Understanding the Benefits of Spousal Lifetime Access Trusts

By David Stork | Published: September 2023

Most people are not subject to Federal Estate and Gift Tax because its exemption is currently set at $12,920,000^[i], the amount one can give during a lifetime or at death to anyone, free of estate and gift tax. Once assets get above that figure, one’s estate at death could be subject to an estate tax of 40% for amounts over the exemption.^[ii]

This amount is indexed for inflation and will sunset on January 1, 2026, to half of the inflation-adjusted amount, roughly $6,700,000.^[iii] Gifts or bequests to spouses get a 100% deduction so the goal of higher net-worth married couples is to take advantage of both spouse’s exemptions.^[iv] For such married couples, what can they do now to preserve the current exemption levels in the event of a sunset?

The Spousal Lifetime Access Trust
A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created and funded by one spouse to benefit the other (and could also benefit other family members).^[v] The settlor, or “donor spouse,” uses their current gift tax exemption to make a gift to the SLAT, and the other spouse, the beneficiary spouse, is named as a current beneficiary. While the donor spouse would give up rights to the assets transferred into the trust, the beneficiary spouse maintains access to those assets. There can be flexibility in the structure of the trust such as the beneficiary spouse changing the future flow of the trust assets.

Tax advantages of the SLAT include utilizing current estate and gift tax exemption levels to protect against the possibility of future sunsetting. For example, if a spouse (the grantor) creates a SLAT for the benefit of the other spouse (the beneficiary) and funds it with the current exemption amount of $12,920,000, the beneficiary will have access to those assets. If exemption sunsetting occurs, the amount reduces to roughly $6,700,000 The top estate rate is currently 40% so in the scenario above the federal estate and gift tax savings would be $2,680,000 ($6,700,000 x 40%= $2,680,000). This amount is only the amount contributed to the trust. Growth on the trust would also be excluded from federal estate and gift tax.

SLATs are taxed as grantor trusts for Federal income tax purposes, meaning the grantor pays the income tax on any earnings of the trust.^[vi] This gives the trust the potential to grow without Federal income taxes being paid by the trust, and payment of those taxes by the grantor is not considered an additional gift. Pennsylvania does not recognize grantor trusts so PA state income tax will have to be paid by the trust.

There are some basic considerations for a SLAT. The trust must be irrevocable, and the grantor cannot retain any beneficial interest in the SLAT. The beneficiary spouse, and perhaps other family members if included as current beneficiaries in the trust document, are the ones who could benefit from the trust. However, a primary benefit is the SLAT assets and growth will not be included in the grantors or beneficiary spouses’ estate. A SLAT’s overall goal is to become the resource of last resort for the beneficiary spouse, allowing for long-term growth to be outside both spouse's combined estates. However, the downside risk for the grantor spouse would be a divorce from or death of the beneficiary spouse.

The trustee (the person or organization who manages the assets of the trust)^[vii] can be the beneficiary spouse of the SLAT, however, the grantor spouse cannot serve as trustee.

The primary beneficiary of the SLAT is the spouse of the donor. Children, grandchildren, and other descendants may also be named as either current or future beneficiaries. When the SLAT continues beyond the lifetime of children, additional tax matters need to be considered. Generation-skipping tax exemption can also be utilized if it is desired that the trust continues for the benefit of grandchildren and beyond.

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About the Author – David Stork
David Stork is a Wealth Director with Bryn Mawr Trust serving the Central Pennsylvania team based in Hershey. David leads an advice-driven cross-functional group of wealth advisors, investment advisors, and relationship managers to deliver extraordinary client experiences. David’s career in the financial services industry spans more than 20 years. He has a high level of technical experience in estate, tax, and financial planning issues. He is a resident of Lancaster, PA.

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^[i] Estate Tax | Internal Revenue Service (irs.gov)

^[ii] A Guide to the Federal Estate Tax for 2023 - SmartAsset

^[iii] Give it away now? The sunset of the gift and estate tax exemption is around the corner - Baker Tilly

^[iv] How Does an Estate Tax Marital Deduction Work? - SmartAsset

^[v] What is a SLAT Trust? Estate Planning - Spousal Lifetime Access Trust (cbiz.com)

^[vi] What is a SLAT Trust? Estate Planning - Spousal Lifetime Access Trust (cbiz.com)

^[vii] What is a Trustee - Trustee Duties and Responsibilities | Trust & Will (trustandwill.com)

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