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Need a financial backup plan? The most effective estate-planning strategies often involve the use of irrevocable trusts. But what if you’re uncomfortable placing your assets beyond your control? What happens if your financial fortunes take a turn for the worse after you’ve irrevocably transferred a sizable portion of your wealth? If your marriage is strong, a spousal lifetime access trust (SLAT) allows you to obtain the benefits of an irrevocable trust while creating a financial backup plan. Indirect access A SLAT is simply an irrevocable trust — which may be an irrevocable life insurance trust (ILIT) — that authorizes the trustee to make distributions to your spouse if a need arises. Like other irrevocable trusts, a SLAT can be designed to benefit your children, grandchildren or future generations. You can use your lifetime gift tax and generation-skipping transfer tax exemptions (currently, $5.43 million each) to shield contributions to the trust, as well as future appreciation, from transfer taxes. And the trust assets also receive some protection against claims by your beneficiaries’ former spouses or other creditors. The key benefit of a SLAT is that, by naming your spouse as a lifetime beneficiary, it gives you indirect access to the trust assets. You can set up the trust to make distributions based on an “ascertainable standard” — such as your spouse’s health, education, maintenance or support — or you can give the trustee full discretion to distribute income or principal to your spouse. There are a few important rules you’ll need to follow to ensure a SLAT achieves your objectives. To keep the trust assets out of your taxable estate, you must not act as trustee. You can appoint your spouse as trustee, but only if distributions are limited to an ascertainable standard. If you desire greater flexibility over distributions to your spouse, appoint an independent trustee. Also, the trust document must prohibit distributions in satisfaction of your legal support obligations. Another critical requirement is to fund the trust with your separate property. If you use marital or community property, there’s a risk that the trust assets will end up in your spouse’s estate. Risks There’s a significant risk inherent in the SLAT strategy: If your spouse predeceases you, or if you and your spouse divorce, you’ll lose your indirect access to the trust assets. One way to mitigate this risk is to use dual SLATs. In other words, you and your spouse each establish an irrevocable trust using your separate property and naming each other as lifetime beneficiaries. If you and your spouse set up dual SLATs, design them carefully to avoid running afoul of the “reciprocal trust doctrine.” Under that doctrine, the IRS may erase the benefits of spousal trusts if it concludes that the spouses end up in the same economic position as if they had each set up trusts for themselves. Have your cake and eat it, too Properly designed, a SLAT allows you to “have your cake and eat it too.” You gain the benefits of an irrevocable trust while retaining indirect access to its assets “just in case.” • |