal aspects of your estate plan. After all, an estate plan is a set of legal documents for the courts to understand your wishes for your estate after your death.
The attorneys at The Orlando Law Group can these types of issues in Orlando, Waterford Lakes, Altamonte Springs, Winter Garden, Lake Nona, St. Cloud, Kissimmee, and Central Florida.
If you have questions about anything discussed in this article or other legal matters, give our office a call at 407-512-4394 or fill out our online contact form to schedule a consultation to discuss your case. We have an office conveniently located at 12301 Lake Underhill Rd, Suite 213, Orlando, FL 32828, as well as offices in Seminole, Osceola and West Orange counties to assist you.
The articles on this blog are for informative purposes only and are no substitute for legal advice or an attorney-client relationship. If you are seeking legal advice, please contact our law firm directly.
Last Updated on October 11, 2024 by The Orlando Law Group
