We are starting to see a renewed interest in the Spousal Lifetime Access Trust (“SLAT”). This was a new estate planning strategy that surfaced in late 2012 designed to take advantage of the lifetime exemption by funding the bypass trust during the life of the grantor (the donor spouse). There can be an additional advantage for states that have estate and gift taxes that are not aligned with the federal estate tax exemption.
The longevity of the current lifetime exemption isn’t certain. The lifetime exemption sunsets in 2025 and there is the potential it could be repealed by future Congress and/or the President before then. The SLAT is seeing a rise in popularity for individuals who want to ensure they maximize the lifetime exemption at its current rate, prior to the election and/or the sunset.
A SLAT is an irrevocable trust that Spouse A creates for the benefit of Spouse B. It can also benefit other family members (usually lineal descendants). Spouse A would utilize his/her lifetime gift exemption to establish and fund the SLAT. Spouse A is giving up the ability to control and benefit from that gift directly. The additional benefit of the SLAT is that it is often taxed as a grantor trust which means that Spouse A will also receive the tax burden thereby making an “additional” tax free-gift each year by paying the tax burden individually.
As with all estate planning, there are advantages and disadvantages to a strategy.
As mentioned above, the SLAT can be a Grantor Trust which means that the Grantor (Spouse A in my example above) will pay the trust’s income taxes each year. This is essentially an additional tax-free gift to the trust.
Depending on your state, you may be able to avoid inheritance taxes. If the SLAT is established in a tax-friendly state, you could potentially avoid state income taxes. The SLAT can benefit more than just a spouse. The SLAT could also benefit descendants if structured to do so. A SLAT can serve as a Dynasty Trust which would shelter assets from divorces or creditors.
A disadvantage may be that once you gift into the SLAT, you cannot get it back. Of course, the beneficiary could share the distributions; however, the grantor does not retain a demand right to receive back the gift. Another concern may be if the Beneficiary Spouse dies, then the Grantor Spouse would lose any sort of benefit from distributions out to that Beneficiary Spouse.
A SLAT could potentially reduce conflict if the spouses divorce. If a SLAT is created while the marriage is healthy, then perhaps the divorce could be more amicable.
As we near a national election, there is always the possibility of changes to the tax law. You want to make sure your attorney is one that is well versed in this type of trust and will remain vigilant in ensuring your trust document is compliant and that this is the right trust option for your family.
For more information, please contact:
Jacqueline Jenkins, CTFA
Managing Director / Chief Fiduciary Officer
Phone: 561-515-6156 / Email: firstname.lastname@example.org
The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only. FSTC does not offer tax or legal advice, professional counsel should be sought for tax or legal advice.