Spousal Lifetime Access Trusts
An Old Technique for a New Tax Regime
We have all heard the saying, “The only constant in life is change.” The past year has shown us how true that phrase is. And now, with a new political party at the helm in Washington, D.C., we can anticipate the likelihood of tax law changes that impact current estate planning techniques.
Proposals put forward by President Biden would reduce the current $11.7 million individual estate tax exemption back to $5 million or even lower. Additionally, these proposals would increase the highest rate for estate tax from 40% to 45%. Even if President Biden is not successful in implementing these proposals, the current exemptions are set to expire in 2026. Should that happen, exemption levels will be reduced to $5 million per individual and $10 million for a married couple (adjusted for inflation).
Given the current historically high exemption amount and the very real possibility that it will meaningfully decrease in the near future, now is an excellent time to review your estate plan and consider whether changes to take advantage of the current exemption amounts might be in order.
ENTER THE SLAT
While there are a number of different estate planning techniques designed to fully utilize the high exemption amounts, increasingly estate planners and commentators have been talking about one technique in particular: the Spousal Lifetime Access Trust, better known as a SLAT.
The reason for the heightened interest is not because the SLAT is a new estate planning technique. It has been with us for years. Instead, the potential for changes to the tax laws has given this type of trust its moment to shine. A properly drafted and funded SLAT can take full advantage of the current high exemption amounts, remove assets from the reach of the estate tax and potentially provide protection from creditors. The feature that may make the SLAT most appealing is the opportunity to make a significant gift of assets while still maintaining the possibility of indirectly benefitting from those assets.
How does the SLAT do all of this? The structure is relatively straightforward. As the name suggests, the trust is most commonly used by married couples. One spouse, called the “donor spouse” creates the trust and funds it with his or her own individual assets. This is a critical point. The donor spouse must use his or her own separate (not jointly owned) assets to fund the trust. The trust is irrevocable and contains language allowing the other spouse, called the “beneficiary spouse,” to request distributions, usually to support the beneficiary spouse’s standard of living.
As with any trust, a trustee is named to administer the trust according to its terms. As long as the couple remains married, any distributions from the trust to the beneficiary spouse will indirectly benefit the donor spouse.
Whether a SLAT is the right fit for your particular situation is a decision to be made in consultation with your estate planning attorney and other financial advisors. There are a number of important items to consider. Most importantly, a gift to a SLAT is an irrevocable gift. The donor spouse ultimately cannot get those funds back. Careful planning will be necessary to determine the appropriate amount of funds to gift, taking into account the need to keep sufficient assets back to support the married couple’s lifestyle.
Although the SLAT is designed to provide for distributions to the beneficiary spouse, those distributions will be at the discretion of a trustee and thus cannot be guaranteed. Along those same lines, thought should be given as to what might happen in the event of the beneficiary spouse’s death. Once the beneficiary spouse has passed away, the trust assets will no longer be, even indirectly, available to support the donor spouse.
And while no one likes to think about the possibility of divorce, your estate planning attorney should discuss drafting techniques to protect your assets should the worst happen.