Tag: Estate Law

2025: SLATs on the Brink of a Rapid Rise in Popularity?

The 2010 Tax Relief Act temporarily increased the federal estate and gift tax exemption to $5 million per individual, a significant rise from prior years. As the 2012 fiscal cliff approached, concerns grew that these higher exemptions might be reduced, prompting a surge in estate planning activities. During this period, Spousal Lifetime Access Trusts (SLATs) gained popularity as estate planners promoted them as a strategic tool to lock in the increased exemption, allowing one spouse to make substantial gifts to a trust benefiting the other spouse while still retaining some access to the assets.

Figure 1: Google Search Volume Jul 2011 – Aug 2024 for GRATs (yellow) and SLATs (red)

The outlook – Estate tax exemption down to $3.5 Million in 2025?

Since the introduction of a higher gift and estate tax lifetime exemption after 2017, the focus of tax planning for many clients has shifted from reducing estate taxes to minimizing income taxes. In 2024, each taxpayer can pass up to $13.61 million to beneficiaries without incurring gift and estate taxes or $27.22 million for married couples. With the top estate tax rate at 40% for amounts exceeding these limits, many believe that the high exemption eliminates the need for complex end-of-life tax planning. However, these elevated exemption amounts are set to revert to pre-2017 levels in 2026, potentially lowering the exemption to around $5 million per individual.

Adding to this urgency, proposals like Elizabeth Warren’s tax plan (1) could further reduce the estate tax exemption to $3.5 million per individual, with increased tax rates on larger estates. Such changes would significantly broaden the scope of estates subject to taxation, making proactive planning essential. In this context, many savvy taxpayers are turning to strategies like Spousal Lifetime Access Trusts (SLATs) to maximize the current exemption while it remains high, allowing them to lock in tax advantages before the expected changes take effect.

What to do?

Use the higher exemption amounts before they go away by establishing trusts that remove assets from the taxable estate. Spousal Lifetime Access Trusts, or “SLATs,” have emerged as one of the most popular and effective estate planning tools for this purpose.

Type of Trust Purpose Key Features Tax Implications
Spousal Lifetime Access Trust (SLAT) Remove assets from taxable estate while providing spouse access One spouse creates trust for the benefit of the other; assets grow outside estate; irrevocable Assets removed from grantor’s estate; no estate tax on appreciation; spouse can access funds
Grantor Retained Annuity Trust (GRAT) Transfer asset appreciation to heirs with minimal gift tax Grantor retains an annuity for a set period; remaining assets pass to beneficiaries Minimal gift tax on remainder interest; potential to transfer appreciation tax-free
Irrevocable Life Insurance Trust (ILIT) Exclude life insurance proceeds from taxable estate Owns and controls life insurance policy; proceeds not included in estate Life insurance proceeds are estate tax-free; may have gift tax on premiums paid
Charitable Remainder Trust (CRT) Provide income stream to grantor and charity, reduce estate size Income stream to grantor or beneficiaries; remainder to charity; irrevocable Partial estate tax deduction; reduces taxable estate; income stream taxed
Qualified Personal Residence Trust (QPRT) Transfer primary or vacation home out of estate Grantor retains right to live in home for set period; home passes to heirs afterward Reduces estate tax by freezing value of home; gift tax on remainder interest

How do SLATs work?

SLATs allow one spouse, known as the donor spouse, to transfer assets into an irrevocable trust for the benefit of the other spouse, the beneficiary spouse. This transfer uses the donor spouse’s lifetime exclusion amount, effectively removing the assets from their taxable estate, including any future appreciation. The beneficiary spouse can access the trust’s assets as needed, providing flexibility and financial security. Meanwhile, the donor spouse maintains indirect access to the assets through their marriage. The donor spouse also controls how the trust assets will be managed and distributed when the SLAT is created. Additionally, SLATs offer strong asset protection, as the trust structure can help defend against potential creditor claims.

Some Caveats

It’s important to also consider and discuss with clients the potential drawbacks of SLATs. Some of the key disadvantages include:

Risk of Divorce or Death: If the donor spouse and beneficiary spouse divorce or if the beneficiary spouse predeceases the donor spouse, the donor risks losing access to the assets in the SLAT. To mitigate this risk, a “floating spouse” provision can be included in the trust, identifying the beneficiary as the “person to whom the settlor is currently married” rather than naming a specific individual. Additionally, the trust can be drafted to allow the trustee to make loans to the donor spouse for further protection.

