Spousal Lifetime Access Trusts: A Tax Saving and Asset Protection Measure
If your estate planning goals include saving estate taxes and seriously protecting assets, chances are you will need to consider one or more irrevocable trustsA trust that cannot be revoked by the Grantor. Irrevocable trusts are created to either save taxes or protect assets, or both. More in your estate plan. The spousal lifetime access trustThis irrevocable trust represents a gift usually to the spouse and heirs of the Grantor. Read More (SLAT) is a prime example of a trust that will accomplish both of these goals.
The SLAT is a means of reducing the size of your estate tomorrow by making a gift to your spouse, in trust, today. The spousal lifetime access trust freezes the value of the asset(s) at today’s fair market value. Without the trust, the asset would be valued at your death, or at your spouse’s death, with all the growth in value being taxed – on top of the value of the asset today.
You should consider the SLAT in the following circumstances:
- Expecting estate tax liability at your death despite your revocable trust planning
- Buying a second home or investment property (the SLAT can hold title)
- Protecting an asset from having to be sold to pay a judgment or a debt, and to protect the asset from being accessible in divorce (if your spouse were to remarry after your death)
Example of How Spousal Lifetime Access TrustsThis irrevocable trust represents a gift usually to the spouse and heirs of the Grantor. Read More Work
In one recent case, the client owned stock in a family business. The future looked promising for the enterprise in 2012, and indeed it was. The shares sold for three times the value only six years later. The SLAT was used by our client to reduce taxes and to protect the asset, as follows:
- The shares were contributed to the SLAT in 2012. Estate tax on the growth would have been an estimated $5 million, but that tax is prevented by the SLAT.
- Both spouses are still living, and they continue to enjoy the benefits of the SLAT. The value received for the sale of the shares is captured in the trust for the spouse of the donor, but the spouse conveniently uses the fund to bolster their joint lifestyle and for re-gifting to children and grandchildren.
- When the donor was sued recently for an unrelated liability, the trust assets were inaccessible to the potential creditor. This discouraged the creditor, allowing for a favorable settlement.
Who Sets Up the Trust?
In general, the spouse with the asset will engage in the gift. Alternatively an asset may be divided between the spouses and each may create a trust for the other.
A SLAT Can Help in Income Tax Planning and Tax Basis Planning
If estate taxes are not a factor, the SLAT can be designed as an incomplete gift. This allows tax basis step-up (saving capital gains taxes later). The incomplete nature of the gift means that the donor spouse can redirect or change where the asset goes after death, such as among the heirs or to charities. In the meantime, the asset is protected from the personal liabilities of either spouse.
A SLAT Is Flexible
We can also provide for the spouse making the gift (the grantor) to later be added as a beneficiary by a trust protector, allow the trustee to move the jurisdiction of the trust to an even more favorable state for the tax savings and asset protectionThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More, and allow for the granting of so-called powers of appointment to the spouse or the grantor to enhance income tax planning. The longer the SLAT is likely to be in existence (the younger you are when you create the trust), the more you should have these tools for flexibility and tax planning capacity in the future.
