Introduction to SLANTs
- Discover the remarkable tax benefits of SLANTs, which, unlike SLATs, shift the income tax burden to the trust, helping couples manage their overall income tax liability while reducing their taxable estate.
- Enjoy enhanced asset protection and control with SLANTs, shielding your wealth from creditors and lawsuits while allowing you to appoint a trustee to manage assets in line with your wishes.
- Embrace the flexibility of SLANTs, providing financial support to the beneficiary spouse while preserving assets for future generations
Spousal Lifetime Access Non-Grantor Trusts (SLANTs) are an estate planning tool designed to provide financial support to one spouse while offering tax benefits and asset protection. Like Spousal Lifetime Access Trusts (SLATs), SLANTs enable the grantor spouse to remove assets from their taxable estate, but SLANTs offer a unique tax treatment for income earned within the trust. This article will explore the advantages and limitations of SLANTs to help you determine if this type of trust is suitable for your estate planning needs.
Benefits of SLANTs
SLANTs provide significant tax benefits to couples.
Estate tax. As with SLATs, transferring assets to a SLANT moves assets out of your “estate” so that (1) the transferred assets and their future appreciation will not be subject to gift or estate taxes while (2) the assets remain accessible to your spouse. This can be especially useful for couples who have a significant amount of assets and are concerned about the potential tax burden on their estate.
How that works is simple. When one spouse transfers assets to a SLANT, any gift up to their available lifetime gift exemption amount is free of gift tax. Then, because the assets have left the first spouse’s possession, any growth on those assets — via reinvestment — will belong to the recipients and, as a result, will also not be subject to estate tax now or when the first spouse passes away.
And because only the first spouse has given those assets away — to the second spouse and the kids — the couple can effectively reduce the size of their taxable estate while ensuring that the second spouse can directly access the assets and, therefore, that the first spouse can indirectly benefit. The trust can be structured in a way that provides regular income to the second spouse, while also allowing for the eventual distribution of assets to children or other beneficiaries. This can be a useful way to provide for a spouse without sacrificing the long-term financial security of children or other heirs. In addition, while the spouse setting up and gifting assets to the trust cannot withdraw assets from the trust, they can indirectly benefit from their spouse withdrawing assets from the trust for their own financial needs. (See below for more on how the beneficiary spouse can spend the money, and check out our primer on SLATs for more on these mechanics.)
Income taxes. Unlike SLATs, which are treated as grantor trusts for income tax purposes — and whose income, therefore, is taxed to the grantor — SLANTs are structured as non-grantor trusts. This means that the trust itself is responsible for paying income taxes on its earnings, not the grantor spouse. By shifting the income tax burden to the trust, SLANTs can help couples manage their overall income tax liability.
Asset Protection and Control
In addition to those significant tax and spending benefits, SLANTs provide a layer of asset protection. Because the trust is irrevocable, the gifting spouse has given up control of the assets, and the beneficiary spouse has only limited control, these assets are generally protected from creditors and lawsuits. This can be especially beneficial for couples with a high net worth or those in professions with a significant risk of litigation.
The grantor spouse can also exercise a degree of control over the trust assets by selecting a trustee who will manage the assets and make distributions to the beneficiary spouse. This allows the grantor spouse to ensure that the assets are used in a manner consistent with their wishes and intentions.
Flexibility in Estate Planning
SLANTs offer flexibility in estate planning by providing financial support for the beneficiary spouse while preserving assets for future generations. The trust can be structured to provide income to the beneficiary spouse and, if needed, access to the principal for specific purposes, such as health care, education, or maintenance.
can be tailored to address various family dynamics, such as blended families or couples with significant age differences. For example, a SLANT can provide for a current spouse while also preserving assets for children from a previous marriage.
Potential Pitfalls and Trade-offs
While SLANTs offer numerous advantages, there are potential pitfalls and trade-offs to consider:
- Complexity. SLANTs are more complex than SLATs due to the non-grantor trust structure. This complexity may necessitate additional legal and tax expertise, potentially increasing the cost of establishing and maintaining the trust.
- Trust income tax rates. Since SLANTs are responsible for paying their own income taxes, it is essential to consider that trusts often reach the highest income tax bracket at a much lower income level than individuals. This could result in higher taxes on trust income compared to grantor trusts, where the grantor would pay the tax.
- Irrevocability. Like SLATs, SLANTs are irrevocable, which means the grantor spouse must be comfortable relinquishing control over the assets placed in the trust. In particular, some grantors are concerned about what happens if they set up a SLANT and then get divorced. You can include a provision in your trust that allows you to revoke spousal rights in case of divorce, though that is, of course, a fraught decision that you’ll have to consider thoroughly.
- Limited access to assets. The beneficiary spouse can access the trust’s income and, in certain cases, the principal. However, the grantor spouse typically does not have direct access to trust assets.
SLANTs can be an effective estate planning tool for couples seeking to minimize taxes, protect assets, and provide financial support for the beneficiary spouse. Their unique non-grantor trust structure offers distinct tax advantages by shifting the income tax burden to the trust itself. However, it is essential to carefully weigh the benefits and trade-offs, including the complexity of establishing and maintaining a SLANT, the trust’s income tax rates, and the irrevocable nature of the trust.
As with any estate planning decision, it is crucial to consult with a knowledgeable trust and estate attorney to help you navigate the complexities of SLANTs and determine if this type of trust aligns with your financial goals and family dynamics. By thoroughly understanding the advantages and limitations of SLANTs, you can make an informed decision about whether this estate planning tool is the right choice for your unique circumstances.
- Estate and Tax Planning: Knowing The Difference
- Estate Planning: What’s Important To Know
- Introduction to SLATs and SLANTs
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