Utilizing Spousal Lifetime Access Trusts

April 21, 2020
Brad Galbraith, Esq.

The 2020 federal estate and gift tax exemption is $11,580,000, but under the current law, the exemption is slated to revert to the 2017 level of $5,490,000, adjusted for inflation at the end of 2025. A few months ago, the biggest factor in predicting the fate of the exemption amount was the outcome of the 2020 Presidential election and congressional elections. Now, with the federal government undertaking massive spending amid the Covid-19 pandemic, it seems that taxes may increase regardless of the political situation. 

We want you to know that this means now may be the best time to take advantage of the exemption before it decreases. An effective tool for utilizing the lifetime gift exemption is the Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust with one spouse as the grantor and the other spouse as the lifetime beneficiary. One way SLATs can allow continued access to the gifted property is by appointing as trustee the lifetime beneficiary spouse.  With the spouse serving as trustee, he or she may make distributions of the trust property to themselves. In other words, the trust property is still easily accessible should it be needed. This structure allows the grantor to move assets out of their estate while still potentially enjoying the benefits of those assets through their spouse.

A grantor may also name children as beneficiaries during the grantor’s lifetime, along with the spouse. If the spouse beneficiary dies before the grantor, the children then become the sole beneficiaries. This may be a concern for some, as the possibility of the sudden passing of a spouse could seemingly make the trust property inaccessible to the grantor. This is not the case if the SLAT is properly drafted. The drafter may include a provision allowing the grantor to borrow without interest or security, effectively preserving the grantor’s ability to access trust property.  Thus, in the event the lifetime beneficiary/trustee spouse predeceases the grantor, a person can be appointed to effectively fill in for the spouse for the purpose of accessing trust property for the grantor.

SLATs are taxed as grantor trusts for income tax purposes. This means that the grantor continues to bear the income tax burden for the trust. Thus, it is exactly the same income tax situation as if the trust had not been created in the first place – no better and no worse.

Typically, it is preferable to fund a SLAT with assets that are likely to appreciate significantly, as those assets that are not paid out to the beneficiary spouse can continue to grow and then pass on to their children free of estate tax. Many of you are likely to have assets that have experienced a sudden decrease in value during the current pandemic. As the pandemic subsides and the economy recovers, many investments will eventually appreciate back to the height of their market value from only a few months ago. These investment assets are ideal for funding your SLAT.

We know this blog may raise more questions than it answers. For more information about SLATs and how they might work for you and your family, please call our office to schedule a time to discuss your planning options. We are here to help you now, and in the future.

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