By Steven J. Oshins, Esq., AEP (Distinguished)

What is a Spousal Lifetime Access Trust?

A Spousal Lifetime Access Trust (“SLAT”) is an irrevocable trust set up by one spouse for the benefit of the other spouse and other beneficiaries.

The most frequently used version is the completed gift SLAT although incomplete gift SLATs can be used as a creditor protection tool and should be used more often than it is.

The completed gift SLAT is primarily used for estate tax reduction purposes, and secondarily as a creditor protection tool.  Because of the estate tax reduction benefits, especially since the settlor indirectly retains access via distributions to his or her spouse, SLATs are one of the most popular types of trusts in the estate planner’s toolbox.

Reciprocal SLATs

One popular strategy is for each spouse to set up a SLAT for the benefit of the other spouse.

I’m not saying that this is a wise strategy.  It’s actually a very risky strategy because of the Reciprocal Trust Doctrine which, in this author’s opinion, is violated frequently even if those who are violating it are getting away with it because it either never gets audited or the auditor misses it.

Reciprocal Trust Doctrine

Essentially, the Reciprocal Trust Doctrine says that if one person settles a trust for the benefit of another person and that second person also settles a trust for the benefit of the first person, the IRS will uncross them for estate tax purposes and include the trusts in each respective settlor’s taxable estate as though each of them settled their trust for the benefit of themself.

United States v. Estate of Grace

The key case laying out the Reciprocal Trust Doctrine rules is the United States v. Estate of Grace, 395 U.S. 316 (1969).  The basic facts are as follows:

In 1931, decedent Joseph Grace executed a trust instrument providing for payment of income to his wife Janet for her life, with payment to her of any part of the principal which a majority of the trustees thought advisable.

Shortly thereafter, Janet Grace, at decedent’s request, executed a virtually identical trust instrument naming decedent as life beneficiary, with the trust corpus consisting of the family estate and securities which decedent had transferred to his wife in preceding years.

The court determined they were reciprocal and included the trust in the decedent’s estate.

Many Estate Planners

Many estate planners take the position that you can draft the two trusts with just a few small differences and avoid the Doctrine.

That’s not what the Grace case says!  In fact, the key phrase used multiple times in the court decision is “substantially identical”.  Making one or two or three small changes to a fifty-page trust with small print does not mean that they aren’t still “substantially identical”.

Following are a number of key quotes from the Grace case that should worry estate planners:

• “Interrelated”
• “To the extent of mutual value, leaves the settlors in approximately the same economic position”
• “Substantially identical”
• “Single transaction”
• “Even though of properties of different character”
• “To the extent of mutual value, in the same objective economic position as before”
• “Does not hinge on a settlor’s motives”
• “Depends upon the nature and operative effect of the trust transfer”
• “Especially in intrafamily transfers”
• “Does not depend on a finding that each trust was created as consideration for the other”
• “Does not require a tax avoidance motive”
• “Undisputed that the two trusts are interrelated”
• “Substantially identical in terms”
• “Were created at approximately the same time”
• “They were part of a single transaction designed and carried out by decedent”
• “The transfers in trust left each party, to the extent of mutual value, in the same objective economic position as before.”
• “The effective position of each party vis-a-vis the property did not change at all. It is no answer that the transferred properties were different in character.”

These quotes won’t make a whole lot of sense without reading the case itself to get the context.  Therefore, it is imperative that every estate planner read the Grace case.  It’s not lengthy.

Avoiding the Reciprocal Trust Doctrine

To avoid the Reciprocal Trust Doctrine, one must draft the trusts to be substantially different from one another.

No, this does not mean just giving one spouse a power of appointment, but not giving one to the other.  And it does not mean throwing in a few additional discretionary beneficiaries into one of the trusts who are merely shills.

There are multiple ways to make the trusts substantially different.  This article will not go through every way that this author sometimes does it.  However, some examples are:

1. One spouse sets up a regular SLAT and the other spouse sets up a descendants trust and a trust protector has the power to add the non-settlor spouse as a discretionary beneficiary.
2. One spouse sets up a regular SLAT and the other spouse sets up a SLAT that doesn’t allow any distributions to the beneficiary spouse for the first ten years. [Ten is an arbitrary number.  Five is likely fine.  However, the longer the better.]

Summary

Be careful when using reciprocal SLATs!

RELATED EDUCATION

If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:

• The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
• The Spousal Lifetime Access Trust: Avoiding the Reciprocal Trust Doctrine

ABOUT THE AUTHOR

Steven J. Oshins, Esq., AEP (Distinguished)  is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020, 2022 and 2024. He was named the “Estate Planning GOAT (Greatest Of All-Time)” by an internet poll conducted by the Ultimate Estate Planner in March of 2024. He can be reached at 702-341-6000, ext. 2 or soshins@oshins.com. His law firm’s website is www.oshins.com