At times, estate planning can seem like an alphabet soup of acronyms. Trust and estate advisors speak about ILITs, QTIPs, QDOTs, GRATs, QPRTs, IDGTs, the GST Tax, CRATs, CRUTs and NIMCRUTs, CLATs and CLUTs, FLPs, FLLCs and DAPTs. The 2010 Tax Act added the cumbersome DSUEA to the mix. Now, with the expiration of the current estate and gift tax law looming at year-end, the SLAT, which stands for Spousal Lifetime Access Trust, is gaining prominence as a term and technique. The technique's emergence was noted in the Wall Street Journal’s Week in Words column in an entry titled “SLATs/All Yours – Sort Of.”
The SLAT is simply a credit shelter trust established and funded by the settlor during his or her lifetime that names the settlor’s spouse as a beneficiary. This technique, which is not new, may be an ideal solution for the married couple that wants to take advantage of this year’s $5,120,000 federal gift tax exemption (the exemption reverts to $1 million at year-end under current law), but is wary of making such a large gift. By naming the spouse as trust beneficiary, the couple “hedges its bets” by irrevocably transferring the assets out of their estates while authorizing distributions to the spouse if the need arises. A husband and wife may each establish a SLAT, but those trusts should not be "reciprocal trusts" under the reciprocal trust doctrine.
To establish a Spousal Lifetime Access Trust, the settlor executes an irrevocable trust agreement and transfers assets to the trust. The amount transferred is equal to or less than the settlor’s available federal gift tax exemption. In its simplest form, the trust agreement provides that the spouse is a beneficiary of the trust during the spouse’s lifetime. The trustee may distribute the trust’s income or principal to the spouse or use it for the spouse's benefit. Upon the spouse’s death, the trust fund passes to the couple’s beneficiaries, e.g., outright to or in trust for children and grandchildren.
How does the SLAT save estate taxes? At the settlor's death, the value of the gift is added back to the settlor’s taxable estate (a function of how the estate tax is calculated). However, the trust assets are NOT included in either spouse's gross estate. This distinction can be confusing, but the tax effect is straightforward. By establishing the SLAT, the couple removes from their estates any appreciation on the trust’s assets over the period that begins with the transfer to the trust and ends on the second spouse’s death. These benefits can be further magnified by designing the trust as a “grantor trust” for income tax purposes. If the trust is a grantor trust, the settlor will be taxed on the trust’s income, instead of the trust bearing that tax itself. As a result, the trust assets will grow inside of the trust undiminished by income tax. Over time, the tax savings may be substantial.
If you have questions about Spousal Lifetime Access Trusts or would like to discuss other estate tax planning techniques that may be appropriate in the current legislative and economic environment, please do not hesitate to contact any of our firm's attorneys. You can contact me by e-mail at firstname.lastname@example.org or by phone at (732) 224-1200.