Spousal Lifetime Access Trusts (SLATs): Estate Planning Essentials

Speaker 1 – 00:00
Welcome to EWA’s FinLit podcast. EWA is a fee only RIA based out of Pittsburgh, Pennsylvania. We hope all listeners
of this podcast will beneft as we deep dive into complex fnancial topics that we will make simplifed for you. And
we hope that this really serves as a catalyst so that you can make the best fnancial planning decisions for your
family and also save time. Welcome everybody. Excited to be joined by Jameson Smith and Jimmy Rutenberg here.
Today we’re talking about Slats Spousal Life Access Trust. So we believe this is a great tool for some of our higher
net worth clients. But Jimmy, want to hand it over to you. What’s the what’s the current lay in the land with an estate
planning perspective? Why is this so important today more than ever?
Speaker 2 – 00:50
So the current lay of the land is part of the initial tax act in 2017 increased each individual’s lifetime exemption to
$13 million. Let’s round up to 13. And just for the beneft of everybody, a lifetime exemption just simply means if I
have this amount of assets up to 13 million, I can pass that along to my benefciaries without any estate tax, no tax
of any kind. So that’s for each individual. So if we’re talking about a married couple, under current law, that’s $27
million that can pass free of federal estate tax. We believe that given the results of the election, that is going to be
maintained at least for the next four years. There was talk of that being dropped to 7 million each. And for
everybody’s reminder, if went back 20 years, the lifetime exemption was $1 million.
Speaker 2 – 01:49
So obviously we are in a period of time where you can pass signifcant dollars tax free to your estate. But then
anything above $27 million is subject to a 40% federal estate tax. And then depending on the state you’re living in, a
state inheritance tax as well. So anybody over that limit needs to be thinking about estate planning from that
perspective.
Speaker 1 – 02:14
Jameson. So piggybacking on that. And those limits get those are infation adjusted. So give us an example of like
couples worth 50 million bucks, right? And this is after both spouses die. So with no planning in place, just give us a
breakdown of what tax liability we’re looking at. Let’s just assume, you know, there’s in the U.S. They live in
Pennsylvania. What? How does the math work out here?
Speaker 3 – 02:38
Yeah, so little infation to what Jimmy said. So 20, 25, 13.9. So it went up like a million bucks. But so we’ll say 28
million roundup each. Each person gets tax free. So they have 50 million frst, 28 million, zero federal tax. The 22
million above that to make up their $50 million net worth, gets hit with a 40% estate tax, which would be 8.8 million.
In the state of Pennsylvania, if assets pass to kids, there’s a 4.5% inheritance tax on everything except for life
insurance. So obviously if some of this is life insurance would be different. But let’s assume it’s not 2.25 million in PA
state tax on all assets. So that’s essentially $10 million total in taxes on that $50 million net worth. So net would be
40 million of the 50 million.
Speaker 1 – 03:28
Perfect. So just to recap that someone’s worth 50 million and passes under, let’s assume what Jimmy said is
happens. I agree. It’s very likely that the law extends the next four years. You have $50 million. You think your kids
are getting 50 million? Well, they’re really only getting 40 million. 10 million just gets wiped out. Now if the law
changes, if it sunsets like it’s in law right now is 2026, it drops in half to 7 million each. So right now it’s about 4. Just
rounding up, it’s 14 million each. It drops to 7 million each. If someone dies after 2026, or let’s say after, let’s say
2030 now or 2029, that 10 million of tax turns into 16 million of tax. If the, if in that example of the 50 million net
dollar net worth.
Speaker 1 – 04:19
So almost, you know, over 30, almost a third of your net worth is getting whacked to the Pennsylvania and mostly
federal taxes. So historically, a lot of times people would say, well, I don’t want to give up control. So I realize I could
do this irrevocable trust. But the issue with that is there’s a lack of control. So, James, give us a walk down. How
does a traditional irrevocable trust work? What are the benefts of it? But go to the downsides as well.
