Many farmers looked at transferring assets to the next generation in 2021 via trusts. One trust option to consider is a Spousal Lifetime Access Trust (SLAT).
CONSIDER ASSET TYPE
Other trusts require assets to be transferred out of the marital estate to achieve estate tax savings. A benefit of using a SLAT versus other irrevocable trust is the married couple “retain” the assets, because one spouse creates a trust for the other spouse and vice versus.
However, a SLAT has the same drawback since there is no step-up in assets upon death. Therefore, the best assets to place into the SLAT are ones that don’t need a step-up. An example is farmland that will be in the family for multiple generations. Land can’t be depreciated and only has value if the asset is sold.
You can design a SLAT to last for generations with each generation receiving income but not having the assets included in each generation’s estate.
KNOW LOCAL RULES
Farmers who live in a state with an estate tax also benefit from getting these assets out of their state. In many situations we worry more about the state estate tax than the federal tax.
We typically structure the gift by the donor of separate property. Community property states need additional guidance from their estate tax advisers.
One risk with SLATs is death of the donee spouse since the donor spouse no longer has access to the trust to live on, etc. This can be mitigated by purchasing life insurance on the donee spouse.
Another risk is divorce. If the spouse divorces the donor, the assets are then for the benefit of the ex-spouse.
You can remove these risks. We can add a “floating spouse” to the agreement by requiring the spouse to be married to the donor to qualify for distributions. We can also add a clause that allows an independent trustee to add a lineal descendant of the donor’s grandparents to the trust (in other words, the donor).
We typically see each spouse set up a SLAT; however, they should not be created at the same time or with the same terms. You may set up SLATs in different states, with different beneficiaries or with different “dispositive” provisions.
THE BOTTOM LINE
This type of trust allows you to remove assets from your estate, yet still retain access to the income off the trust as a married couple.
Listen to Paul visit with business-minded farmers and ag experts on The Farm CPA Podcast.
Paul Neiffer is a tax principal with CLA and author of the blog, The Farm CPA. He grew up on a farm in central Washington and still resides in the state.
