Under the American Taxpayer Relief Act of 2012 that was enacted on January 2, 2013, the federal estate tax exemption increased to $5,250,000 per person and the federal gift tax exemption increased to $5,250,000 per person. Also, the gift and estate tax rates decreased to 40 percent. Due to these large exemptions, estate and gift tax planning for many couples may not be as important compared to when the exemptions were lower. However, those individuals whose estates may be subject to the estate tax should consider additional estate and gift tax planning alternatives.
One option to consider is giving away assets during lifetime to children or other intended beneficiaries of your estate. However, many married couples are reluctant to make large gifts because they lose control of the assets and the right to benefit from these assets. An option that has gained a great deal of attention lately is the spousal lifetime access trust or "SLAT". The main reason to establish this type of trust is to remove from your estate any post-gift appreciation on the assets given to the SLAT.
An advantage of a SLAT is that one spouse can give property with a value of up to $5,250,000 to an irrevocable trust for the benefit of the other spouse and still indirectly benefit from the property given to the trust. If proper distribution language is included in the SLAT, the non-donor spouse may serve as the trustee of the trust, which allows him or her to be in control of the assets in the trust. If the non-donor spouse serves as the trustee, the non-donor spouse may make distributions to himself or herself for "health, education, maintenance, and support." Including this language allows the non-donor spouse to serve as trustee without having the assets included in his or her estate upon his or her death. From a creditor protection standpoint, the state law in which the trust is established should be reviewed to determine whether service by the non-donor spouse as a trustee of a trust by the beneficiary would allow creditors to attach the property.
The trustee may make distributions from the SLAT to maintain the non-donor spouse's lifestyle. Consequently, as long as the non-donor spouse is living and remains married, the donor spouse has indirect access to the funds. Upon the non-donor spouse's death, the trust may allow him or her to appoint the property to the donor spouse's descendants in further trust or outright. If this power of appointment is not exercised, the trust directs that the property is to be distributed outright to the donor spouse's descendants or other beneficiaries or held in further trusts for the donor spouse's descendants or other beneficiaries.
A disadvantage of a SLAT is that upon the non-donor spouse's death the assets may no longer be used for the indirect benefit of the donor spouse. However, loss of access to the property may be offset by having the non-donor spouse create a similar SLAT for the donor spouse. If each spouse establishes a trust for the benefit of the other spouse, the establishment of the trusts should be separated by a meaningful period of time and the terms of the trusts should not be too
If your estate will be subject to the federal estate tax and you are married, you may want to consider implementing a SLAT to remove the assets from the estate tax system while still maintaining indirect benefit from the assets during your spouse's lifetime.
Article originally published in Furman University's The Advisor newsletter, 2013 Issue and is posted with the permission of Furman University. Visit www.furman.edu.