Discussing Spousal Lifetime Access Trusts and strategies for using them for each spouse.

Welcome to Future Focused Sophisticated Estate Planning with Wiggin and Dana. The show where CPAs, insurance professionals, investment brokers, trust companies, CFPs and more confirm up on their understanding of estate planning strategies so they can better guide their clients to make wise decisions with their legacy. Future Focus is hosted by Erin Nichols and Michael Clear partners of the private client services department at Wiggin and Dana. Subscribe to future focused sophisticated estate planning on your favorite podcast platform and share episodes with your clients. And now here are your hosts, Erin and Michael.

This week on future focused, we are going to spend more time talking about the spousal lifetime access trust or slat. In that last episode, we hit on why clients use the slat strategy and the situations when gifting is appropriate. When we may want access to that trust, we'll use the slat in some of the trust terms. In this one we're going to talk about a different situation,

Right? So I think last time, Michael, you used the hypothetical client where it's married couple with 25 million and in that scenario, given the current tax laws, it makes sense to focus on one spouse as donor funding a slat above what we think the exemption will sunset to in 2026. So gifting above potentially that six to 7 million threshold in order to take advantage of this expanded exemption amount under the Tax Cuts and Jobs Act. But if we have then a couple that has a higher net worth or another motivation for potentially each creating their own trust for the other.

So when we want both clients, the husband and the wife to both use their exemption.

Exactly. And this would make a lot of sense for the ultra high net worth for sure, that we're trying to use both exemptions up to the just about 13 million now in 2023 for each of them. And that makes a lot of sense for all of the reasons that we were addressing last episode. What then we have to start thinking about is the reciprocal trust doctrine.

Yeah. And in reality here, I'll often try to push people first maybe to do one slat. So one trust that's for the benefit of the spouse and descendants and have the other spouse do a trust that's only for the benefit of the descendants. That's where I'd like them to start. So we've identified we want both spouses to use of their funds, but we've clearly made two different trusts cause there's no spousal access to that second one. That's where I'd like to start. That's where my best practice is going to say that's where our deal is. But often clients come in thinking cause they've read the articles about slats, maybe their financial advisor or their account has handed them something on that. So they've come in with this idea that they're both going to create slats. I'm going to create a slat for my spouse, my spouse is going to create one for me. And that causes us anxiety.

It does for sure because the I r s sees this as an opportunity to assert that a married couple has created these slats in consideration of the other, it's essentially an argument that if you give property to a trust for your spouse and an identical trust is created by your spouse for your benefit, then you haven't really made a gift at all in the I R s. We'll take that as an opportunity to include all of the assets in those trusts within the client's. Taxable estates obviously defeating the whole goal here.

Yeah. So how do we do it? So we don't want to say no to our clients and so we are going to set up a structure effectively. We want these two trusts to be different in really meaningful ways. And I'll just lay out several ways and then we can dive into each one of them. So we'll often encourage the trust be funded with different assets. They be funded at different times. Maybe they have different trustees, they may have different distribution terms and they'll use different definitions, definitions of spouse and descendants. So from a 30,000 foot view, we want these trusts to be different.

So then if we hit Michael on the timing first we've set up this conversation about gifting where really we have a time horizon that we're looking at December 31st, 2025. So we have close to three years to do this planning. If we're separating the trust by time, what is your recommendation? How long do we have to wait before doing a second slot?

So I think it's always nice to separate calendar years if they are different gift tax reporting years, different years would be the, if I was to say it give me two different calendar years, but then I'd also like several months between them, right? So I December, January, I'm not as happy as June, January or this January next January. So the more time the better. Certainly being able to split calendar years also being helpful.

And so if we have the time, which it certainly seems like we do because I'll say that we're all anticipating this potential sunset at the end of 2025. All of the talk that I've heard recently is that there is no anticipation of an earlier change in the exemption amount. So we're feeling fairly confident about that time horizon. But then we have to start thinking about other characteristics of the trust too. And I think a classic example will be clients coming to us, they each own as tenants in common, 50% of an incredible waterfront home on Cape Cod. It's 25 million house. It is the perfect asset in their mind to gift. And we'll overlook for a second what we've mentioned before about some of the complexities of an irrevocable trust owning real property. But does that then give you pause if they're using the same asset essentially to gift even if the gift is separated in time? Yeah,

I think that's a good example. I think it's the ability to use different assets to fund the two trusts is a nice difference. When you're creating two slats, when you use the exact same asset, I think you're not relying upon having different assets in the trust. You've made the IRS's argument stronger, which isn't necessarily mean failure, it means we're going to have to make sure those other things are present. So the gift of half the house in 2023 followed by the other half in 2024 would make me happier. And that's a good point, right? Is all of these is we're going to want, there might be some push and pull on any number of these provisions. We'd like to see differences as many differences between these trusts as possible. So I'd prefer to not have both trusts own that piece of property. But again, if it's a hurdle, it's the only asset they're willing to give away, well then we're going to have to butchers up the other aspects of the differences between the trusts.

