Is a spousal lifetime access trust worth it when most of your wealth is company stock?

Step 1: When the paychecks stop, can withdrawals run without the gifted shares?

Couples often assume the donor spouse can get the shares back if money gets tight. The rule is different. Vernon keeps no right to trust assets; he benefits only through distributions the trustee makes to Judy under the trust terms, and only while she is alive and married to him.

So gather your spending figure and every income source, then set the gift size with the trust counted at zero. Counting on trust distributions for base spending is the slip at this step.

Vernon and Judy (hypothetical, round numbers) are 59 and 57. He is a chief operating officer who retires in two years; she is a retired pharmacist. They have about $16 million in total, including $2.8 million of company shares with a $280,000 basis, plus $1.1 million of deferred compensation. Vernon gifts $1.5 million of shares (basis $150,000) to a SLAT for Judy, using $1.5 million of his $15,000,000 exclusion. Assuming 5 percent a year, for illustration, the trust grows to about $4 million in 20 years, outside both estates. Markets fall as well as rise, and those shares can lose value, principal included, so $4 million is an illustration and not a promise.

Before the gift, 4 percent of $2.8 million gave $112,000 annually. After it, 4 percent of the remaining $1.3 million gives $52,000, a $60,000 gap, or $600,000 over 10 years from other accounts. The $1.1 million of deferred compensation can't go into the trust; it keeps paying Vernon under his election and becomes the base of their withdrawals. Scotia Wealth Management leaves that payout election alone if it already covers the base. We start with the estate roadmap their attorney drafted years ago, then repair the gaps and keep the parts that still work.

Still open: gift $1.5 million or $800,000. If their other taxable savings can't spare $600,000, the smaller gift wins. To test the same draw arithmetic on your own figures, try our calculator.

Most SLATs are grantor trusts, so if the trust sells all $1.5 million of shares with a $150,000 basis, the $1.35 million gain lands on Vernon's own return. At an assumed 20 percent combined rate, for illustration, that is $270,000 paid from the couple's cash in the sale year. It shrinks the estate further, but budget it like a large withdrawal.

The before-and-after for Vernon and Judy

A four-line test you can run tonight

Step 2: What happens if you divorce after funding the trust?

An executive usually raises a SLAT first, after an estate attorney mentions the exclusion, while the beneficiary spouse tends to ask the sharper question: what if we split up? Under many drafts, a divorced spouse stays the beneficiary, and the donor may still owe income tax on the trust's gains.

A floating-spouse clause defines the beneficiary as whoever is married to the donor at the time. Gather the draft, decide on that clause together, and don't let only one spouse read the trust before signing.

Step 3: Retitle the shares and get the gift pre-cleared

Pull the brokerage statement and the cost-basis report by lot. Confirm the shares sit in the donor's sole name, because gifting from a joint account makes the beneficiary spouse a partial donor. Funding straight from the joint account the couple has used for 20 years is the slip here. Read the company's insider trading policy too, since many policies require pre-clearance for gifts and trading-window timing for officers, and if the donor is an affiliate, confirm with counsel how Rule 144 treats the shares.

Step 4: Points to pin down with the estate attorney, CPA and plan administrator

Run the cash-flow test, retitle the shares, get pre-clearance, have the attorney draft the trust, fund it, then file IRS Form 709 by April 15 of the following year.

A joint-account funding error shows what paperwork mistakes cost. It makes the beneficiary spouse the donor of half the shares, and that half can be pulled back into her estate because she also benefits from the trust. Undoing it after funding usually means attorney work on decanting or court reformation, and even that may not fully repair it. Before funding, the fix is cheap: retitle into the donor's sole name, with a written partition agreement where state law calls for one, and leave time between the retitling and the gift.

Situations differ. A single executive can't use a SLAT at all. A married couple far below the combined $30 million, in a state without its own estate tax, may gain little and give up access for it. An early retiree like Vernon at 61 faces a longer withdrawal horizon and needs a bigger cushion outside the trust, while someone working into their late 60s can usually afford a larger gift. A SLAT is also irrevocable, and the attorney must draft it; this is general education, not legal or tax advice. A related page covers payout choices for deferred pay.

Questions for the professionals

How the answer shifts by situation

• Ask the attorney whether the draft has a floating-spouse clause and a swap power that lets low-basis shares come back before death for a step-up.
• Ask the attorney who serves as trustee, and whether Judy's distributions are limited to health, education, maintenance and support if she is trustee.
• Ask the CPA who prepares Form 709 and how the trust's gains will show up on the joint return.
• Ask the plan administrator to confirm in writing that the deferred compensation cannot be assigned, and what election changes the plan allows.

Before you sign the trust: the question for Scotia Wealth Management

Bring this one: if we move this dollar amount of shares into a SLAT, do our withdrawals still cover spending for 30 years with the trust counted at zero, and what will the grantor tax on the trust's sales cost us in the years it sells? Scotia Wealth Management can run that test against the roadmap you already have.