When setting up a Spousal Lifetime Access Trust (SLAT) as a part of an estate plan, there are several considerations to keep in mind, such as who the beneficiaries will be, how the trust will be funded, and avoiding reciprocal trust doctrines.
The grantor should not serve as trustee. A beneficiary spouse may serve as trustee but would be limited to making distributions to themself under an “ascertainable standard.” An Ascertainable Standard, or “HEMS” allows for distributions to be made for beneficiary needs related to health, education, maintenance, and support.
The primary beneficiary is generally the spouse of the grantor; however, siblings, children, grandchildren, and other descendants may also be named as current or remainder beneficiaries.
Naming Trust Protector(s)
Another important consideration is naming a trust protector. While not a fiduciary position, a trusted friend, advisor, institution, or partnership may be assigned as trust protector and given the power to remove a trustee, as well as other duties in the trust agreement. The trust protector may also be responsible for appointing a new trustee if there are none currently acting, or further appointed in the trust document. Often, it is most advantageous to have a non-beneficiary hold this position due to tax considerations and conflicting personal interests in the trust.
Funding the Trust
A SLAT can be funded with a variety of assets; however, it is very important to maintain separate property between the grantor and beneficiary spouse. If the trust is funded with a jointly owned asset, there is a risk that the beneficiary spouse could be perceived as making a gift to the SLAT, which may result in the trust assets being includable in his or her estate, thus wasting the gifting exemption allocated by the grantor.
SLATs offer the opportunity to take advantage of one’s gift and estate tax exemption while maintaining indirect access to those assets through their spouse. Additional flexibility can also be given to the beneficiary spouse through a limited power of appointment. Other provisions to ensure future flexibility can be included such as expressly allowing for decanting and giving additional powers to a trust protector.
Avoiding Reciprocal Trust Doctrines
In situations where both spouses may be using a SLAT as part of their overall planning, there needs to be distinct differences in terms between the trusts of each spouse. If the trusts are too much alike, there is a risk of the IRS viewing them as a tax-avoidance strategy which would eliminate the positive estate planning tax impact.
A SLAT may not be a good idea in difficult marriages. One of the biggest advantages of a SLAT is that the grantor is able to continue enjoying access to the trust assets through the spouse. In the case of a divorce, this benefit is eliminated. To provide some protection for the possibility of divorce, SLATs can be drafted to eliminate a spousal beneficiary in the event of divorce.
State Income Tax
Because a SLAT is a “grantor trust” this means that income earned in the trust is taxed to the grantor. If the grantor is a resident of a state with a state income tax, the grantor will be required to pay state income tax on any income earned by the trust. If income tax planning is a primary purpose of the trust, or the trust holds assets earning a considerable amount of income, other structures such as a domestic asset protection trust (DAPT) or an incomplete non grantor Trust or “ING trust” may better achieve planning goals.