The popularity of SLATs (spousal limited access trust) is, in my view, a great marketing spin. But, in most cases, SLATs are being oversold.
Oversold for the following three key reasons:
(1) A Secondary Interest for the Settlor Spouse? How can (or will) the settlor spouse who creates and funds the SLAT obtain any interest in the SLAT in the event of the early death of the beneficiary spouse? Other than possibly inclusion of an unpredictable limited power of appointment under the terms of the SLAT, I simply cannot find an effective way to protect the settlor spouse. Also, in my view it is only by using an inter-vivos QTIP trust can the settlor spouse retain a secondary interest in the QTIP trust in the event the beneficiary spouse predeceases the settlor spouse without that retention triggering later estate inclusion for the settlor spouse for estate tax purposes. See Treas. Reg. Section 25.2523(f)-1(d)(1); see, for example, IRS Private Letter Rulings 200406004 and 200413011.
In addition, even if one can find tax-law support to avoid estate tax inclusion for the settlor spouse’s secondary interest in, e.g., a SLAT or inter-vivos QTIP trust, that tax planning becomes painfully illusory and ineffective if local state law treats the settlor spouse’s secondary interest as a self-settled trust for creditor claim purposes; thus likely triggering estate inclusion for estate tax purposes. See, for example, Rev. Proc. 76-103.
As to these protective state statutes, the North Carolina statute under N.C. Gen. Stat. Section 36C-5-505(c)(1) is an excellent, well-drafted statute for protecting a settlor spouse’s secondary interest. A copy of this NC statute in included in my recent SLAT speech outline I refer to at the end of this blog post. But, again simply having a protective state statute, even this NC statute, is of no value if the settlor’s secondary interest is a retained interest for federal estate tax purposes.
Not all is lost, however.
These excellent, protective state statutes do lay the foundation for some highly effective incomplete-gift SLAT and inter-vivos QTIP trust planning in situations where the settlor spouse’s funding of the trust is purposely designed as an incomplete gift for gift tax purposes. One might ask: so why bother with a SLAT or inter-vivos QTIP as an incomplete gift? My response is because the tremendous benefit of this incomplete-gift irrevocable trust set-up can provide outstanding asset protection and greater assurance the trust property will remain only within the settlor and beneficiary spouse’s family, and ultimately for their children. Reduces, as examples, the risk to the family assets of old-age, widow or widower predatory marriages, mismanagement of assets, Madoff schemes, etc.
(2) Divorce of the Spouses? This opens up numerous potential problems with SLAT planning well beyond the scope of this blog post. I address this topic much more fully in my SLAT outline referenced below. However, various planners who assert the SLAT can simply include a “movable” definition of “spouse”, or can effectively apply by its terms to a new subsequent spouse, are in my view simply wrong. In addition, most of the above protective state statutes I find dealing with a secondary interest for the settlor spouse mandate that the same beneficiary spouse to whom the settlor spouse is married at the time the trust is created must also continue as a beneficiary of the trust until that beneficiary spouse’s death. These statutes typically do not allow creative efforts in support of these shifting definitions of the beneficiary spouse.
(3) Long-Arm Jurisdictional Litigation Statutes. Any effort to create a trust in another state jurisdiction in order to avail the settlor spouse of more favorable laws in that state can quickly sink if the settlor’s home state’s long-arm jurisdiction statute can (easily in many cases) pull the out-of-state trust into the home state’s litigation arena.
This jurisdiction subject is too broad for this blog post. However, I cover this long-arm statute point and the above two preceding points in a comprehensive recent speech I gave on SLATs at the recent 67th Seattle Estate Planning Seminar. Click here for a pdf copy of my SLAT speech outline [this is a box.com link].
Also contact me if you have any questions or wish to discuss any of these points. firstname.lastname@example.org