Spousal Lifetime Access Trusts

As we have discussed in a prior blog post, the applicable credit against the estate and gift tax
(also known as the “Unified Credit”) for 2022 is $12.06 million. This generally means that a
married couple can transfer $24.12 million of its wealth during the lifetime or at the time of
death of either spouse without paying any gift or estate tax. A spousal lifetime access trust
(“SLAT”) is a planning device that, in certain situations, may help a married couple better
take advantage of either of the spouses’ Unified Credits.

What is a SLAT?

A SLAT is an irrevocable trust created by one spouse (the “Grantor Spouse”) for the benefit
of (at least partially) the other spouse (the “Beneficiary Spouse”). A SLAT is designed so
that the assets it holds are excluded from the estates (for federal estate tax purposes) of both
the Grantor Spouse and the Beneficiary Spouse. During the Beneficiary Spouse’s lifetime, a
SLAT may be for the benefit of beneficiaries other than the Beneficiary Spouse (e.g., the
descendants of the Grantor Spouse), though additional beneficiaries are not required (i.e., the
SLAT may be solely for the benefit of the Beneficiary Spouse during his or her lifetime).
After the death of the Beneficiary Spouse, it is generally advisable (but not a requirement)
that the trust property continue to be held in trust for additional beneficiaries, such as the
descendants of the Grantor Spouse, because the trust property can generally be excluded
from the estates of such additional beneficiaries, as well.

How can a SLAT help a married couple take advantage of the Unified Credit?

The primary function of the Unified Credit is to exclude the transfer to which it applies from
taxation at the time of transfer. An important additional benefit of making transfers and
using the Unified Credit during life is that, once the exemption is used on a lifetime transfer,
the transferred asset is sheltered from further taxation even if it greatly appreciates in value
by the time of the transferor’s death. For example, if the Grantor Spouse transfers an asset
worth $4 million to a SLAT, the Grantor Spouse will use $4 million of his Unified Credit as
of the date of the transfer, but the asset will no longer be included as part of the Grantor
Spouse’s estate going forward. Therefore, if at the time of the Grantor Spouse’s death the
asset is worth $6 million, the asset will have no additional effect on the Grantor Spouse’s
Unified Credit. In other words, by transferring the asset to the SLAT during life, the Grantor
Spouse saved $2 million of his Unified Credit by effectively avoiding having the
appreciation in the asset’s value included in his estate.

A SLAT can also be an effective technique for “locking in” the current Unified Credit
amount. As discussed in an earlier blog post, the Unified Credit is currently at an all-time
high and is scheduled to decrease to approximately half of its current amount on January 1,
2026. However, if the Grantor Spouse transfers assets worth $12.06 million to a SLAT in
2022, the Grantor Spouse has effectively used his entire Unified Credit, even if the amount
of the Unified Credit decreases in the future. Alternatively, if the Unified Credit increases in
the future, the Grantor Spouse could simply transfer additional assets to the SLAT so as to
effectively use any additional Unified Credit amount which has become available to the
Grantor Spouse due to such increase.

Can the Grantor Spouse be a beneficiary or trustee of a SLAT?

Much like other planning techniques based on a lifetime use of the Unified Credit, SLATs
come with an important caveat. The Grantor Spouse cannot be a beneficiary or trustee of the
SLAT, and generally cannot retain an ability to remove or replace the trustee of the SLAT,
because unless the Grantor Spouse truly parts with the assets, the IRS can use various
statutory provisions to include the transferred assets in the Grantor Spouse’s estate for estate
tax purposes. This may create a problem for those who want to take full advantage of the
Unified Credit but are rightly apprehensive of parting with so much wealth during their
lifetimes.

For married couples, SLATs can be an effective way to balance the concern described above
and the need to optimize use of the Unified Credit. While there are other techniques for
taking advantage of the Unified Credit during life (e.g., making transfers outright or to trusts
for the benefit of persons other than one’s spouse), the core idea of a SLAT is to transfer
assets to a trust to which one’s spouse has lifetime access (hence, the name “spousal lifetime
access trust”). By creating a SLAT, the Grantor Spouse can use his exemption and start the
estate-tax-free growth of the transferred assets while (presumably) still receiving an indirect
benefit from the transferred assets, so long as he is married to the Beneficiary Spouse.

What are the downsides to a SLAT?

Though a SLAT may be a powerful tool, the spousal access to the SLAT may prove to be too
narrow for some couples. For example, a Beneficiary Spouse cannot serve as trustee of the
SLAT unless the distribution standards in the SLAT are either mandatory or subject to an
ascertainable standard (e.g., health, support, maintenance and education). Giving the
Beneficiary Spouse too much discretion over the SLAT will cause the assets in the SLAT to
be included in the Beneficiary Spouse’s estate for federal estate tax purposes, which would
defeat the purpose of the SLAT.

Furthermore, to the extent the assets of a SLAT are actually distributed to the Beneficiary
Spouse, such distributed assets have effectively been added to the Beneficiary Spouse’s
estate for estate tax purposes (unless they are depleted prior to the Beneficiary Spouse’s
death).

Since the assets of a SLAT are not included in the Grantor Spouse’s estate or the Beneficiary
Spouse’s estate, the assets will not receive a step-up in basis upon the death of the Grantor
Spouse or the Beneficiary Spouse. Therefore, careful consideration should be given before
funding a SLAT with an asset with a large built-in capital gain.

Finally, before creating and funding a SLAT, the Grantor Spouse must consider divorce
risks. If a divorce were to occur, the Grantor Spouse would have no way to recover his
assets from the SLAT and would also lose the indirect benefit of being married to the
Beneficiary Spouse. Therefore, a well-drafted SLAT should take into account the effects of
divorce, perhaps by barring the Beneficiary Spouse from being a trustee and/or beneficiary of
the SLAT after a divorce, or even by providing that the SLAT is for the benefit of whomever the Grantor Spouse is married to at a given time (rather than just the spouse at the time of the
SLAT’s creation).

If you have questions about Spousal Lifetime Access Trusts, other techniques for effectively
using your Unified Credit, or your general estate planning, we invite you to contact an
attorney at Thomas, Fisher & Edwards, P.A. at (864) 232-0041.