As we have discussed in a prior blog post, the applicable credit against the estate and gift tax(also known as the “Unified Credit”) for 2022 is $12.06 million. This generally means that amarried couple can transfer $24.12 million of its wealth during the lifetime or at the time ofdeath of either spouse without paying any gift or estate tax. A spousal lifetime access trust(“SLAT”) is a planning device that, in certain situations, may help a married couple bettertake advantage of either of the spouses’ Unified Credits.

What is a SLAT?

A SLAT is an irrevocable trust created by one spouse (the “Grantor Spouse”) for the benefitof (at least partially) the other spouse (the “Beneficiary Spouse”). A SLAT is designed sothat the assets it holds are excluded from the estates (for federal estate tax purposes) of boththe Grantor Spouse and the Beneficiary Spouse. During the Beneficiary Spouse’s lifetime, aSLAT may be for the benefit of beneficiaries other than the Beneficiary Spouse (e.g., thedescendants of the Grantor Spouse), though additional beneficiaries are not required (i.e., theSLAT may be solely for the benefit of the Beneficiary Spouse during his or her lifetime). After the death of the Beneficiary Spouse, it is generally advisable (but not a requirement)that the trust property continue to be held in trust for additional beneficiaries, such as the descendants of the Grantor Spouse, because the trust property can generally be excluded from the estates of such additional beneficiaries, as well.

How can a SLAT help a married couple take advantage of the Unified Credit?

The primary function of the Unified Credit is to exclude the transfer to which it applies fromtaxation at the time of transfer. An important additional benefit of making transfers andusing the Unified Credit during life is that, once the exemption is used on a lifetime transfer,the transferred asset is sheltered from further taxation even if it greatly appreciates in valueby the time of the transferor’s death. For example, if the Grantor Spouse transfers an asset worth $4 million to a SLAT, the Grantor Spouse will use $4 million of his Unified Credit as of the date of the transfer, but the asset will no longer be included as part of the GrantorSpouse’s estate going forward. Therefore, if at the time of the Grantor Spouse’s death theasset is worth $6 million, the asset will have no additional effect on the Grantor Spouse’sUnified Credit. In other words, by transferring the asset to the SLAT during life, the GrantorSpouse saved $2 million of his Unified Credit by effectively avoiding having theappreciation in the asset’s value included in his estate.

A SLAT can also be an effective technique for “locking in” the current Unified Credit amount. As discussed in an earlier blog post, the Unified Credit is currently at an all-time high and is scheduled to decrease to approximately half of its current amount on January 1,2026. However, if the Grantor Spouse transfers assets worth $12.06 million to a SLAT in2022, the Grantor Spouse has effectively used his entire Unified Credit, even if the amount of the Unified Credit decreases in the future. Alternatively, if the Unified Credit increases in the future, the Grantor Spouse could simply transfer additional assets to the SLAT so as to effectively use any additional Unified Credit amount which has become available to theGrantor Spouse due to such increase.

Can the Grantor Spouse be a beneficiary or trustee of a SLAT?

Much like other planning techniques based on a lifetime use of the Unified Credit, SLATs come with an important caveat. The Grantor Spouse cannot be a beneficiary or trustee of the SLAT, and generally cannot retain an ability to remove or replace the trustee of the SLAT, because unless the Grantor Spouse truly parts with the assets, the IRS can use various statutory provisions to include the transferred assets in the Grantor Spouse’s estate for estate tax purposes. This may create a problem for those who want to take full advantage of theUnified Credit but are rightly apprehensive of parting with so much wealth during theirlifetimes.

For married couples, SLATs can be an effective way to balance the concern described above and the need to optimize use of the Unified Credit. While there are other techniques for taking advantage of the Unified Credit during life (e.g., making transfers outright or to trusts for the benefit of persons other than one’s spouse), the core idea of a SLAT is to transfer assets to a trust to which one’s spouse has lifetime access (hence, the name “spousal lifetime access trust”). By creating a SLAT, the Grantor Spouse can use his exemption and start the estate-tax-free growth of the transferred assets while (presumably) still receiving an indirect benefit from the transferred assets, so long as he is married to the Beneficiary Spouse.

What are the downsides to a SLAT?

Though a SLAT may be a powerful tool, the spousal access to the SLAT may prove to be to on arrow for some couples. For example, a Beneficiary Spouse cannot serve as trustee of theSLAT unless the distribution standards in the SLAT are either mandatory or subject to an ascertainable standard (e.g., health, support, maintenance and education). Giving theBeneficiary Spouse too much discretion over the SLAT will cause the assets in the SLAT tobe included in the Beneficiary Spouse’s estate for federal estate tax purposes, which would defeat the purpose of the SLAT.

Furthermore, to the extent the assets of a SLAT are actually distributed to the BeneficiarySpouse, such distributed assets have effectively been added to the Beneficiary Spouse’s estate for estate tax purposes (unless they are depleted prior to the Beneficiary Spouse’s death).

Since the assets of a SLAT are not included in the Grantor Spouse’s estate or the BeneficiarySpouse’s estate, the assets will not receive a step-up in basis upon the death of the GrantorSpouse or the Beneficiary Spouse. Therefore, careful consideration should be given before funding a SLAT with an asset with a large built-in capital gain.

Finally, before creating and funding a SLAT, the Grantor Spouse must consider divorce risks. If a divorce were to occur, the Grantor Spouse would have no way to recover his assets from the SLAT and would also lose the indirect benefit of being married to the Beneficiary Spouse. Therefore, a well-drafted SLAT should take into account the effects of divorce, perhaps by barring the Beneficiary Spouse from being a trustee and/or beneficiary of the SLAT after a divorce, or even by providing that the SLAT is for the benefit of whomever the Grantor Spouse is married to at a given time (rather than just the spouse at the time of theSLAT’s creation).

If you have questions about Spousal Lifetime Access Trusts, other techniques for effectively using your Unified Credit, or your general estate planning, we invite you to contact an attorney at Thomas, Fisher & Edwards, P.A. at (864) 232-0041.