Higher gift and generation-skipping transfer (GST) tax exemptions mean greater opportunities for individuals to make gifts to family members during life, when the donors can share in the joy these gifts bring to their families. Individuals with a more modest net worth, however, will want to balance any desire to make lifetime gifts with their need to retain adequate funds to support their current and future lifestyle. For married couples, a spousal lifetime access trust (a so-called SLAT) may provide the solution.

Overview. For married individuals who want to make lifetime gifts to their descendants but have concerns about permanently giving away a large part of their estate and their ability to maintain their current lifestyle, a SLAT may be the solution. With a SLAT, one spouse (donor-spouse) makes a gift to an irrevocable trust using the donor-spouse’s gift tax exemption. The SLAT names the non-donor spouse (beneficiary-spouse) as a current beneficiary, which allows the trustee to make distribution of trust funds to the beneficiary-spouse during his or her life.

Potential Benefits.

The use of a SLAT offers a number of advantages, including:

  • The donor-spouse uses his or her exemption but may not feel a “permanent loss” as the beneficiary-spouse still has access to the funds, if needed, during life.
  • The beneficiary-spouse and/or descendant(s) can serve as trustee, subject to certain limitations (see below under “Planning Considerations”).
  • Descendants can be named as current and/or remainder beneficiaries, so the SLAT can continue as part of a legacy plan for future generations.
  • If the donor-spouse allocates GST tax exemption to the SLAT gifts, the trust can benefit multiple generations of descendants without incurring additional estate or GST taxes.
  • As an irrevocable trust, the SLAT can protect assets from the beneficiaries’ creditors.

SLATs & Life Insurance. SLATs are often combined with life insurance planning, with the SLAT using the donor’s gift to buy life insurance on the donor-spouse. If appropriate, the trustee can choose to take policy loans or withdrawals to supplement or support distributions to the beneficiary-spouse, potentially income tax-free (depending on the type of policy and the amount of loan/withdrawal). Further, on the donor-spouse’s death, the death benefit should pass to the SLAT beneficiaries free of income and estate taxes.

  • Example: John creates a SLAT benefiting his wife, Jane, during her life, with the remainder passing to his descendants. John funds the trust with $3 million, using his gift and GST tax exemptions. The SLAT buys a cash value life insurance policy on John with a $5 million death benefit. The death benefit is protected from estate tax, at a potential maximum savings of up to $2 million, assuming a 40 percent estate tax rate.

Planning Considerations.

To achieve the potential benefits offered by a SLAT, the following questions should be carefully considered.

  • How will the SLAT be funded? The donor-spouse should consider funding the SLAT using only his or her own assets (not joint assets). If the beneficiary-spouse is deemed to make a gift to the SLAT, it could result in inclusion of the trust assets in his or her estate.
  • The SLAT must be irrevocable.
  • Will the SLAT acquire life insurance on the donor spouse? If so, it may affect who should have control over or rights to the SLAT-owned policies (e.g., ability to name or change beneficiaries, to make policy withdrawals, etc.).
  • Who will serve as trustee? The beneficiary-spouse or another beneficiary may serve as a trustee of the SLAT, provided that the beneficiary’s power to make distributions to him or herself is limited by something called an “ascertainable standard” (e.g., distributions can only be made for health, education, maintenance, and support). The donor-spouse should not serve as a trustee of the SLAT.
  • How will you provide for planning flexibility? To provide planning flexibility, the beneficiary-spouse can be given a limited power of appointment, effective at his or her death, which allows him or her to change how the SLAT assets will be distributed among the couple’s descendants after the beneficiary-spouse’s death.
  • Who will have access to the SLAT funds? Divorce or the premature death of the beneficiary-spouse will cut off the donor-spouse’s access to the SLAT funds.