Florida Banking December 2021 | January 2022

TRUST BANKING

SPOUSAL LIFETIME ACCESS TRUST – A 2022 ESTATE PLANNING OPTION

BY KAREN MCCRAE-LEE FATT, CTFA, AEP®, CES™

Y our high net worth clients are likely paying attention to the Biden Administration’s proposed changes to the 2017 tax reform law known as the Tax Cut and Jobs Act (TCJA). With the TCJA lifetime gift and estate tax exemption at currently $23.4 million per married couple, a significant amount of wealth can be passed to loved ones without exposure to the 40 percent estate top tax rate. While this tax advantage is set to expire December 31, 2025 and revert to the pre-2018 tax exemption levels of $10 million per married couple or $5 million per individual, the Biden Administration’s tax proposal seeks to accelerate the reduction. Under the current proposal (as of Nov. 1, 2021), the tax exemption level for individuals would shift from $5 million to $3.5 million ($7 million per married couple) as early as 2022, and the new top tax rate would increase to 45 percent. Given the possible increase in estate tax, many advisors are exploring estate planning options with their clients. The Spousal Lifetime Access Trust (SLAT) is one instrument that is receiving renewed attention. A SLAT is an irrevocable trust wherein one spouse (the donor spouse) gifts individual assets to the trust for the benefit of the other spouse (the beneficiary spouse), with the remainder interest passing to the donor spouse’s children and grandchildren. In gifting these assets to the SLAT, the donor spouse is able to benefit from the use of the federal lifetime gift and estate tax exclusion (which is currently $11.7 million per individual) by removing those gifted assets from his or her estate. Additionally, any future appreciation of those gifted assets within the SLAT is excluded from the combined estates of both spouses and is not subject to federal estate taxation. Although a SLAT is an irrevocable instrument, the donor spouse may still indirectly benefit from

the lifetime distributions from the SLAT to the beneficiary spouse given that they both reside within the same household. In case of divorce, unless the SLAT has specific language that allows the trust to terminate at such an event, the donor spouse will lose the indirect benefit of the SLAT while the beneficiary spouse continues to benefit. Generally, the beneficiary spouse is the primary beneficiary of the SLAT and can often serve as trustee with the limited ability to request distributions from the SLAT for health, education, maintenance and support (HEMS). If the beneficiary spouse needs distributions from the SLAT beyond HEMS in order to maintain an accustomed standard of living, then to avoid any potential risk of triggering the SLAT assets as part of his/her estate, an advisor might recommend appointing an independent trustee, which may be a corporate trustee or co-trustee with the power under the SLAT to distribute assets to the beneficiary spouse beyond HEMS. As typically drafted by legal practitioners, a SLAT is treated as a grantor trust for income tax purposes. As a grantor trust, income, deductions and credits are taxed to the donor spouse and thereby not taxed at the trust level (2021 top tax rate for trusts with income levels at $13,050, starts at 37 percent). However, as discussed more fully below, one downside to creating a SLAT is that assets gifted to the SLAT are not included in either the estate of the donor spouse or the estate of the beneficiary spouse, and therefore do not receive a step up in capital gains tax basis at the death of either spouse. Even though a SLAT can be created for each spouse, in order to not raise questions concerning the reciprocal trust doctrine (which is a tax law concept that can arise when two parties create similar trusts for each other), legal counsel may advise that their

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