Unwanted Tax Consequences: SLATs can lead to unfavorable estate, gift, and income tax outcomes. If the donor spouse retains certain powers over the trust, such as the unrestricted ability to replace the trustee, the SLAT’s assets might be included in the donor spouse’s estate, undermining the trust’s tax avoidance objectives. Contributions to a SLAT are also considered completed gifts, so if the contribution exceeds the annual gift tax exclusion ($18,000 in 2024), it will reduce the donor spouse’s lifetime exclusion. Additionally, because SLAT assets typically do not receive a “step up” in cost basis at either spouse’s death, this can increase capital gains taxes for beneficiaries when the assets are eventually sold.

Application of the Reciprocal Trust Doctrine: Couples must be cautious about creating reciprocal SLATs, as this could lead to the trusts being “uncrossed” and included in each spouse’s estate, defeating the primary purpose of the SLAT. Proper planning and drafting are essential to avoid this pitfall.

Indirect Gift Doctrine: According to Internal Revenue Code (IRC) § 2036, if an individual transfers assets but retains the right to income, possession, or enjoyment of the assets or retains control over who will benefit from them, those assets will be included in their gross estate for estate tax purposes.

This situation can easily occur when creating a Spousal Lifetime Access Trust (SLAT). For example, both spouses may intend to create SLATs with each other as beneficiaries while introducing various differences to avoid the “reciprocal trust” doctrine established in the Grace case, 395 U.S. 316 (1969) (see above). However, if one spouse lacks significant assets, the wealthier spouse might give assets to the less affluent spouse, who then uses those assets to fund a trust that names the wealthier spouse as a beneficiary. If the indirect gift principle is applied, the wealthier spouse could be considered the trust’s grantor for estate tax purposes, thus including the trust’s assets in their gross estate under § 2036. Additionally, if the wealthy spouse is the trustee or holds certain tax-sensitive powers, estate inclusion may also result under § 2036(a)(2) or § 2038. This scenario is common among couples with significant differences in wealth. For this reason, many practitioners avoid reciprocal SLATs.

A practical example

James owns an LLC that he has held for about three or four years. He wants the LLC’s investments to support his wife, Emma, during her lifetime and then pass on to benefit their children and later their grandchildren without being subject to federal estate tax.

To achieve this, James forms an irrevocable SLAT for Emma and the children, naming Emma and their friend, Grace, as co-trustees. James retains the right to replace the trustee of the trust at any time and for any reason, provided the replacement is someone who is not related to him or employed by him.

The trust stipulates that Emma can make distributions to herself based on what is reasonably needed for her health, education, maintenance, and support (HEMS standard). Grace, as an independent trustee who is not a beneficiary of the trust, has the power to distribute any or all of the trust assets to Emma at any time and for any reason, according to her sole and absolute discretion, with no obligation to make such distributions.

The trust also grants Emma the right to redirect how the trust assets will be distributed upon her death, provided they are used solely for their descendants. This is known as a “limited power of appointment.”

In this scenario, James retains the right to replace trust assets with assets of equal value, making the trust “disregarded” during James’s lifetime for federal income tax purposes. Additionally, Emma’s role as both a trustee and beneficiary of the trust also causes the trust to be “disregarded” for federal income tax purposes during James’s lifetime. In other words, James and not the trust pays income taxes (2).

Conclusion

As we look toward 2025, Spousal Lifetime Access Trusts (SLATs) are positioned for a significant surge in popularity. Initially gaining traction during the uncertainty of the 2012 fiscal cliff, SLATs have continued to evolve as a cornerstone of strategic estate planning, especially as clients face the prospect of a reduced federal estate tax exemption. With the exemption potentially dropping to $3.5 million per individual if the Warren tax proposals are enacted, SLATs offer a timely and powerful tool to lock in current tax advantages, allowing couples to transfer substantial wealth while maintaining flexibility and financial security.

However, SLATs are not without their complexities and potential pitfalls. The risks of divorce, death, and unfavorable tax consequences highlight the need for careful drafting and planning. By integrating provisions such as a “floating spouse” clause and adhering to the Health, Education, Maintenance, and Support (HEMS) standard, practitioners can mitigate these risks and enhance the trust’s effectiveness.

Ultimately, as the landscape of estate planning continues to shift, the steady rise of SLATs will likely accelerate, making them an increasingly essential part of the conversation between clients and their advisors. Whether as a means to navigate the complexities of estate tax law or to ensure the financial well-being of future generations, SLATs stand ready to play a pivotal role in the years ahead.

References:

  1. American Housing and Economic Mobility Act of 2024 https://www.warren.senate.gov/imo/media/doc/final_text_-_ahem_2024.pdf
  2. Adapted from an example in Alan S. Gassman, Christopher J. Denicolo & Brandon Ketron, SLAT-OPEDIA: Considering All Options and a Client-Friendly Letter, Tax Mgmt. Est., Gifts & Tr. J. (2021). PermaLink https://perma.cc/5636-T5W5
© 2024 wealthcarelawyer.com. All rights reserved
For more news on Spousal Lifetime Access Trusts, visit the NLR Estates Trusts section.

