The Spousal Lifetime Access Trust: A Key Estate Planning Asset

Melissa J. Linn

The Spousal Lifetime Access Trust:  A Key Estate Planning Asset

KEY TAKEAWAYS

  • A spousal lifetime access trust (SLAT) offers a flexible option for reducing the tax liability of an estate. 
  • It is important that the trust not be considered a tax avoidance vehicle.
  • Understanding the ramifications of the trust are important before implementing.          

The 2022 lifetime estate and gift tax exemption is $12,060,000 per individual, which permits married couples to combine their exemptions to transfer up to $24,120,000 estate tax-free.

Any portion of an individual’s estate in excess of the exemption amount at death will be subject to a 40% estate tax. The current exemption amount was established by the 2017 Tax Cuts and Jobs Act (TCJA) and is scheduled to be reduced to an inflation adjusted $5,000,000 when the current provisions sunset at the end of 2025.

For clients with a net worth (or anticipated net worth) in a range near or over the reduced exemption amount, it is prudent to consider implementing various estate planning techniques to transfer assets outside of the estate, with the ultimate goal of avoiding excessive estate taxes.

Many planning techniques involve the creation of an irrevocable trust that is considered a separate entity from the estate. For a trust to be excluded from a grantor’s (the person who establishes and funds the trust) estate, the grantor cannot be a beneficiary of the trust. For grantors that may require their assets to supplement their standard of living, transferring assets to an entity that eliminates their ability to utilize those same assets can stop the planning process before it even begins.

If, however, a trust is established by someone else, then the assets in that trust are generally not included in the beneficiary’s estate, and they can receive distributions from the trust.

A spousal lifetime access trust (SLAT) is precisely this type of structure. It allows a person to establish an irrevocable trust for their spouse as the beneficiary and provides the family access to the assets. This removes the asset from both the grantor and their spouse’s estates. Not only can the spouse be a lifetime beneficiary, but they can also be the trustee, providing them with management and distribution authority. In addition, as with any properly created irrevocable trust, the assets in the trust may be afforded asset protection from creditors.

While each spouse may create a spousal lifetime access trust for the other, it is important that the trusts are not perceived to be tax-avoidance vehicles created pursuant to an agreement and in exchange of the other. Attempts to establish reciprocal trusts will be “uncrossed” by the IRS and treated as though each person created a trust for his or her own benefit. 

“Ultimately, SLATs offer married couples facing estate tax liability the ability to remove assets from their taxable estates while providing peace of mind that the assets continue to be available to maintain their standard of living, if needed.”  

Some factors that contribute to a finding of reciprocal trusts include: if the trusts are identical in substance, executed closely in time or funded with the same (or similar) assets in equal quantities. 

Individuals considering the use of a SLAT must fully comprehend the ramifications of their spouse being the beneficiary of the trust. If there is a divorce or if the spouse passes away, access to the trust will cease. An analysis of the individual’s future cash flow should be conducted to ensure the ability to provide for a continued standard of living should one of these situations occur.

Spousal Lifetime Access Trust (SLAT)

Spouse

Children

  • May act as trustee
  • Has access to funds for health, education, maintenance, and support as needed
  • Assets are removed from estate
  • May act as trustee/successor trustee
  • May be current or remainder beneficiaries
  • Assets may be removed from their estate

Ultimately, SLATs offer married couples facing estate tax liability the ability to remove assets from their taxable estates while providing peace of mind that the assets continue to be available to maintain their standard of living, if needed. As with many planning techniques, SLATs can be powerful tax planning tools that can benefit beneficiaries in a variety of ways, depending on each person’s specific circumstances. It is important to discuss the details and considerations with your advisors.

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May 17, 2022
Senior Vice President and Senior Wealth Planning Strategist

Melissa J. Linn

Senior Vice President and Senior Wealth Planning Strategist

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