Speaker 3 – 04:48
Yeah. So an irrevocable trust, generally you put money into, you have a third somebody else is the trustee, meaning
they have control over how the assets get distributed for the benefciaries. It’s going to be whatever the trust terms
say. But yeah, the downside is you give up control of it. The upside is anything that’s in that irrevocable trust is
outside of your estate. So it avoids those estate taxes. And this is a really big problem that high net worth families
face. And I would Say, number one, lack of they don’t want to give up control. Number two, they’re trying to avoid
taxes. Number three, who do we choose as the trustee who’s responsible to actually manage this fourth thing, which
we don’t need to hit on a lot.
Speaker 3 – 05:31
But in the frst example, if those assets are ill liquid, if they’re real estate or a business, you have to come up with that
tax somehow. And you know, if you have all that money sitting in a brokerage account, it’s really easy. You just cut a
check to pay the taxes. But if it’s illiquid, you know, there’s a tax problem. And then probably the biggest thing that
aside from any of the fnancial stuff, is just the family dynamics of who’s actually inheriting the money without, you
know, number one, letting somebody, whether it’s kids or family members, get a bunch of money they didn’t work for,
that can be bad. Or family dynamics of, you know, an uneven split in benefciaries. So I’d say that’s general lay of the
land of what issues arise.
Speaker 3 – 06:09
But we’re going to really hit on, you know, what’s the solution for still maintaining control while putting money in your
vocal trust to get the tax benefts.
Speaker 1 – 06:16
Yeah. So just as a quick recap, someone’s worth 50 million bucks, they do nothing, they die. 20, 30 plus, let’s say 16
million is going to taxes hot ballpark. They do an irrevocable trust. Let’s say they stuff, you know, they keep 14 million
in their estate, anticipating those limits will eventually go down. Look, this is talking about a young couple, maybe in
their 60s. They put, they slowly gift or they use exemptions. They get a bunch of money out of the state in a
traditionally revocable trust. Now they need Uncle Johnny or whoever. A traditionally revocable trust. You’re not
naming a spouse as a trustee. You’re naming an outside party. If they need money now, we need someone else’s
signatures. And it was originally your money. It’s no longer your money. Essentially, you’ve gifted it. That’s why it’s out
of your estate.
Speaker 1 – 06:59
So there’s a solution now. And the purpose of this podcast is what’s referred to as a slat that gives us best of both
worlds. It can help us save a tremendous amount of taxes. And it also still allows a couple, now this is for married
couples only, to still have access to that money. So, Jim, with that said, give us an overview. What is a slat? How
does it Work.
Speaker 2 – 07:21
So a slat, like you said, it’s a spousal, excuse me, lifetime access trust. And essentially it’s the same type of
irrevocable trust that Jamison just described. Meaning it’s not includable in your estate. All growth inside this
document is not includable in your estate. But the big difference is, instead of naming a third party as a trustee, and
I’ll use myself as an example, if I create the trust, the person who creates the trust is the grantor. If I create a trust for
the beneft of my family, I can now name my spouse as trustee. And by doing that, if I put assets in this document
that I don’t want includable in my estate, but I might want to have indirect access to, my wife being the trustee, has
the right to take distributions from this document.
Speaker 2 – 08:22
So the biggest issue when we talk to clients about their estate plan is, number one, okay, what assets are going in
here? Number two, you’re telling me that I’ve created all this wealth. I’m potentially in my 40s and 50s. I understand
there’s an estate tax that might be 40 years down the road, and you’re asking me to give up control of all of these
assets. That’s kind of where sometimes the discussion stops. The slat allows for that discussion to continue and for
the grantor to recognize. Okay, you’re telling me I can’t have access to it, but my wife can? Okay, I can live with that.
And that’s something that we can discuss.
Speaker 3 – 09:06
And let’s just explain the structure a little more. So let’s use you as an example. Jimmy creates a trust. He’s the
grantor, wife. Lori is the trustee. Benefciary would be Lori and kids.
Speaker 2 – 09:17
Correct.
Speaker 3 – 09:17
So that way if Jimmy wants the money, it’s for the beneft of the benefciaries, he can indirectly take the money out
for Lori. And they’re still, you know, as long as they’re still married, that they can use that for whatever they want. So
that’s really the workaround is.
Speaker 2 – 09:31
Yeah, Jamo. The concept really is if there’s a distribution coming out of this document and it’s for the beneft of my
wife. Well, if we’re still married, you could probably make the argument that I’m benefting to some extent from
whatever that distribution is, where that distribution leads to.
