Understanding More about Spousal Lifetime Access Trusts

May 9, 2014 | Breandan Donahue, Estate Planning Attorney, Goosmann Trust Law Counsel

A Guest Submission From

The current federal estate tax landscape is extremely favorable with a high exemption
amount and the recent permanence of portability in the tax code. It is now possible with
minimal to no estate or financial planning – a common reality today – for a married couple
to pass on $10.68 million in assets at the time of the second spouse’s passing without being
concerned about federal estate taxes. One practical effect of this realization is that it has
diminished much irrevocable trust planning, including the Spousal Lifetime Access Trust,
or SLAT.

The premise of the SLAT is none-too-complex. During an individual’s life, the individual
transfers property to the SLAT where the property is used to provide for the support of the
individual’s spouse. This is an irrevocable transfer by the person creating the trust, so once
made, the assets cannot be retrieved. In theory, the individual is giving up the property by
transferring it to the trust, though the reality is they retain indirect access to the assets
through the spouse. A minimum amount of wealth is needed because the transfer is
irrevocable, but for those with estates above $5 million, a SLAT offers a number of potential
benefits even if only modestly funded.

The foremost advantage of the SLAT, and the primary reason for its promotion, is that it
offers significant creditor protection while still keeping the property close to and indirectly
accessible by the grantor. With some careful planning and drafting, the attorney can make
it so that the assets are unreachable by both the grantor’s creditors, since the assets are no
longer part of his estate, and the spouse’s creditors, since the assets never became a part of
hers. But the spouse does have access to the trust for support, and the grantor has access
to the trust through the spouse. The SLAT offers fairly robust asset security without
removing the assets too far.

In conjunction with a SLAT established by the other spouse – also known as a dual SLAT – it
can amount to an effective shield from creditors of either spouse. This is riskier and
requires particularly specialized drafting as the judiciary can intervene through the
reciprocal trust doctrine. If the trusts are too similar, as determined by a number of
factors, the property will be returned to the grantor’s estate. Varying the terms of each
trust so that they are reasonably different from one another and creating the trusts at
different dates should be sufficient to cure this.

Giving up control of one’s assets is not easy and a SLAT does have its risks. It requires a
particular conviction in the enduring nature of one’s marriage. Divorce removes even
indirect access to the property in the trust and could also mean supporting one’s estranged
spouse for life. However, there is a remedy as the SLAT can be written so that the spouse is
a general term and not a specifically identified person. If there was a divorce, there would
no longer be a spouse, and the trust would be administered for the benefit of the next
group of beneficiaries, likely the grantor’s children. Should the grantor remarry, there
would be a new spouse, and the trust would then exist for the new spouse’s benefit.
There are other advantages to the SLAT, one such advantage lying at the intersection of
state and federal taxes. While the exclusion at the federal level is $5.34 million, in those
states that tax estates at death or inheritance, the amount sheltered is well below that
figure. Almost all states, on the other hand, do not tax gifts made during life, with
Minnesota and Connecticut being the exceptions. By creating a SLAT and funding it during
life, substantial state level taxation at death can be avoided even if there would not be any
federal taxes.

Another overlooked feature of a SLAT is its capture of the generation-skipping transfer tax
exemption, which is $5.34 million but cannot be passed between spouses. Portability does
not apply. Loosely speaking, the generation-skipping transfer tax is levied on transfers to
individuals beyond the next immediate generation. By relying exclusively on portability,
the first spouse forfeits his or her generation-skipping transfer exemption. If a couple’s
planning includes the generation beyond their children, and they have assets in excess of
the exemption, this means the loss of a tax savings of up to $2.1 million. The GST
exemption can be preserved by creating a SLAT.

In the end, and with the right couple, the SLAT is still a relevant estate planning tool.
Through it, assets can be kept close to the grantor while still receiving the creditor
protection and tax savings benefits provided by an irrevocable transfer to a trust.

Breandan Donahue is the lead estate planner for Goosmann Trust Law Counsel and represents individuals and
families at various life-stages to implement their legacy planning goals. Breandan received his Juris Doctor from
the University of Virginia School of Law and is licensed to practice in Iowa, Nebraska, and South Dakota
Goosmann Trust Law Counsel is a boutique estate planning department in a full-service business law firm. Trust
Law Counsel offers fixed fees and emphasizes efficient work while taking a collaborative approach with other
professional advisors. The firm has offices in Sioux City, Iowa; Dakota Dunes, SD; and Sioux Falls, South Dakota.
For more information go to: www.TrustLawCounsel.com