A gifting strategy that allows a couple to take advantage of the gift tax exemption while retaining access to the funds is the Spousal Lifetime Access Trust (SLAT). The SLAT is an irrevocable trust that a grantor creates for the benefit of a spouse. The trust allows the assets to appreciate in value during the beneficiary spouse's lifetime outside of the grantor's taxable estate. Upon the death of the beneficiary spouse, the appreciated value of the trust assets can pass estate tax free to the remaining beneficiaries, such as their children.
Some factors to consider in structuring a SLAT are:
- The trust must be funded by the grantor's separate property. In a community property state, this could mean dividing the community property into separate property prior to transferring the assets into the trust.
- The trust must prohibit distributions to the beneficiary spouse that are in discharge of the grantor's legal obligation of support. Engaging in prohibited distributions may render the principal assets of the trust includible in the grantor's gross estate under Internal Revenue Code (IRC) section 2036. To avoid such occurrence, an independent trustee could be appointed to distribute the income or principal of the trust for the benefit of the spouse.
*This blog entry was not written by an Attorney and should not be construed as professional legal advice.