Speaker 1 – 09:51
Yeah, absolutely. So, you know, the downside, the only downside we see to the slats, other than there’s a one time
setup fee. So if you work with a good attorney, that can be a very reasonable fee after that. These do require their
own tax returns. Very simple, you know, couple pages reporting what assets you hold. And then really the only
downside otherwise would be divorce. Because if you don’t have a prenuptial agreement and then you get divorced,
let’s say you’ve set up one slat and Mr. Is the grantor, Mrs. Is the trustee. Well, if you’re now getting divorced, Mrs.
Whatever is in that trust and she’s the Trustee, owns that 100% and then the rest of the assets outside of the slack
then get split 50.
Speaker 1 – 10:33
So the workaround, this is just making sure you have a slat for both spouses and then making sure you put
equivalent amount of money in each slat, then that’s going to put you in the same place that you otherwise would
have been regardless. So, but that’s the number one question we get is are there any downsides? And that would be
the downside. So you do want to be thoughtful about, you know, how stable a marriage you are you in assuming
you’re in a stable marriage, you never know what the future holds. So still, you know, be thoughtful. Let’s, let’s set up
both slats and let’s fund them, you know, with equal investments. And speaking about funding.
Speaker 3 – 11:06
So say can we hit on the reciprocal trust document?
Speaker 1 – 11:09
Oh yeah, now’s the perfect time.
Speaker 3 – 11:11
The reciprocal trust doctrine. I don’t know all the legal nuances to it. All I know is that you can’t have this trust be
identical for each spouse.
Speaker 2 – 11:19
You got to change some of the wording in one of the documents so that it’s not completely mirrored whether it’s.
Speaker 3 – 11:26
Assets like maybe one can hold life insurance, one can’t. Or some terms would have to be different, but generally we
just. Trusts are slightly different. Then they just sign them at different.
Speaker 1 – 11:34
Times a couple months pages for the principal distributions for benefciaries could be a little bit different as well. So,
okay, so let’s talk about funding this slat. So there’s for super high net worth clients right now, they’re going to be
faced with a decision over the next four years like do we utilize the exemption? Because if you exemption right now
13.99 million. If you gift 7 million out of your estate so you can use that exemption either when you’re living or when
you die. If you don’t use any of it, you’re subject to, you know, whatever the limit might be when you die. So if you die
20 years from now, it could be back to 1 million. It could be 3 1/2 million like Bernie Sanders was proposing recently.
Could still be 14 million, who knows?
Speaker 1 – 12:13
But if you don’t touch it, you’re at the mercy of whatever the government decides the day you die, whatever law is in
place that year. So the interesting planning opportunity right now is if you were to gift 7 million and you have 14
million, that leaves you a 7 million left. But if the government drops it fve years from now, let’s say back to 7 million
you already used works off of that when you die. So you now have zero. So for someone that has a large net worth if
they want to do extremely good planning, the option would be let’s use all 14 million. Because once you use all 14
million, there’s no clawback of that. Let’s get some highly appreciable assets outside of our estate.
Speaker 1 – 12:54
The, the 14 million plus all growth, whatever it is, would pay, would pass federal tax free and Pennsylvania
inheritance tax free as well. So that would be the strategy. Now for most people, they’re not going to want to walk
away. Gifting 14 million per spouse right now, even at a 50 million dollar net worth, 28 million would leave you 22
million. You’re like, well, we’re not comfortable with gifting half of our money outside. So the absolute low hanging
fruit, there’s a couple things and so let’s talk about what’s tax efcient, but let’s talk about just on annual basis what
people can do with, you know, no, I say no strings attached, but just the low hanging fruit does not affect their
exemption. So Jamison, walk us through that.
Speaker 3 – 13:35
Yeah, so you can gift 19,000 person into anything you want. But if you have a slat, let’s say there’s husband, wife, two
kids, that’s 38. And there’s two slots. Each slat can have 38. Yeah, 38. Plus you get $5,000 for your spouse being the
benefciary. So 42,000 per slat. 43,000 per slat on annual basis can go in. Anything above that would work. So if you
put a million bucks in, the frst 43 isn’t reportable and then the difference works off that $14 million exemption.
