With a new administration moving into the White House, many high net worth married couples are reaching out to seasoned advisors about the impact of potential tax changes. At Stouffer Legal, we discuss the creation of a spousal lifetime access trust commonly referred to as a SLAT with many of these couples.
The Basics – What is a SLAT?
A SLAT is a gift from one spouse to an irrevocable trust for the benefit of the other spouse. The SLAT is funded while both spouses are still alive which is different than many other types of credit shelter trusts. The beneficiary spouse can receive distributions from this trust even though it is designed to be excluded from the beneficiary spouse’s gross estate and not subject to estate tax when the beneficiary spouse dies. The amount transferred into the SLAT uses the federal lifetime gift exemption (currently $11.58 million in 2020) and shields the gift from gift tax.
The grantor gives up any rights and control over the assets transferred; however, the spouse, as beneficiary, still maintains access. The spouse can receive trust distributions as the beneficiary, but use them for joint support and maintenance.
We work with couples to draft language in the SLAT appropriate for each particular situation and take precautions against future divorce or premature death. Often a SLAT will be worded to only benefit a current spouse so that it ends with divorce. It can also be worded to allow funds to be returned upon the spouse’s death or even allow the beneficiary spouse to make loans back to the grantor spouse as needed. There are many creative ways to word SLATs to protect spouses in a variety of unforeseen circumstances.
While a couple may set up SLATs for each other, they are not permitted to mirror one another. The IRS will not recognize mirrored SLATs which then defeats the purpose of creating them in the first place. To remedy this, the SLATs need to be funded with different types of assets and set out different distribution schedules.
Generally, the SLAT and the grantor are treated as the same taxpayer for income tax purposes even though the SLAT is a separate legal entity. You report the income and deductions on your tax return and pay ordinary income tax on the income generated from the assets in the SLAT.
Set up a consultation with the knowledgeable attorneys at Stouffer Legal to learn more about SLATs. Exemption. Do not procrastinate because it may be wise to set up and fund these prior to any tax law changes that decrease the federal gift and estate tax. With the urgent need to fund COVID-19 related stimulus spending, the federal government may need to raise revenue rather quickly. It is even possible that legislation passed later in 2021 will be retroactive to January 1, 2021. That is worse case scenario, but if you are a high net worth married couple, schedule an appointment right away to discuss the option of using a SLAT to protect your assets.