How a SLAT Can Help Married Couples Reduce Massachusetts Estate Taxes

Understanding the Strategic Role of SLATs in Estate Planning for Couples

With changes likely forthcoming for estate and gift taxes, there has been increased interest in various estate planning strategies to address estate taxes. The Tax Cuts and Jobs Act (TCJA) of 2017 established a higher estate tax exemption amount that has increased to a lifetime estate tax exemption amount of $13.99 million for individuals and $27.98 million for married couples in 2025. However, the changes established with the TCJA were not permanent and the exemption amounts are scheduled to “sunset”, reverting to the pre-2017 levels, which accounting for an inflation adjustment, the exemption amounts are projected to be approximately $7.2 million per individual and $14.4 million for married couples.

While the federal exemption amounts may still seem high even if they are reduced from current levels, we can’t forget about state estate taxes. For people who live in states with a lower estate tax exemption amount, such as our home state of Massachusetts, you may still need to plan for estate taxes even if your estate value is below the federal exemption amount. Currently in Massachusetts, estates valued over $2,000,000 are subject to a state estate tax, ranging from 7.2% to 16%.

An option available to married couples for reducing potential estate taxes is a Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust created by one spouse (the donor spouse) for the benefit of the other spouse (the beneficiary spouse). The core function of this trust is to remove assets from the donor's taxable estate, thereby reducing potential estate tax liabilities. This is accomplished by gifting assets to the trust during the donor's lifetime. The trust is designed to benefit a spouse and potentially other beneficiaries such as children and grandchildren.

How does a Spousal Lifetime Access Trust work?

The grantor (one spouse) creates the trust and transfers assets in their individual name into it, permanently removing them from their estate. A SLAT should not be funded with jointly owned assets. Once assets are transferred into the trust, the donor relinquishes control over them. The other spouse is named as a beneficiary, meaning they can receive distributions from the trust. This transfer is considered a gift, therefore the donor spouse will use a portion of their lifetime gift and estate tax exemption amount, so that no tax is due on the transfer.

The assets placed in the SLAT, including any future appreciation, are removed from the donor's estate and potentially from the beneficiary spouse's estate as well. The beneficiary spouse, during their lifetime, can access the trust's income and, under certain circumstances, the principal. The trust's terms dictate the extent and manner of these distributions, offering flexibility in tailoring the SLAT to the couple's specific needs. The beneficiary spouse can access the funds in the trust as needed for their own health, education, maintenance and support. In this way, the donor spouse can indirectly benefit from the assets distributed to the beneficiary spouse, although the strategy is most effective when most of the assets are retained in the trust and the beneficiary spouse is not aggressively withdrawing trust assets.

Upon the beneficiary spouse’s death, the trustee transfers any remaining assets to the remaining trust beneficiaries – typically children or grandchildren. The distributions to remaining beneficiaries can happen outright or remain in another trust to be distributed according to certain provisions. When structured properly, the assets in the SLAT will be excluded from the donor’s taxable estate and the taxable estate of their spouse.

Considerations when using a SLAT

A primary consideration for the donor spouse is that they are giving up control over the assets placed in the SLAT. Also, SLATs are grantor trusts meaning that the gifting spouse, not the trust, is responsible for paying the income taxes generated by the trust annually. Also, the potential estate tax savings from using a SLAT is diminished if the beneficiary spouse receives significant distributions from the trust, bring those assets back into the taxable estate. The beneficiary spouse should understand that they do not have complete access to the trust assets. Generally, they can only request distributions for their health, education, maintenance and support.

Consideration should be given to the current dynamics of the marriage. If a couple divorces, the donor spouse could lose the indirect benefit of the assets if the beneficiary spouse continues to receive trust distributions. Although the trust can be drafted to terminate the ex-spouse’s beneficial interest in the trust, a couple may find it challenging to agree on the use of these terms and this risk should be carefully considered.

Additionally, if the beneficiary spouse pre-deceases the donor spouse, the trust can be structured to continue for the benefit of other family members, however the donor spouse’s indirect economic benefit from the trust would stop.

Trustee Selection

The selection of a trustee is also an important consideration with SLATs. The grantor may not act as trustee. The beneficiary spouse can serve as a trustee of a SLAT, however the use of an independent trustee should be considered given that a beneficiary spouse that makes trust distributions to themselves beyond an ascertainable standard can trigger the inclusion of the trust assets in the taxable estate, undermining the original intent of the trust.

Tax Considerations

Special attention is advised in situations where both spouses want to set up a SLAT to avoid the “reciprocal trust doctrine”, which can apply if the IRS feels that the two trusts are identical, thus nullifying the strategy and pulling the assets back into each spouse’s estate.

Additionally, the assets in a SLAT do not receive a step-up in cost basis upon the death of the donor spouse and the beneficiary spouse since those assets have been previously removed from their estates. Beneficiaries will need to be aware of potential capital gains tax consequences when selling assets.

Example: Using a SLAT to address Massachusetts Estate Taxes

Massachusetts Estate Tax Threshold - Massachusetts imposes an estate tax on estates exceeding $2 million. This is a critical factor in estate planning within the state.

Example Scenario:

Imagine a couple, Jack and Diane, residing in Massachusetts. Jack's individual estate is valued at $4 million. This means that without proper planning, $2 million of his estate would be subject to Massachusetts estate tax upon his death.

SLAT Implementation:

Jack elects to create a SLAT, with Diane as the beneficiary. He transfers $2.5 million of his assets into the SLAT.

Impact:

By doing so, Jack effectively reduces his personal taxable estate to $1.5 million. This amount is now below the Massachusetts estate tax threshold of $2 million. Therefore, by using the SLAT, Jack has removed a large portion of his estate from being subjected to the Massachusetts estate tax. Furthermore, any future appreciation of the 2.5 million dollars held within the SLAT, is also removed from his taxable estate.

Key Benefits in this Example:

Threshold Avoidance - The SLAT allows Jack to strategically move assets out of his taxable estate, bringing it below the state's $2 million threshold.
Tax Minimization - This directly results in significant state estate tax savings for his heirs.
Asset Growth Protection - Future growth of the assets in the SLAT are also protected.

Important Considerations:

It's crucial to remember that estate tax laws can be intricate and subject to changes. It is recommended that couples consult with a qualified estate planning attorney who is well-versed in Massachusetts estate tax regulations. By using a SLAT, people living in Massachusetts can take action to protect their assets from state estate tax.

The SLAT is a sophisticated estate planning tool that can provide significant tax advantages and financial security for high-net-worth couples. However, it requires careful planning and consideration of various factors, including the irrevocability of the trust, marital stability, and potential tax implications. Consulting with an experienced estate planning attorney and financial advisor is crucial to determine if a SLAT is the right strategy for your specific circumstances.