Speaker 1 – 14:12
So the interesting, I’m going to run some math here. That’d be 7,166 per month. So let’s say now typically someone a
good candidate for these would be someone that’s in a top 1% net worth. So if you’re in your 40s or 50s and your net
worth’s over 14 million, most likely, you know, your growth on your estate will probably outpace whatever the
exemptions are in the future. If you’re that young or if you’re that young, let’s say 30s through 50, and you’re a top 1%
income, which would be, you know, right around 800,000 plus of income. Most likely. If you’re a disciplined saver,
you’re probably going to be, you’re going to have. Unless you spend everything assuming.
Speaker 3 – 14:50
Yeah. You’re saving at a healthy rate and the exemption’s going to drop.
Speaker 1 – 14:53
Yeah. So if you’re 40 years old and you start, you set these up and you’re a high income earning executive or
physician and you’ve got two kids like Jameson explained, so able to do 19 for benefciary one, 19 for benefciary
two, 5,000 for the spouse and then do that for the opposite side, that’s 86,000 a year you can put in without reporting
it, without utilizing your exemption. It’s just a freebie. The government gives you 7,166 per month. If you put that in
and you’re just investing in stocks and you earn a diversifed, you know, growth rate of 7% compounded. Fast forward
40 years when you’re 80, you’ve got $18.9 million in these two slats. So over $9 million each and that you’re going to
save 44 and a half percent of that number in taxes. So that’s over $9 million. And.
Speaker 3 – 15:37
Yeah. Any, any.
Speaker 1 – 15:38
I just did the math wrong. Hold on. It’s going to drive me crazy. It’s, what it is it’s 8.45 million in taxes saved, but a
total. But that’s, I mean that, and that’s, that didn’t cost you anything because you put the money away, you’re going
to save it along the way it’s asset protected and also along the way you have access to it. So there’s really no
downside if you expect to have this. To set these up and start doing these.
Speaker 3 – 16:03
Yeah. The great thing is all that appreciation is now in the slat and out of the estate. And because it’s a grantor trust,
so you’re still going to pay, depending on what asset you have in there, most likely still pay capital gains taxes on it.
But because it’s a grantor trust that gets passed back out to whoever set the trust up. So that can be a way too. If the
Grantor obviously has a lot of money that they’re trying to put in there. They can pay the taxes and that leaves more
money that passes to the kids.
Speaker 2 – 16:29
That’s an excellent point. The tax on that is actually just an extra gift that the grantor is making. So that’s a really
good point.
Speaker 3 – 16:36
Capital gains tax is much better, is much more favorable than the 40% estate tax.
Speaker 2 – 16:40
But if the grantor has a signifcant amount of money and you’re really trying to get it out of your estate, that tax
should not be an issue to the grantor. It’s just more money building up inside the trust.
Speaker 1 – 16:50
Guys, what would you choose? If you had a mix of, you know, we’ve got life insurance, we’ve got stock, we’ve got
bonds, we’ve got cash, we’ve got some private investments that we’re expecting to go, you know, crazy returns.
What, what would you decide what’s best to put in here and what’s not?
Speaker 2 – 17:06
I think it really depends on the particular situation. Every asset you just described works. Life insurance, for example,
if the grantor has signifcant illiquid assets, if we’re talking about real estate or things that can’t be turned to cash
quickly, but something happens and now there’s a tax due in nine months, life insurance is going to be very helpful
there because it’s liquid. So again, really depends on the situation and what the grantor’s estate is comprised of.
Speaker 3 – 17:38
Yeah, I think so. Life insurance can be a nice asset because you could use that. In the example we used 43,000 a
year to pay the premiums into it. And then at death, that death beneft goes tax free into the. Into the slat.
Speaker 2 – 17:51
And the 43 leverages a much higher death beneft. That’s what you’re trying to do with these documents, leverage.
Speaker 3 – 17:56
So that’s one. The private investments can be a good one if you.
Speaker 1 – 17:59
Why is that? Like give us an example, you put in 50,000 to some private investments, now it’s going to probably turn
into 500,000. Why would we put that in the slab versus keep it in your estate.
