The Spousal Lifetime Access Trust (“SLAT”) has become a popular estate planning strategy employed by married couples. Currently the Tax Cut and Jobs Act of 2017 (“TCJA”) increased the federal gift and estate tax exemption to a current $11,700,000 per spouse. Therefore, a married couple could exempt a total amount of $23,400,000. However, this exemption is scheduled to revert to pre-2018 exemption levels on January 1, 2026. Furthermore, President Biden has stated he would like to reduce the exemption to $3,500,000 per person prior the scheduled reversion. The Treasury Department has issued regulations stating that once the estate and gift tax exemption reverts to its pre-2018 levels, taxpayers who had taken advantage of the increased exemption during the time it is available by making gifts will not be adversely affected when the exemption returns to its pre-2018 levels. This is very important as it gives taxpayers the right to make gifts to exempt $23,400,000 from their estate as long as the TCJA is still in place. Therefore, considering the prospect of a 2026 reversion to the lower exemption amount as well as the political uncertainty in the United States to lower the exemption amount, it makes sense to utilize the increased exemption by making gifts before it either decreases due to the sunset provision or due to a congressional act.
The issue for many tax payers is that they do not want to give up control of assets during their lifetime by making a gift outright or in Trust and lose the ability to utilize those funds. Yet taxpayers would still like to make a gift to reduce their estates. One of the estate planning vehicles that can be used where taxpayers would still have use of the money and yet the assets would be out of your estate is the creation of a Spousal Lifetime Access Trust. The Spousal Lifetime Access Trust is a gift from one spouse (“donor”) to an irrevocable trust for the benefit of the other beneficiary spouse. The beneficiary spouse can receive distributions from the SLAT during his or her lifetime, yet the SLAT will be excluded from the beneficiary spouse’s gross estate and will not be subject to estate tax when the beneficiary spouse dies. It is one of the only estate planning vehicles where you can gift an asset yet still have limited access to the funds albeit through your spouse.
The terms of a SLAT can be flexible. A SLAT does not need to provide for the beneficiary spouse to receive trust income for life. However, in many situations it is advisable especially if the donor spouse would still like access to the funds. The SLAT must be an irrevocable trust, therefore the donor spouse must irrevocably transfer assets to the trust. However, as long as the donor spouse and beneficiary spouse are still married, then the donor spouse would still have access to those funds through the beneficiary spouse. However, once the beneficiary spouse dies or in the event the taxpayers become divorced, the donor spouse would no longer have access to those funds.
However, the donor spouse can be protected by creating another irrevocable trust in which the beneficiary spouse also creates an irrevocable trust for the benefit of the donor spouse with similar provisions so each spouse would have access to funds. However, please note that the Trusts cannot be a reciprocal as the IRS has rules in regard to the creation of reciprocal trusts in which both trusts may end of being included as part of your estates. There are a myriad of ways this can be avoided.
In most instances, a SLAT is treated as a grantor trust. A grantor trust means that the grantor of the SLAT is for income tax purposes treated as owning the assets of the SLAT. Therefore, any income from the SLAT would be included in the donor spouse’s gross income requiring the donor spouse to pay income tax thereon, thereby further reducing the taxpayers taxable estate.
One of the issues taxpayers wrestle with is who should be trustee of the SLAT. The donor spouse should not be the trustee of the SLAT. In the event you would like to make the beneficiary spouse the trustee of the SLAT, then distribution should be mandatory or subject to an ascertainable standard. An ascertainable standard restricts distributions from the SLAT to provide for the beneficiary’s health, education, maintenance and support. You should consider appointing a trustee who does not have an interest in the trust to make discretionary distributions.
If you need any additional information in regard to a SLAT or other estate planning techniques, please contact Joseph A. Bellinghieri, Esquire at 610-840-0239 or via email at [email protected].
