Spousal Lifetime Access Trusts
The current $5,000,000 lifetime gift tax exemption is scheduled to expire on December 31, 2012. As of this writing, it is uncertain as to whether this exemption amount will continue, be increased (not likely) or be decreased. Barring any Congressional action, this provision will sunset and the exemption will revert back to $1,000,000 on January 1, 2013.
For married couples who have unused exemption amounts, serious consideration should be given to using the technique commonly referred to as a Spousal Lifetime Access Trust (“SLAT”). If properly designed, both the desire or need for current income and the removal of the assets from your estate can be accomplished.
Here is a very simple example of how it can work: Husband can establish an irrevocable trust for the benefit of his wife. Income from the trust can be regularly distributed to the wife during her lifetime. Thus, the husband has indirect access to the income. Upon the death of the wife, the remaining principal can be passed estate tax free to the children. These SLATs can be set up by both the husband and wife as long as the trusts are not identical under the IRS Reciprocal Trust Doctrine.
Therefore, if properly constructed, a married couple can shelter up to $10,000,000 from estate tax. If the exemption reverts back to $1,000,000 ($2,000,000 for a married couple) the potential estate tax savings could be as much as $8 million multiplied by whatever the post-2012 estate tax rate might be.
The above is a simple explanation and example. Anyone considering the use of a SLAT is certainly advised to consult with their own tax advisor.