Counsel Fee Award When Contesting A Will

In general, the party tasked with defending a decedent’s Will during a Will contest, which is typically the executor, is entitled to the reimbursement of counsel fees that they incur in defending the Will on behalf of the Estate. At times, however, a party who has filed an action to contest a Last Will and Testament may also be entitled to an award of counsel fees provided there was a reasonable and legitimate basis to contest the decedent’s Last Will and Testament. In a recent appellate division case, the court affirmed an award of counsel fees to the contestant of a decedent’s Will for these very reasons.

In this matter, the defendant executor had been awarded counsel fees by the court, as the defendant was responsible for defending the decedent’s Last Will and Testament against the challenges levied by the plaintiff. In addition, the trial court also awarded counsel fees to the plaintiff, as it found that plaintiff’s challenge to the decedent’s Will was made in good faith and was reasonable. Moreover, the court found that plaintiff’s fees for which it sought reimbursement were fair and reasonable. In response, the defendant argued that the award of counsel fees was contrary to the applicable New Jersey court rules, and therefore, objected to the award. The appellate division reviewed the applicable rule of professional conduct, RPC 1.5(a), and concluded that the plaintiff had reasonable cause to contest the validity of the decedent’s Will, and moreover, that the fees the plaintiff sought were reasonable. As such, the appellate division concluded that the trial court correctly awarded counsel fees to the contestant of the decedent’s Will.

This appellate division decision reaffirmed a well-accepted standard as to an award of counsel fees in the context of probate litigation. When you are either taxed with defending a Last Will and Testament or intending to contest a Last Will and Testament, this factor should be considered when deciding whether settlement makes sense. Since there is no guarantee to either side that the counsel fees will be awarded, it is an issue that should be considered in the context of any settlement discussions before trial.

COPYRIGHT © 2021, STARK & STARK
Article by Paul W. Norris with Stark & Stark.
For more articles on estates and trusts, visit the NLR Family, Estates & Trusts section.

Larry King Will Contest — Key Takeaways

The press has made much of the handwritten will that Larry King executed in the months before he died and in which he purports to change his prior will executed in 2015 to leave his estate equally between his children. The facts pertaining to the King estate dispute are explained in more detail in this article from the Los Angeles Times.

The family dispute over the King estate highlights issues that sometimes arise when an elderly Testator/Testatrix makes changes late in life after becoming weakened physically and perhaps mentally as a result of age and disease. Here are four key takeaways:

  1. The handwritten will is likely to be probated. King’s handwritten will was witnessed by two witnesses and therefore, potentially satisfies the requirements of section 6110 of the California Probate Code. California was likely King’s state of domicile at the time of his death. However, even if King’s will does not satisfy the requirements of section 6110, it appears to satisfy the requirements of section 6111 of the California Probate Code for a holographic will. Although the requirements vary from state to state, a holographic will is generally a will in the testator’s handwriting that may or may not be witnessed. Holographic wills are permitted and can be admitted to probate in 26 states including California. Some states will allow a holographic will to be admitted to probate if the will was executed in another state and was valid in such other state. Even other states will only accept holographic wills when made by members of the armed forces under certain circumstances.
  2. The dispute over King’s will is just the tip of the iceberg. The bulk of King’s assets were titled in the name(s) of his revocable trust(s) and will be conveyed through those trust(s), which he apparently did not seek to revoke or amend in his own hand (or otherwise) before he passed away. In fact, according to news reports, the probate estate to be conveyed according to the terms of the will is only $2 million, as compared to his nonprobate estate (i.e., the revocable trust(s) and other assets passing outside of probate) estimated by TMZ to be worth $144 million (other reports indicate his net worth was $50 million). One of the advantages of passing assets by trust, rather than by will, is that the administration is not subject to the probate process. This helps to prevent the trust agreement from becoming a matter of public record and having to file an inventory of its assets with the court which is not the case with a will. This element of privacy offered by trusts can be a big deal for wealthy individuals, particularly celebrities like King. Also, note that keeping the makeup of the assets private only works if title to the assets are transferred from the testator to the trust during the testator’s lifetime. It appears in King’s case that $2m of his assets did not make into trust.
  3. Any pre- and/or post-nuptial agreements will be important in how King’s estate will be distributed ultimately. News reports indicate that King did not have a prenuptial agreement with Shawn Southwick King (“Southwick”), who was his 7th wife in 8 marriages. Although the couple was married for 22 years, they separated in 2019 and King had filed for divorce. They had not yet reached a financial settlement. Because California is a community property state, Southwick will likely have a claim to 50% of the assets the couple acquired during their lengthy marriage, regardless of any changes King made to his will. It is unclear whether the parties executed one or more post-nuptial agreements. King and Southwick reportedly were separated in 2010 after tabloids reported King had a relationship with Southwick’s sister. Reports indicate the couple then executed a post-nuptial agreement declaring all of King’s $144 million in assets (even those acquired before his marriage to Southwick) to be community property. Southwick reportedly filed for divorce in 2010, and King sought to have the post-nup nullified. The couple subsequently reconciled for a time and King reportedly updated his estate plan in 2015. It seems likely his 2015 estate plan would have addressed the status of the marital assets.
  4. Setting aside the will on the basis of undue influence will be challenging. Southwick is alleging that King was unduly influenced by his son, Larry King, Jr., who is 59 years old and a resident of Florida. Larry, Jr. is King’s oldest child, but apparently the two did not have a relationship for most of Larry, Jr.’s life. Nonetheless, King reportedly transferred over $250,000 to Larry, Jr. in the final years of his life, and Southwick is seeking to set aside those transfers, in part, on the basis of undue influence. Southwick claims that when King executed his will in October 2019, King was “highly susceptible” to outside influences and had “questionable mental capacity” due to various physical health issues. Under California law, undue influence is defined as “excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will and results in inequity.” Typically, proving that a Testator’s “free will” was overcome is a difficult task. Southwick will be particularly challenged by the length of time that transpired between King’s execution of his will and his death.

