SPOUSAL LIFETIME ACCESS TRUST (“SLAT”)

I.PURPOSE AND STRUCTURE OF A SLAT

For those clients who have concerns about permanently giving away a significant part of their estate and whether they will need to have access to those assets in the future, a spousal lifetime access trust (SLAT) may be the solution.

With a SLAT, the client makes a gift to an irrevocable trust that benefits the client’s spouse during the spouse’s life. The gift to the SLAT uses the client’s $5.49 million gift tax exemption but still offers the client’s spouse (and indirectly, the client) access to the funds, if needed, during life. The client’s descendants also can be named as discretionary beneficiaries,and the spouse or other beneficiary can serve as trustee, provided the power to make distributions to him or herself is limited by an ascertainable standard (e.g., health, education,maintenance, and support). Concerns over the loss of access to the SLAT assets if the spouse predeceases the client can be addressed by acquiring life insurance on the spouse that is made payable to the client or to a trust for the client’s benefit.

The benefits of a SLAT can be further leveraged when the SLAT acquires insurance on the client’s life. The funds in the SLAT provide a ready source for the payment of premiums.When appropriate, the trustee can choose to take policy loans or withdrawals to supplement or
support distributions to the spouse, if needed. Further, on the insured’s death the insurance proceeds pass to the spouse and/or descendants free of additional transfer taxes.

Example: A client creates a SLAT for the benefit of his spouse during her life,with the remainder passing to the client’s descendants. The client funds the trust with $5.49 million, applying his gift and generation-skipping transfer (“GST”) tax exemptions. The SLAT acquires a life insurance policy on the client with a $5 million death benefit and a cash value component. The $5 million death benefit is protected from estate and GST tax, a potential savings of up to $2 million assuming a 40% estate tax rate.

II. BENEFITS OF A SLAT

The use of a SLAT, particularly when combined with the acquisition of life insurance by the SLAT, offers a number of advantages, including:

• The gift to the SLAT uses the client’s $5.49 million exemption but still allows flexibility for the spouse to benefit from the funds (and indirectly, the client) during the spouse’s life.
• The SLAT is a grantor trust during the joint lifetime of the client and the spouse,which enables the assets within the SLAT to grow free of income taxes. If appropriate, this benefit can be extended over the client’s lifetime (in the event the spouse dies first) by granting the client certain powers over the trust.
• Investment in a life insurance policy by the SLAT can minimize the income and net investment income tax (“NII tax”) burdens on the client – growth within the policy, and policy loans and withdrawals (up to basis in the contract) should be income and NII tax free.
• If the client allocates his or her GST tax exemption to his or her gifts to the SLAT,the trust can be structured as a dynasty trust and benefit multiple generations of the client’s descendants without the imposition of additional transfer taxes.
• As an irrevocable trust, the SLAT can protect assets from the beneficiaries’ creditors.

III. OTHER CONSIDERATIONS

In order to achieve the advantages and benefits offered by a SLAT, the following issues should be considered when structuring the SLAT:

• Only the client’s assets should be used to fund the SLAT.
• The trust must be irrevocable.
• If the SLAT is going to acquire insurance on the client’s life, care should be taken to ensure the client will not have any “incidents of ownership” over the policies in the SLAT.
• The client’s spouse or other beneficiary may serve as a trustee of the SLAT provided the ability to make distributions to him or herself is limited to an “ascertainable standard” (e.g., health, education, maintenance and support). The client should not serve as a trustee of the trust.
• The client’s spouse can be given a testamentary limited power of appointment to change how the assets are allocated among the client’s descendants at the spouse’s death.
• Divorce or the premature death of the spouse will cut off the client’s access to the funds in the SLAT.
• Spouses who want to implement SLATs for the benefit of each other will need to structure the SLATs carefully in order to avoid running afoul of the reciprocal trust doctrine, which could trigger estate tax inclusion of the SLATs’ assets in the spouses’ estates. The SLATs should have different substantive terms (e.g.,different rights, powers and beneficial interests) in order to avoid application of the doctrine.