What is a Spousal Lifetime Access Trust? A Spousal Lifetime Access Trust (also known as a “SLAT”) is an irrevocable trust established and funded by a taxpayer for the benefit of his or her spouse. Assets properly transferred to a SLAT are removed from the married couple’s estates for federal gift and estate tax purposes.
Why are Spousal Lifetime Access Trusts established? The 2021 aggregate lifetime gift and estate tax exemption is $11,700,000 per individual, or $23,400,000 per married couple. Under current law, this exemption will be reduced by 50% on December 31, 2025. The Biden administration and other lawmakers have proposed reducing the aggregate lifetime gift and estate tax exemption prior to December 31, 2025. SLATs take advantage of the current exemption amount prior to its scheduled expiration or legislative reduction.
How is a Spousal Lifetime Access Trust established? A SLAT is created by one spouse (the “Grantor Spouse”) gifting property to an irrevocable trust for the benefit of the other spouse (the “Beneficiary Spouse”). The Grantor Spouses uses his or her federal estate tax exemption amount when transferring assets to the SLAT. While the SLAT is irrevocable, the Grantor Trust may indirectly benefit from the property gifted to the SLAT so long as the Beneficiary Spouse is living and remains married to the Grantor Spouse. The indirect benefit is achieved due to the Beneficiary Spouse’s status as the SLAT’s primary beneficiary who can request distributions from the SLAT to maintain his or her accustomed standard of living during his or her lifetime. However, the Beneficiary Spouse should not request distributions from the SLAT unless those distributions are necessary, as distributions from the SLAT will be re-introduced to the Beneficiary Spouse’s taxable estate. Upon the death of the Beneficiary Spouse, the trust assets are transferred to the remaining SLAT beneficiaries (i.e., descendants), either outright or in further trust.
What are the Potential Benefits of Spousal Lifetime Access Trusts?
- Removal of Assets from Taxable Estates. The Grantor Spouse’s transfer of assets to a SLAT is considered a taxable gift that permanently removes the assets from the Grantor Spouse’s taxable estate. The SLAT’s assets are excluded from the Beneficiary Spouse’s taxable estate as well.
- Post-Transfer Appreciation. The assets transferred to a SLAT are removed from the Grantor Spouse’s estate. Any subsequent appreciation on the SLAT’s assets is also outside of the Grantor Spouse’s and Beneficiary Spouse’s taxable estates, potentially resulting in additional estate tax savings.
- Creditor Protection. A SLAT may also an effective asset protection tool for the Beneficiary Spouse and the SLAT’s remainder beneficiaries. The SLAT may include a spendthrift provision designed to preclude a beneficiary’s creditors from attaching the beneficiary’s interest in the SLAT.
Spousal Lifetime Access Trust- Important Considerations.
- Death of Beneficiary Spouse. Upon the Beneficiary Spouse’s death, the Grantor Spouse no longer has indirect access to the SLAT’s assets; instead, the SLAT’s assets may be distributed outright or continue to be held in trust for the benefit of the Grantor Spouse’s children or other beneficiaries.
- Beneficiary Spouse Serving as Trustee. The Beneficiary Spouse may serve as trustee of the SLAT so long as the Beneficiary Spouse’s power to make distributions of SLAT assets is limited to an ascertainable standard of health, maintenance and support. Distributions of the SLAT assets beyond this ascertainable standard should be authorized by an independent co-trustee to mitigate the risk of inclusion of the SLAT’s assets in the taxable estate of the Beneficiary Spouse.
- Loss of Step-Up in Basis at Death. The transfer of assets to a SLAT permanently removes the SLAT’s assets from the Grantor Spouse’s taxable estate; therefore, the SLAT’s assets will not obtain a step-up in cost basis upon the Grantor Spouse’s death. However, a SLAT may include specific language that authorizes the Grantor Spouse to swap assets of equal value with the SLAT, thereby allowing the Grantor Spouse to exchange assets with low basis from the SLAT for cash or assets with a higher basis. This power of substitution may provide beneficial income tax treatment when the SLAT’s assets are liquidated or sold.
- Income Tax Treatment. SLATs have historically been structured as “grantor trusts” for income tax purposes. The Grantor Spouse, while living, pays the income tax liability on the earnings generated in the SLAT, rather than the SLAT itself bearing the burden of income taxes. The grantor trust structure may further reduce the taxable estate of the Grantor Spouse and allow the assets inside the SLAT to appreciate without being encumbered by income taxes. The Grantor Spouse’s payment of the SLAT’s income tax liability is effectively a non-taxable gift to the SLAT. However, the House of Representatives’ Ways & Means Committee recently approved draft legislation as part of Congress’ ongoing $3.5 trillion budget reconciliation process. The proposed legislation includes significant tax proposals, including the elimination of certain tax benefits of grantor trusts.
Disclaimer: This information is intended to stimulate thought and discussion and to provide readers with useful ideas in the area of estate planning. However, this information does not constitute and should not be treated as legal advice or tax advice regarding the use of any particular estate planning technique, device or suggestion. Our law firm does not assume any responsibility for any individual’s reliance on the information presented. Each reader should verify independently all statements made before applying them to a particular fact pattern and should determine independently the legal and tax and other consequences of using any particular device, technique or suggestion.