What is a Spousal Lifetime Access Trust?

A Spousal Lifetime Access Trust or “SLAT” is a special type of irrevocable trust.  A SLAT is created by one spouse for the benefit of the other.  The spouse who creates the SLAT is referred to as the grantor and the spouse who receives gifts from the SLAT is referred to as the beneficiary spouse.  SLATs can be used to maximize available estate tax exemptions, provide asset protection, and create a legacy for generations to come.

How Does It Work?

In a nutshell, here’s how a SLAT operates.  

1. The grantor spouse transfers ownership of his separate property into the trust and reports the gift on a gift tax return.  SLATs may only be funded with separate property. Because California is a community property state it is wise to draft a partition agreement to ensure that the property being transferred into the SLAT is indeed separate property. 
2. Once the property is transferred to the trust (referred to as “funding” the trust), the beneficiary spouse may request distributions of income or principal from the SLAT that may also indirectly benefit the grantor spouse. 
3. When the SLAT is terminated (typically when the beneficiary spouse dies) the assets that are still in the trust pass to the remainder beneficiaries as described in the trust (usually children and or grandchildren).

What Kind of Assets can be funded/transferred into a SLAT?

A SLAT may be funded with several different types of assets if they are the Grantor’s separate property.  It makes sense to transfer assets that will go up to in value.  If you were to transfer a depreciating asset into the trust, you would waste part of your individual lifetime gift and estate tax exemption.  If you transfer $2 million of Apple stock to your SLAT and it goes up in value to $20 million, you will have only used $2 million of your exemption and the $18 million dollars of increased value is outside of your taxable estate.

What are the Risks?

To truly maximize the benefits afforded by SLATs, a couple would each create a SLAT for the benefit of the other.  The IRS; however, may interpret two trusts as constructively related under the Reciprocal Trust Doctrine.  Applying this doctrine, the IRS may conclude that because two SLATs are reciprocal and disregard them by including the SLAT assets in the grantor’s estate (destroying the entire purpose of the SLAT).

To avoid the reciprocal trust doctrine, consult with a qualified attorney.  Your attorney will likely counsel you to, among other things, create the trusts and transfer assets to them at different times, use different trust language, and provide beneficiaries alternative rights of withdrawal.

Where Can I Get More Information?    

Drafting a spousal lifetime access trust is a complicated endeavor and will require the assistance of a qualified California estate planning attorney.  For more information about how to properly create a SLAT that maximizes your individual lifetime gift and estate tax exemption call the Law Office of Jonathan Alexander at (949) 334-7823. 

To learn more about Mr. Alexander, his practice, and his estate planning philosophy please visit his bio linked here.