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Spousal Lifetime Access Trust & The Increased Estate Exemption

Spousal Lifetime Access Trust & the Increased Estate Exemption

Thinking about taking advantage of the current federal estate exemption? A Spousal Lifetime Access Trust may play a critical role in your long-term estate planning.

What is a Spousal Lifetime Access Trust (SLAT)?

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created by one spouse for the benefit of the other spouse. The donor spouse uses their gift tax exemption to make a gift to the SLAT for the benefit of their spouse.  The donor spouse gives up his or her right to the property transferred into the trust while the beneficiary spouse maintains access to that same property. 

The fundamental goal is to get assets into a trust that can provide financial support to a beneficiary while sheltering those assets and any future growth from estate and gift tax.

Estate and Income Tax

  • Estate Tax – The 2020 estate and gift tax exemption of $11.58 million per individual can be used during life or at death. Completed gifts using the exemption along with any future appreciation are sheltered from future estate and gift taxes. A variety of assets can be used to the fund the trust with the goal of gifting assets with the most potential for appreciation. Any assets not used to support the beneficiary spouse’s lifestyle remain in the trust for future beneficiaries. As with most irrevocable trusts, future appreciation on the assets is protected from transfer taxes.
  • Income Tax – SLATs are taxed to the grantor of the trust. This means that the grantor is responsible for all taxes associated with any trust earnings (i.e., dividends, interests, capital gains). This can be beneficial as it allows the trust the potential to grow “tax-free” because the grantor is paying the tax bill. It can also be a burden if the income of the trust becomes very large. An additional benefit is that the payment of those taxes by the grantor is not considered a gift.

Other Key Considerations

  • Naming Trustees – The donor spouse should not serve as trustee. A beneficiary spouse may serve as trustee but would be limited to making distributions to herself under an “ascertainable standard.”  An Ascertainable Standard allows for the beneficiary’s need for health, education, maintenance, and support (HEMS).  It’s important to include language to allow for the removal or replacement of trustees. The donor and/or beneficiary spouse along with other beneficiaries can have this authority.
  • Naming Beneficiaries – The primary beneficiary is the spouse of the donor. Children, grandchildren, and other descendants may also be named as current or remainder beneficiaries. Assuming the trust will continue for multiple generations, there are additional tax consequences to consider. The trust can be structured to allow only the beneficiary spouse access to the funds during his or her lifetime or it can benefit both spouse and other family members either during life or after the beneficiary spouse’s death.
  • Funding the Trust – Careful funding of the trust should be taken into consideration. As mentioned above, a SLAT can be funded with a variety of assets. However, maintain separate property between the donor spouse and beneficiary spouse is important.  There is a risk that funding the trust with jointly owned asset is that the beneficiary spouse could be perceived as making a gift to the SLAT, which may result in the trust assets being includable in his or her estate, which would waste the gifting exemption allocated by the donor spouse.
  • Drafting Flexibility – SLATs offer the opportunity to take advantage of utilizing one’s gift and estate tax exemption while maintaining indirect access to those funds. Incorporating additional flexibility to the beneficiary spouse can be given through a limited power of appointment. This power provides the ability to allocate trust assets in any manner to a limited class of recipients, generally the children in equal or unequal shares and with similar or different parameters. This is especially helpful in cases where children are too young for the parents to determine what their future needs will entail.
  • Materially Similar Trusts – In situations where each spouse may be using a SLAT as part of their overall planning, there needs to be notable differences in terms between the trusts. If not dissimilar enough, the two trusts could be viewed as tax-avoidance strategy by the IRS negating the positive estate planning tax impact. Care must be taken in drafting to ensure that this risk is minimized.
  • Marital Considerations – A SLAT is probably not a good idea in difficult marital situations. Good practice dictates that any estate planning done with a spouse be coordinated with any marital agreements that have been put in place. A SLAT works when the estate planning and marital income needs are aligned and coordinated. Divorce poses considerable risk to the functionality of a SLAT. Because one of the greatest utilities of a SLAT hinges on a spouse as a primary beneficiary, divorce has the effect of cutting off a donor spouse’s indirect access to the SLAT. The SLAT can also be drafted to eliminate a spousal beneficiary in the event of divorce.

Tails You Win; Heads You Don’t Lose

Given the changing political landscape, there is always the possibility of tax law reform. A SLAT affords an estate plan the flexibility to adapt. Donors can maximize gifting opportunities while maintaining the ability to adjust to a changing financial and tax landscape.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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