Spousal lifetime entry trusts, or SLATs, have been an property planning software for a few years, however the irrevocable trusts have gained recognition forward of the pending sundown of present property and present tax exemption legal guidelines. On Jan. 1, 2026, the $12.92 million present and property tax exemption per particular person will revert to the prior legislation’s $5 million exemption cap (adjusted for inflation). 

That could be a massive hole to handle by gifting and property planning methods. 

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In a SLAT, one partner makes a present to profit the opposite partner — and probably different members of the family — eradicating the property from their mixed estates for tax functions. However whereas helpful devices, SLATs aren’t foolproof. The three massive dangers related to SLATs are: divorce, the untimely loss of life of a beneficiary partner and ongoing tax compliance.

Divorce
Divorce presents a difficult scenario for property typically, however the non-donor partner in a SLAT dangers shedding entry to property if the donor partner opts to not present it. As well as, the divorced donor partner could find yourself paying taxes on property solely accessible to the ex-spouse. Whereas it might be attainable to renegotiate the phrases of a SLAT as a part of a divorce settlement, there are apparent problems when including divorce attorneys to the combo of property planning attorneys and CPAs. It might be unattainable to regain entry relying on the complexity or nastiness of the divorce. 

Dying
One other entry danger is the sudden or untimely loss of life of the beneficiary partner. Though SLATs might be structured to return property to the donor partner within the occasion of the beneficiary’s loss of life, the surviving partner has primarily wasted the exemption as a result of returned property can be added again into the donor partner’s property and, if valued past the non-taxable exemption, can be taxed at a a lot greater fee. After the loss of life of the beneficiary partner, property could also be accessible to the surviving partner by the kindness of secondary beneficiaries, however distributions to the surviving partner probably would turn into revenue on that surviving partner’s tax return.  

If a pair has a couple of SLAT, provisions are sometimes differentiated to adjust to reciprocal belief doctrines, and this differentiated language could find yourself inflicting one partner to have much less entry to property than the opposite partner. These financial implications needs to be modeled as “what-if” situations earlier than organising a number of SLATs.

Taxes and extra taxes
Though SLATs are designed to cut back the scale of a person’s taxable property whereas nonetheless offering oblique entry to property by spouses or members of the family, there are pitfalls to their administration and tax remedy. SLATs can work completely effectively with the help of educated property attorneys and CPAs, serving to the consumer comply with phrases and tax submitting necessities to the letter. However there are additionally some ways to destroy a SLAT if not managed constantly as a part of gifting, tax planning and administration. Mismanagement results in taxation and penalties. 

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First, a well timed present tax return should be filed after funding a SLAT. Additionally, the donor might want to resolve if the property within the SLAT can be used inside the beneficiary’s lifetime or if property are supposed to move to the subsequent era. The CPA submitting the present tax return could have to allocate a generation-skipping tax. Failure to file a well timed present tax return may end up in accrued curiosity, penalties and even the asset by no means formally being faraway from the donor’s property.

As a result of SLATs are usually arrange as a grantor belief for revenue tax functions, the grantor additionally pays the revenue tax on behalf of the belief. Very often, the mechanics to report this revenue are  ignored. A grantor belief with revenue would require the setup of a taxpayer identification quantity. 

Plus, the U.S. tax code imposes an revenue submitting requirement on trusts with taxable revenue of $600 or extra. That is an annual revenue take a look at for the property held in belief, due to this fact grantors should concentrate on how a lot curiosity revenue, dividends or capital positive aspects have been earned within the SLAT, and on a well timed foundation share this data with their CPA. The CPA should correctly calculate any annual tax obligation and crucial funds.

If sure property held in belief are bought, there are additionally revenue tax obligations for the donor partner. For instance, if the donor partner locations the couple’s appreciating trip dwelling in belief and the couple decides to promote the asset sooner or later, the donor partner will incur revenue taxes on the house’s elevated worth when bought. Promoting property within the belief with capital positive aspects triggers capital positive aspects tax for the donor partner. Which means that people should be cautious in regards to the forms of property positioned within the SLAT and whether or not their improve in worth will lead to further taxation.  

Whereas SLATs might be helpful in the case of property and tax planning, they can be costly and complicated. Purchasers, their monetary planners and different advisors needs to be on the identical web page concerning belief provisions for entry, the tactic and timing of distributions and future tax implications.