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March072022

Spousal Lifetime Access Trusts

Kevin Wong, CPA, MST, MSA

03.07.22 | T&E Chat

Steve and Madison have done well during their lifetime and accumulated a significant net worth. They have not done any estate planning over the years. However, due to a recent death within the family, they have started looking into their options. The 2017 Tax Cuts and Jobs Act had increased the lifetime gift and estate tax exemption, which is set to expire after 2025. Steve and Madison are concerned their estate will be on the hook for significant taxes if the exemption goes back down in a few short years. They want to find a way to remove assets from their estate without making current gifts to their children as they are concerned it may affect their future standard of living. A Spousal Lifetime Access Trust (SLAT) can be a solution to Steve and Madison’s dilemma.

What is a taxable gift?

Before we can define a SLAT, we need to understand what a taxable gift is. For a transfer to qualify as a taxable gift, the taxpayer must surrender their beneficial interest and sufficient control of the assets being gifted. The taxpayer will lose the ability to financially benefit from the asset in the future. This loss of control and future benefit from the asset can deter a taxpayer from making a taxable gift.

What is a SLAT?

A SLAT is an irrevocable trust where the donor spouse (the “Grantor”) creates and makes a gift to the trust in which the other spouse (the “Spouse”) is the primary beneficiary. With the Spouse as the beneficiary of the SLAT, the Grantor can indirectly benefit from any distributions made to the Spouse during their lifetime. By making the gift to the SLAT, the Grantor effectively gives up control and beneficial interest in the assets gifted. A second trust can be created by the Spouse benefitting the Grantor. Due to the “reciprocal trust rule,” though, the two trusts should not be implemented at the same time and should be drafted so that they are not substantially similar.

Potential benefits and pitfalls of a SLAT

The benefits of a SLAT are:

  • Removal of assets and future appreciation from the Grantor’s estate.
  • Custom-tailored trust provisions to meet the Grantor’s objectives, such as mandatory or discretionary distributions to the Spouse for “health, education, maintenance, or support.”
  • Typically structured as a grantor trust with income earned being taxed to the Grantor, further reducing their estate.

There are some pitfalls to be wary of:

  • The beneficiary Spouse will continue to benefit from the trust in the event of a divorce as the SLAT is an irrevocable trust, and the terms of the trust cannot be changed.
  • The Grantor of a SLAT only benefits from distributions during the Spouse’s lifetime. Once the Spouse dies, the Grantor’s access to the trust through the Spouse terminates. This could affect the Grantor’s standard of living if the Grantor relies on the distributions.
  • If a beneficiary is also serving as trustee with the ability to make broad distributions to themselves, that could trigger the inclusion of trust assets within their taxable estate.
  • A SLAT should be funded by assets owned by the donor spouse and not jointly owned assets.

Conclusion

A SLAT can be a great vehicle for Steve and Madison and others who are apprehensive about making significant gifts to make use of their lifetime exemption while still maintaining their standard of living. However, taxpayers should be wary of the pitfalls that come with a SLAT before making such a decision. Discuss with your trusted advisor if a SLAT is the right option for you.

Questions? I can be reached at 212.331.7441 | kewong@berdonllp.com or contact your Berdon advisor.

Kevin Wong is a Senior Manager in the Personal Wealth Services Group of Berdon LLP with nearly 10 years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.

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