It's a classic totality of the circumstances test. There's nothing no one factor that will ruin this strategy, but we want to make it as strong as possible. So to the extent we separate it by calendar year, we use different assets. That's fantastic. Probably not enough though.

Probably not enough, right?

We need to have more differences and there are a number of ways that we can do that. I think that isn't necessarily that impactful to the clients to their gift at least. So one of the classic features that we will put in is to have one trust say that there always has to be an independent trustee serving. I like to then put in the other trust, uh, provision within the trustee article that says the grantor should be ineligible to serve. And that can be an important distinction at the i r S level.

And you look at it, right? Both spouses are making irrevocable gifts to irrevocable trusts. So if in one of them we've appointed an independent trustee and required an independent trustee and in the only distributions that that can be made or the main distribution is in the independent trustee's complete discretion and in the other trust we have the spouse serving as trustee and they can make distributions to themselves or their health education, maintenance and support. Those are major differences between the two trusts. And I think would be a serious difference in the eyes of the I R s.

That's a great segue actually, cause it's not always the way I come at it, but it makes a lot of sense to align the trustee distinctions with distribution standards. It's fairly easy to vary the distributions within a lifetime trust for the spouse. So the one that requires an independent trustee would make sense to leave it at absolute discretion and then put a HEM standard in the one where the spouse beneficiary is the sole trustee. We also see variations with, for example, five and five powers.

So that's the beneficiary's, right? An absolute right to withdraw 5% of the trust principle in any given year.

And I like to put that provision in the trust that doesn't have hems. So it feels like both spouses are getting something ascertainable. One has the power to distribute assets to him and or herself for health, education, maintenance and support. The other lacks that access but will have a withdrawal power that they can exercise at the end of every year.

Yeah. So kind of just highlighting that, we've talked about that fourth area of differences being the distribution terms. The one trust has complete discretion with an independent trustee and maybe has that gives the beneficiary the right to take out 5%. The other trust has uh, health education, maintenance and support standard maybe doesn't have that complete discretion standard and doesn't have that five and five. So we've made the trust different by having different distribution terms right there within it. Another possible difference is using powers of appointment.

That's right. So commonly when we are planning with slats, we like to give the beneficiary spouse a limited testamentary power of appointment. Most typically you see the permissible class of appointees as the grantor's descendants. That's a great power to give one spouse and then you would not give it to the other. Meaning at the termination of that lifetime trust that's in existence for the joint lifetime of the two spouses, you force the assets to descendants in a specific manner. And the other, the spouse has this exercisable power either just by will or in inter vivos instrument. Yeah,

The power of appointment is just a trust flexibility tool, right? So we're making these irrevocable gifts right now. We retain that power appointment, we're provide a beneficiary with a power of appointment. You're allowing some changes to the ultimate distribution in the future, which is helpful from a planning perspective. So having one trust with and one trust without is a very solid difference. You may also just use slightly different powers of appointment between them to make them different. If you're going to think of, you know, one maybe is limited to descendants, the other one is can go anywhere except to your self creditors, your estate creditors of your estate, right? So differing the terms of the powers of appointment is another way to have different distribution terms.

One planning technique that I like in that context, which can be helpful with other provisions as well, is to somehow include charitable planning there. So including charities as permissible appointees within the power of appointment can be a great feature that is amenable to clients. And you can also see that sort of provision pop up in a power to add beneficiaries, right? A classic grantor trust power. You give that power to an independent third party in a non fiduciary capacity and that person could add charities as permissible beneficiaries of the trust.

I think that's a great point and one that we weren't highlighting in our heads ahead of time is a good difference is creating grantor trust status with different ways between the trusts. So maybe one trust has a substitution power and another trust. You have a power to make loans or you have this what I would call a selector power, but ultimately the power to add beneficiaries. So using different powers within the slat to create grantor trust status is another way to make a difference between those trusts.

