Estate Planning Law

Spousal Lifetime Access Trusts

By Rebecca G. Doane, Esq. and Randell C. Doane, Esq., published in the Palm Beach Daily News, January 3, 2021

The term “unprecedented” has become ubiquitous in the past year. For estate planners, months of pandemic and political unrest has created a perfect storm for wealth transfer planning. The high Federal Estate and Gift Tax exemption, low interest rates, and depressed asset values could all be described as unprecedented in our collective lifetimes. Never has a married couple been able to transfer so much wealth, $23,160,000 in 2020, to their chosen beneficiaries without paying Federal Estate or Gift tax. Fearing political change and tax reform, many astute individuals are changing their estate planning focus from making gifts at death to making gifts during life, in order to take advantage of this opportunity to make large tax-exempt gifts.
One way that married couples can take advantage of the current exemption amount is to utilize a Spousal Lifetime Access Trust or SLAT. The concept behind a SLAT is simple, one spouse creates and funds an irrevocable trust during life for the benefit of their spouse and possibly their children or other beneficiaries. A gift tax return is filed to report this lifetime gift, and the gifted assets and any future appreciation are no longer included in the estate of the gifting spouse or the beneficiary spouse at death. If the exemption amount is reduced in future years, the assets in the trust remain exempt. If the exemption amount increases in future years, the gifting spouse will still be able to use the additional exemption amount. The gifting spouse will generally remain liable for paying the income taxes associated with the trust, not only allowing for preservation of the trust assets, but effectively allowing additional gifts to future generations of the amount paid in income tax without incurring any gift tax.
This technique may sound like it only benefits the ultra-wealthy, but with the estate tax exemption currently scheduled to revert to $5,000,000 (indexed for inflation) in 2026, and the potential for vast tax reform in the coming years, we encourage clients of even modest wealth to consider making lifetime gifts. These impending changes to our tax law may seem distant and nebulous, but the time to prepare is now. The downside is almost non-existent. The potential upside is massive. The money contributed to a SLAT remains available to the beneficiary spouse and the family, so there isn’t a true depletion of resources for the gifting spouse. The assets are now owned by an irrevocable trust, which should render them unreachable by the creditors of the beneficiaries. If properly structured, the assets owned by the SLAT can continue to grow for generations without incurring any transfer tax. In addition, the SLAT can be drafted to allow for flexibility in future years. For example, the Trustee can be given the power to reimburse the gifting spouse for taxes paid on trust income if that becomes desirable later in life.
There are many potential pitfalls in properly drafting, funding, and reporting a gift to a SLAT. The terms of the trust must be carefully considered, particularly when both spouses are making gifts to a SLAT for the other. The assets contributed should be carefully selected for their growth potential. Appraisals may need to be obtained. Jointly owned assets may need to be retitled in order to properly utilize one or both spouse’s lifetime gift tax exemption. Finally, the transfer of the assets to the SLAT needs to be carefully documented and reported on Form 709, Federal Gift Tax Return, for the year of the gift. Accordingly, it is imperative that qualified counsel be consulted when considering or implementing such a gifting strategy.