The King will contest is likely to continue for some time, with the next hearing scheduled to take place later this month. Whether the probate court dispute will be expanded to other litigation between Southwick and Larry, Jr. remains to be seen.

See Robert Brunson’s three-part interview with psychiatrist Linda Austin for more insights into mental health and undue influence

Copyright ©2021 Nelson Mullins Riley & Scarborough LLP

ARTICLE BY Robert H. Brunson and Maurice D. Holloway of Nelson Mullins

For more articles on estate law, visit the NLR Estates & Trusts section.

Be Organized Now, Save Your Family Time and Money Later

Recently posted in the National Law Review an article by Jessica M. DesNoyers of Varnum LLP regarding wills and estate planning:

Varnum LLP

I have assisted in the distribution and administration of more than one trust and estate, and I speak from experience – the process is much easier on the family and takes considerably less time if the deceased was organized.

If the decedent died without a valid will or any estate planning, and the decedent owned any assets upon his or her death, the family has to file a claim in Probate Court to transfer the property and hope that they know what all of the decedent’s assets were.  If the decedent died with a valid will, but did not have a trust in place, or did not transfer all of his or her assets into the trust, the family will still have to file a claim in Probate Court.  Finally, even if a solid estate plan is in place, there are a number of tasks to be completed and documents to be filed or mailed before the decedent’s estate can be disbursed or administered.  To make the process easier on family members attempting to comply with your last wishes, here are some easy things you can do now to help your family later:   he distribution and administration of more than one trust and estate, and I speak from experience – the process is much easier on the family and takes considerably less time if the deceased was organized.

  1. Meet with an attorney to ensure your estate plan is up-to-date, and you have all the documents you need.
  2. Keep all of your estate planning documents together and in a safe place, and let your attorney or a trusted family member know where they are.
  3. If you have retirement accounts, money market accounts, or insurance policies where you’ve named beneficiaries, keep all of those document together with your estate planning documents.  Confirm that your documents name the beneficiaries you want named.  Keep company contact information with the documents so that your family knows who to contact at the company to make a death claim and receive benefits.
  4. Keep all title documents together with your estate planning documents, or if kept in a safe deposit box or safe, make a note with your estate planning documents altering family of where it is how to access it.  This would include title to cars and real estate.
  5. If you have specific personal items you want to give to certain individuals, make that clear.  You can create what is called a “holographic will” for personal items by handwriting (not typed) what items you want to give to which people or entities, write the date on the document and sign it at the end of the document.  This does not take the place of an estate plan, but can be used to distribute items such as family heirlooms.
  6. Finally, keep a list of all the assets you have that will need to be transferred.  No, you do not need to list every plate in your cupboard.  You should, for example, list which banks you have accounts with and what types of accounts, where you own real property, life insurance policies, and vehicles or “toys” (i.e. boats, ATVs, etc.) you own.

Being organized is relatively easy, and the benefits of the time you take today will be a gift to your family after you are gone.  Call an estate planning attorney today to assist you in the process.

© 2011 Varnum LLP