One of the features that you did highlight in the beginning, which I think is a very interesting one, is the definitions. So this might be a touchy topic depending on who you're working with, but the definitions of who

Often the situations give this to us. So if it's a second marriage or if they have different children or they have joint children and different children. So that definition of children becomes important. The definition of descendants becomes important in the document.

And typically when we're looking at a trust agreement, we're looking at the definition of children and descendants to see, for example, whether adopted children are included or if it's limited to bloodline. But often overlooked is whether that definition is limited to children and descendants of the marriage of the couple that you're planning for or otherwise, if it's only defined with respect to the grand tour spouse. And you can see how those would have very different effects if there are other kids in the picture. So I think a classic example would be doing this planning for a younger couple. They have kids and you define children and descendants just with reference to the grantor spouse. No one thinks differently about it because it's relatively common, it feels boilerplate. But later on if there's a divorce and a remarriage and then children from that second marriage, those children would be permissible beneficiaries of the grantor's slat. And that might not be the intent, certainly of the beneficiary spouse if the goal really is to have this sort of collective planning and gifts for their family unit,

Right? So you see how our desire to avoid the reciprocal trust doctrine coupled with these highlights, hits how we talk to our clients about what these trusts contain and the definition of descendants should be talked about. Absolutely. Because absolutely it has real impact similar to the definition of spouse. And we'll just quickly say, you know, you can define the spouse as a specific person who will always be my spouse. You may have a spouse no longer be defined as spouse upon a divorce, or you may have that floating spouse where it's whomever the grant tour is married to at the time is the beneficiary. Now those are meaningful differences that you may have in the trust. They create interesting conversations with clients as we talk about the strategy. And it's often one of the things they say, no, Mike, we're not doing that. And I say, that's okay, that just means we have to bolster up our other differences. It is a possible difference. We often shoot it down for good reasons, but it leads us to say, okay, fine. If we're not going to do that, we need to focus on timing and they, we need to focus on the other aspects of making these trusts different.

And ultimately at the end of the day, I think the timing considerations and the different assets varying that can be a lot, lot more palatable to a married couple than actually substantially varying the terms of the trust. Because at the end of the day, you do sort of want it to feel like people are being treated equitably,

Right? So if you're listening to this podcast in November of 2025 and the exemption's about to drop, you're going to come in and you're going to want, both spouses are going to say, we want reciprocal slats. So you're not going to have the timing ability, so we're going to hit those other ones. We're going to make the terms very different. You're going to make the trustees different, you're going to make the distribution terms different. Whereas if we're doing one of the trusts in January of 23, then that's what we're focused on. We're going to lay out these terms, we're going to talk about it. And if in the future the other spouse also wants to make another gift and it's a year later, some of the maybe distribution terms aren't as important, maybe the trustees can be the same. It's all in a totality of the circumstances as we look to avoid this doctrine.

Absolutely. So I think that's an important takeaway for sure, for the professionals listening to this is it really is important to start the conversation with your clients early regarding gifting, because it could be a structure and a plan that takes more than a year, and it'll be helpful to put that in motion sooner rather than later.

Yeah. And the more time we have, the more flexible we can make the trust agreement to make it match the client's needs and wants. So having that piece, I, you know, I think of slats and I think of all the articles that have been written about them, and I remember back to a year ago when everybody wanted a slat, it was a slat for you and your dog and your descendants... you know? So going back to remembering that the slat is the spousal lifetime access trust. We're using it as a mechanism for you to use your exemption. We know under the current law the exemption drops in 2025, so we should be thinking about making these gifts. And the slat strategy is a great strategy to use. Our conversation today was kind of remembering that we need to use our best practices to make these trusts somewhat different from each other.

Absolutely. It's a fun topic to discuss and certainly we would welcome the continuation of it if this is something you're interested in pursuing with your clients.

So we'll wrap up our conversation today. I hope this was informational and understanding that using the slat as an effective tool, it is possible for both spouses to use a slat. We want those terms to be different and there's a variety of ways to make them different. So with that, thank you Erin. I ask our listeners to subscribe and also to follow us both on LinkedIn.

Thanks Michael. We'll see everyone next time.

Thank you for listening to Future focused sophisticated estate planning, hosted by Erin Nichols and Michael Clear partners of the private client services department at Wiggin and Dana at Wiggin and Dana. Our aim is preserving the wealth that a family has worked so hard to create and pride ourselves in offering value-driven solutions and results. Subscribe to the show on your favorite podcast platform, share episodes with your clients and follow our highly talented, creative and experienced lawyers on LinkedIn for even more great insight. We'll see you next time on future focused sophisticated estate planning.