Proactive Planning With Low Market Values Using Spousal Lifetime Access Trusts

Theresa Marx
April 13, 2020

Would you like to transfer wealth to your family, but are concerned about relinquishing complete access to it now?

This is the third blog in a six-part series that focuses on proactive planning strategies in a volatile market.

Much has been written about how market volatility and low asset valuations create an opportunity to efficiently move wealth to children and grandchildren.While those explanations might resonate, not everyone is ready to give away a significant amount of wealth.After all, what if those assets are needed in the future?A strategy that allows the best of both worlds—efficiently transferring wealth, while retaining indirect access to that wealth if needed—is a Spousal Lifetime Access Trust (SLAT).

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What is a SLAT?

A SLAT is a type of irrevocable trust that includes the grantor’s spouse as a beneficiary and takes advantage of the current gift tax exemption amount.  In a typical structure, the grantor makes a transfer to a trust that is for the benefit of the grantor’s spouse and, if desired, the grantor’s descendants.  The trustees can distribute income and principal to any of the beneficiaries pursuant to the trust’s terms. 

How SLATs Work

As the trust is funded during life, the married couple will be able to take advantage of the gift tax exemption, but also retain access to the trust’s assets through the ability of the grantor’s spouse to receive income and principal distributions. To the extent that trust distributions are not made, both the assets and the appreciation of the assets during both of the spouses’ lifetimes will escape any further gift or estate taxes. This can be enhanced with the allocation of Generation Skipping Transfer tax exemption. Because of the potential use of various transfer tax exemptions, this trust should generally be viewed as a source of last resort for the grantor’s spouse during his or her lifetime.

Taking this strategy a step further, both spouses may wish to create SLATs to provide each of them some access to trust assets. The trusts should not be substantially identical, as the Internal Revenue Service may “look through” identical trusts and find that no gifts were made. The trusts can be created at different times, funded with different amounts and contain different terms. For example, one trust may be for the benefit of a spouse only, and the other for the spouse and descendants. One spouse may have a power of appointment, and another may not.  Note: It is critical to work with a qualified professional when structuring such trusts.

Benefits of a SLAT in a Volatile Market

SLATs, like other irrevocable trusts, are an effective way to remove growth on appreciating assets from an estate and pass it down to future generations.  When asset values are low, the tax cost of using lifetime gift tax exemption is reduced, so more assets can be transferred or the exemption can be preserved for other uses.  Additionally, if the trust is properly drafted, the grantor may be able to swap out assets that have increased in value for assets that are more stable, in order to lock in appreciation during times of market swings and volatility.

Some Other Thoughts

  • SLATs are often grantor trusts for income tax purposes;  income realized by the SLAT is taxable to the grantor.  This allows the assets within the trust to grow without the burden of income taxes.   
  • The grantor’s spouse (but not the grantor) may serve as trustee and make distribution decisions under an “ascertainable standard”— for example, health, education, support and maintenance. 
  • When creating a SLAT, the grantor should consider the impact on the grantor if the spouse predeceases the grantor or if the spouses divorce.  In either event, the grantor will lose the indirect access to the SLAT.  Further, in a divorce, the grantor may continue to support an estranged spouse depending on how (or if) the SLAT addresses divorce.  Both spouses creating SLATs for each other may mitigate the consequences of death and divorce.

For more information on SLATs and other lifetime gift planning strategies, visit our Lifetime Gift Planning resource page.

Proactive Planning During a Time of Uncertainty and Volatility
Part 1: Proactive Planning in Volatile Markets With Grantor Retained Annuity Trusts (GRATs)
Part 2: Proactive Planning in Volatile Markets with Roth Conversions
Part 4: Proactive planning with low market values using a sale to a Grantor Trust
Part 5: Proactive planning with low interest rates using intra-family loan
Part 6: Proactive planning with low market values using gifts