A common estate tax planning tool is a spousal lifetime access trust (or SLAT), whereby a spouse (the grantor-spouse) during his or her lifetime creates an irrevocable trust for the benefit of the other spouse (the beneficiary-spouse). A SLAT permits the beneficiary-spouse to have access to the trust assets, and on his or her death, the remaining assets typically divide into separate trusts for descendants. SLATs, however, can pose a “liquidity risk,” meaning upon the beneficiary-spouse’s death, the marital unit will lose access to the assets of the SLAT.
Beginning in 2018, the Tax Cuts and Jobs Act doubled the estate tax exemption, from the base amount of $5,000,000 to $10,000,000. The exemption is increased each year for inflation and is currently $12,060,000 for 2022 and is projected to increase approximately $800,000 for 2023. Under current law, however, the doubled exemption amount will sunset on January 1, 2026, and automatically revert to the $5,000,000 base amount. In such a case, the client could lose over $6,000,000 of exemption per spouse (accounting for the inflation increases). Given the 40% percent federal estate tax, this loss of exemption could amount to $2,400,000 of additional estate tax per spouse.
SLATs have become a particularly popular estate planning technique over the last few years as clients want to “lock in” the doubled exemption amount before the scheduled reduction in 2026. Moreover, as the political landscape has changed over the past couple of years, clients have grown concerned that the estate tax exemption amount could suddenly be reduced by new legislation. The SLAT technique permits the grantor-spouse to move over $12,000,000 of assets into a SLAT as a completed gift for tax purposes, but still have indirect access to the funds through the beneficiary-spouse. Nevertheless, clients were often concerned that the assets of the SLAT would pass to the children’s generation upon the death of the beneficiary-spouse, thereby resulting in the loss of the indirect access to the assets of the SLAT by the grantor-spouse.
Effective July 1, 2022, a new Florida law attempts to resolve this liquidity risk. Specifically, Section 736.0505(3) of the Florida Statutes provides that the remaining assets of a SLAT may pass to another irrevocable trust for the benefit of the grantor-spouse (the New Trust) and, importantly, the assets of the New Trust will be deemed to have been contributed by the beneficiary-spouse and not the grantor-spouse. The intended effect of the new law is to permit the grantor-spouse to be a beneficiary of the New Trust (which is funded with the remaining SLAT assets) after the beneficiary-spouse’s death while shielding the assets from the grantor-spouse’s creditors and, as a result, avoiding estate taxation of such assets upon the grantor-spouse’s death. This is a significant change to Florida law, which generally does not permit “self-settled spendthrift trusts,” a type of irrevocable trust that permits a person to create an irrevocable trust for his or her benefit that is protected from such person’s creditors.
You should be aware of some uncertainties with the new Florida law. When creating the SLAT with this reversion feature, the grantor-spouse makes a completed gift and thereby removes the gifted assets (and their future appreciation) from his or her estate for federal estate tax purposes. However, it is unclear whether the IRS could argue that the assets of the New Trust will be includable in the grantor-spouse’s estate and subject to estate tax upon his or her death due to the grantor-spouse’s status as a beneficiary of the New Trust. In other words, there is a risk that directing assets to the New Trust may result in the frustration of the desired estate tax benefits of forming the SLAT in the first place. Further, the strength of the creditor protection it affords is untested in Florida. Finally, a common feature of SLATs is to include a “marriage termination provision,” meaning that if the spouses divorce, the SLAT will terminate and immediately divide into separate trusts for descendants; however, to qualify under the new Florida law, it appears that a SLAT cannot have a marriage termination provision.
A SLAT is a powerful estate planning technique designed to enable the current estate tax exemptions to be locked-in before they are reduced. The new Florida law creates additional flexibility to benefit the grantor-spouse but comes with some untested issues. The implementation of a reversionary SLAT should be carefully considered and structured.
Christopher C. Weeg is a Board-Certified tax lawyer and a CPA with a focus on tax and estate planning. Chris’ law practice includes drafting wills and trusts; advising on income, gift, estate, and GST tax issues; forming business and non-profit entities; and probating estates.
Mark R. Brown, partner with Comiter Singer Baseman & Braun, LLP, is Board Certified in both Tax Law and Wills, Trusts & Estates, and is a licensed CPA in Florida. Mark currently serves as Chair of The Tax Section of the Florida Bar and is also a Director of the Palm Beach Estate Planning Council and Chair of its Annual Estate Planing Supplement.