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Do You Need a Spousal Lifetime Access Trust?

What is a Spousal Lifetime Access Trust, and when is funding one beneficial? Read on for more.
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With the increase in the federal estate and gift tax exemption, a Spousal Lifetime Access Trust (SLAT) has become a popular recommendation for wealth transfer planning. But what exactly is a SLAT, and when is funding one beneficial?

What Is a SLAT?

A SLAT is simply an irrevocable trust created by one spouse for the benefit of the other. The trust may allow only the spouse as the lifetime beneficiary while descendants are the remaindermen; others allow the descendants as additional lifetime beneficiaries. The trust can be structured as appropriate for each family and additional parameters can be included as appropriate. To maintain flexibility, the beneficiary spouse can be granted a limited power of appointment to allocate trust funds to a limited class of recipients (typically descendants and possibly charities) to accommodate situations in the future where the ability of descendants to handle trust distributions may be unknown.

Why Fund a SLAT?

The primary reason for creating a SLAT is to “freeze” the estate at current levels and utilize a client’s gift and estate tax exemption before the current exemption sunsets in 2026 (or before that sunset is accelerated in new tax legislation). One can think of a SLAT as a credit shelter trust funded during lifetime.

Essentially, by transferring assets to a SLAT that use an individual’s gift and estate tax exemption, the individual shelters those assets, along with appreciation on them, from future transfer taxes. Generally, if possible, donors should fund with assets that are expected to appreciate significantly over time to enhance the tax advantages of the transfer. Assets that are not distributed to the spouse continue to grow outside the estate tax base (and, if structured properly, also exempt from the generation-skipping tax), remaining available for future generations. It is best to fund a SLAT with individually owned property of the donor spouse. Funding with jointly owned property could be challenged by the IRS as the beneficiary spouse making a gift to the trust, causing estate tax inclusion.

Advantages of Using a SLAT

The SLAT will be taxed as a grantor trust for income tax purposes. This can be an advantage, as the growth potential will not be reduced by need to pay income taxes from trust assets and payment of those taxes by the donor spouse is not considered an additional gift.

The primary advantage of SLATs is that they can alleviate the individual’s concerns regarding access to assets. Many individuals are very hesitant to shift significant wealth to trusts for fear that they “may need it later” due to uncertainty regarding the future of the economy. Individuals want to avoid “buyer’s remorse.”

SLATs also can have benefits for asset protection purposes.

Other Considerations

Although the grantor trust status can be beneficial to wealth transferability, the grantor will bear responsibility for all income taxation of the trust, including taxation of capital gains, even though those gains are typically allocated to principal and thus not distributable to the spouse.

If the beneficiary spouse predeceases the donor spouse, the donor spouse may lose any indirect access to the trust property. Further, divorce poses risks to the operation of the SLAT. Care should be taken in drafting so that the trust benefits only the current spouse and not any former or estranged spouses, or that the spousal beneficiary is eliminated entirely in the event of divorce (of course, this will also eliminate the donor spouse’s indirect access to the trust property).

Beware the Reciprocal Trust!

What if one spouse (Spouse 1) wants to fund a SLAT for his or her spouse, and the spouse also wants to fund a SLAT for Spouse 1 in order to use all exemptions available to the marital unit? Beware the “reciprocal trust doctrine,” allowing the IRS to “uncross” the trusts.

The doctrine states that if a husband creates a trust for his wife, and the wife creates a nearly identical trust for the husband, then the two trusts may be “un-crossed” and treated for tax purposes as if each spouse had created a trust for himself or herself, thus causing estate tax inclusion.

There are many different provisions that can be used to differentiate the SLATs, so it is imperative to discuss with legal counsel drafting the trusts the differences incorporated into each trust. This will help to mitigate that the SLATs are not reciprocal and the use of the exemption won’t be later held invalid. Also, keep in mind that state laws regarding creditor access/creditor protection should also be reviewed to assess whether the grantor spouse does not retain any unexpected rights that would trigger estate tax inclusion.

The Time to Act May Be Now!

With the current estate tax exemption of $12,060,000 per individual scheduled to “sunset” at the end of 2025, it is never too early to start wealth transfer planning. Individuals expecting to have an estate tax liability should explore whether a SLAT would be beneficial to their estate planning sooner rather than later.

Reach out to your FORVIS Private Client advisor or submit the Contact Us form below for help assessing whether a SLAT could be a beneficial option.

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