Spousal Lifetime Access Trusts, commonly known as “SLATS,” received considerable attention from commentators after the 2010 increase in the Federal Estate and Gift Tax Exemption Amount from $1 million to $5 million. They were intended to be utilized to permit married taxpayers to take full advantage of the increased gift tax exemptions available to them by making lifetime asset transfers while retaining access to the gifted property. This combination of gift tax benefit and continuing access to the gifted property is a rarity in the estate planning field. The goal was to enable spouses to make current use of their increased exemption amount against the possibility that the 2010 Act’s sunset provision would cause the exemption amount to be retroactively decreased to $1 million, resulting in the imposition of a tax on lifetime transfers exceeding that amount. Similarly, the recently enacted “Tax Cuts and Jobs Act” contains a sunset provision that drastically reduces the gift tax exemption amount in 2026 from $11 million to $5 million.
SLATs involve the creation by each spouse of an irrevocable trust funded with that spouse’s unused gift tax exemption amount. Each spouse is named as lifetime beneficiary of the other’s trust, thereby permitting access to the other spouse’s trust property during lifetime. Once the predeceased spouse dies, the surviving spouse loses access to the property in his or her trust. So long as both spouses are alive, each has access to the other’s trust property while each has made full use of his or her gift tax exemption amount in case the feared sunset provision were to take effect.
One cautionary note: as a result of the “reciprocal trust” doctrine, donors must be exceedingly meticulous about the drafting and administration of these trusts. The doctrine states that if spouses establish identical or near identical trusts for each other, then the trusts may be “uncrossed” and treated for tax purposes as if each spouse had established a trust for him or herself, thereby defeating the purpose of its creation. To avoid such an outcome, the trusts could be established at different times, a third party could be appointed co-trustee with the beneficiary spouse, the trusts could be funded with different types of assets and one of the trusts could confer special powers upon the beneficiary spouse, such as a power of appointment of the trust property. In all events, the trusts should prohibit the distribution of trust assets that would satisfy the beneficiary’s obligation to support the other spouse.
Finally, as of this writing, there is uncertainty about the application of the “clawback” doctrine, which, in the event of a reversion of the current gift tax exemption from $11 million per person to $5 million, pursuant to the Act’s sunset provision, would convert what was assumed to be a nontaxable gift to a taxable gift. It appears that yet to be promulgated regulations will clarify this question in favor of the taxpayer by precluding imposition of the clawback, but there is as yet no definitive guidance. If properly designed and administered, SLATS can immunize the trust assets from gift and estate taxes, as well as creditors, and can even enable the donor to allocate his or her generation skipping transfer tax exemption to the trust property, which would have the effect of sheltering trust assets from federal transfer taxes for generations to come.