SLAT: Is It Possible to Have Access to Trust Assets Without Estate Inclusion?

Situation – With the amount sheltered from estate tax (exemption) at an historic high of $13.61 million ($27.22M for a couple) many high net worth households are looking for opportunities to minimize their federal or state death tax exposure by gifting assets during their lifetime. By gifting assets when the exemption is high a high net worth couple is able to avoid both federal and state “death taxes” on the transferred amount (and the growth on the asset) even if the exemption amount is less at time of death. With sunset of the exemption down to $5 million indexed around the corner, time is running out to take advantage of this gifting opportunity. However, even high net worth couples can be reluctant to give away assets because of the fear that one day they may need the property if circumstances change. Of course, clients of more modest net worth are going to be reluctant to give up access.

If you have married clients who are concerned about giving up access to gifted property a strategy referred to as the Spousal Limited Access Trust or Spousal Lifetime Access Trust (SLAT) might be appealing. It’s important for financial advisors to be aware of this planning technique because life insurance is typically purchased as part of the strategy. This Counselor’s Corner will outline the primary planning and tax issues associated with implementing and administering a SLAT as well as discuss the use of life insurance in the arrangement.

Solution – A SLAT is a lifetime irrevocable trust established by one spouse (the donor spouse) for the benefit of the other spouse (beneficiary spouse) and children (and possibly grandchildren). The trust document is written to allow for distributions to the beneficiary spouse which arguably allows the donor spouse to indirectly benefit from the trust assets. While the trust is written to permit distributions that can benefit the donor spouse it is best to put only those funds in the trust that a donor can reasonable expect to do without. A SLAT can also function as a life insurance trust and acquire a single life policy on the donor’s life or survivorship policy on both spouses.