Speaker 3 – 18:10
So this could work the same whether it’s a private investment or you’ve business, you know, a stock or business
ownership. So whatever. Let’s say in your example you put 50 in. Depending on how many benefciaries are on that,
you may be able to get that 50 of the initial contribution into the slat based on just those gifting exemptions or
gifting exclusions each year. So you’re getting a $50,000 asset in for free under the freebie gifting. And if that hits for
a million bucks, same thing as the life insurance. Now that entire million dollars is owned by the slat. So anything
that can, you know, that we think is going to be highly appreciative. That’s the best asset to put in there because it’s
the best bang for your buck of a.
Speaker 1 – 18:46
You got it in without an exemption and now you have an exchange. You got, in that example, a million dollars out of
your estate versus that would have taken, you know, 12 plus years to get that much money and utilize an exemption.
So those private investments are great if you’ve done them. And again, if they hit, they’re liquid, you can still use
them through each other if you’re married.
Speaker 3 – 19:03
So, and then why don’t you talk about if you don’t have either of those options and you’re just, you’re not doing life
insurance, you’re just funding into an investment account. What are the best assets to hold in.
Speaker 1 – 19:12
Yeah, what we want to avoid at all costs is cash or bonds. And the reason why I avoid cash or bonds is the tax rates.
The tax rates on these climb up pretty quickly. It’s like over 20,000. You’re already in the 37% tax bracket. Now if
you’re already in the 37% tax Bracket and this is a trust that you’re paying the tax liability, it doesn’t really matter
because you’re already in the highest tax bracket. But if you invest in stocks, growth stocks specifcally, or a direct
index portfolio inside the slat, we can eliminate income rate tax and just have capital gain taxes. And not only that,
but if we’re direct index, we can tax loss harvest inside of the trust as well.
Speaker 1 – 19:46
And so that tax loss harvest can erase the, you know, the tax liability as much as possible if you need to use it while
you’re living. And then obviously the higher the basis, the better for your benefciaries in the future. So I think we
covered a very big overview. But any questions as far as, or any other comments?
Speaker 2 – 20:04
I just, I think the takeaway for everybody is don’t let the ownership of assets be an impediment to doing estate
planning. I mean, there are ways in which, and I don’t like to use the phrase you can have your cake and eat it too, but
to some extent, spousal lifetime access trusts allow that. So, you know, at least research it and understand that
there are outcomes that can benefcial all the way around.
Speaker 1 – 20:35
Yep.
Speaker 3 – 20:35
And I wanted to say a Real world example at a client. Well, over the exemption, we set these up like two years ago.
Kids are college age, one’s just out of college. And so it’s spouse kids as benefciary we’re gifting in each year. Now
that the kids are out of college, we’re being really intentional about just teaching them fnancial planning that they’re
not going to inherit a bunch of money. They have to work for what they get. But prior to being in college, the parents
had kind of helped them pay for things. They worked 1099 jobs, they had taxes on their income that they hadn’t really
planned for. And the parents would always front that bill. Well, now that they’re out of college, the parents want them
to start paying for these things.
Speaker 3 – 21:14
And the kid had some big unexpected expenses from, I guess, poor decision making, but nothing crazy, just things
they didn’t plan for. And so we, instead of the parent just paying it for it, we took it out of the slat and said, hey, we’re
going to cover this. But this is money out of your inheritance. Yeah, money that was going to you anyway. So now
we’re training them to, you know, hey, this is less money that you’re getting to help do this. So lots of fexibility and
can be a good tool for things like that.
Speaker 2 – 21:42
Yeah, Matt, the only other thing I would add too, you don’t have to name your spouse as the trustee. You can have a
spousal lifetime access trust and have a independent, friendly trustee be the trustee as long as your spouse is the
benefciary. So, you know, again, certainly spouse could be trustee, but it’s not limited to that either. You can pick
whoever you want to be the trustee. And you know, oftentimes an independent, friendly trustee might even have a
little more discretion in distribution.
Speaker 3 – 22:13
And important to have a backup if the spouse dies. For the spouse, that’s the trustee and benefciary.
Speaker 2 – 22:19
And the backup shouldn’t be the grantor. The backup should be somebody else.
Speaker 3 – 22:21
Somebody else independently.
Speaker 1 – 22:22
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