A spousal lifetime access non-grantor trust (often referred to as a "SLANT") is an irrevocable trust structured to benefit the donor's spouse, while avoiding grantor trust treatment for income tax purposes. The structure is counterintuitive, as a spousal trust (often referred to as a "SLAT") typically, whether intentionally or unintentionally, invokes the grantor trust rules under Internal Revenue Code ("IRC") Sections 671 through 677 to shift the trust's income tax burden to the donor-spouse. A SLANT does the opposite. It is drafted to avoid the grantor trust rules so that the trust, rather than the donor, is treated as the taxpayer. As this article demonstrates, the design of a SLANT relies primarily on avoiding spousal attribution and having an adverse party make all decisions that affect the spouse-beneficiary's beneficial interests.
Like a SLAT, a SLANT removes contributed assets and future appreciation of those assets from the donor-spouse's taxable estate when the donor-spouse makes an irrevocable and completed gift to the trust. The trust can also take advantage of the generation-skipping transfer tax exemption and be structured as a dynasty trust.
The principal rationale for choosing a SLANT is income tax planning. A donor who does not want ongoing liability for income tax liabilities incurred by the trust requires a non-grantor trust. Further, high-income spouses facing significant state income tax burdens may benefit substantially when the trust, rather than the donor-spouse, is the taxpayer, as the donor-spouse (who is the creator of the trust) can situate the trust in a jurisdiction with a lower income tax rate, or no income tax at all.
A SLANT also avoids the complexity and risk associated with unwinding grantor trust status. Trusts that own S corporation stock are especially vulnerable because various events can convert a trust into an ineligible S corporation shareholder, triggering adverse tax consequences. A SLANT reduces the risk of inadvertently terminating S corporation status for stock owned by the trust.
The use of a SLANT also mitigates the application of the rules under IRC Section 643(f), which gives the IRS authority to collapse multiple trusts into a single trust when they have substantially identical grantors and beneficiaries and when a principal purpose of the structure is tax avoidance. Collapsing defeats strategies such as qualified small business stock basis stacking or maximizing state and local tax deductions. Although Section 643(f) analysis can be fact-dependent, the non-grantor status strengthens the argument that each trust is a separate taxpayer with distinct economic consequences.
The key pieces of a SLANT relate to the spousal attribution rules and the adverse-party rules under Sections 672, as applied to Sections 673 through 677.
Section 672(e) treats the donor as holding any power or interest held by the donor's spouse (i.e., the beneficiary-spouse) at the time the trust was created, or from the time that a beneficiary married the donor (for an existing power or interest), during the period of time that such spouses are married. Because a SLANT is structured specifically to benefit a spouse, the trust must isolate the spouse's beneficial interests from any rights and powers that would be imputed back to the donor. Since attribution applies both to powers held by the beneficiary-spouse and to the beneficiary-spouse's beneficial interests, it is essential that the trust avoid granting the beneficiary-spouse any right or authority that could be imputed to the donor.
Several grantor trust provisions are implicated by spousal attribution. For example, Section 673 treats the donor as owner when the donor retains a reversionary interest exceeding five percent of the trust portion at inception. A SLANT therefore cannot contain similar features for the beneficiary-spouse. Additionally, Section 675 triggers grantor trust status when the donor or any non-adverse party (including the spouse of the donor) holds certain administrative powers without adequate safeguards. Problematic powers include: (i) the ability to engage in transactions without full consideration; (ii) the ability to borrow without adequate interest or security; and (iii) administrative discretion so broad that it provides indirect economic control.
A broader issue is the treatment of adverse and non-adverse parties. If a non-adverse party (as to the donor-spouse) can affect beneficial enjoyment, the IRS will treat the donor as holding the relevant power. Section 674, which governs the powers to control beneficial enjoyment, is the provision most frequently implicated. If income or principal can be distributed at the discretion of a non-adverse party to the beneficiary-spouse without the involvement of an adverse party, grantor trust treatment results. As noted above, Section 675 can be implicated as well. Section 676 will cause grantor treatment if the donor or a non-adverse party can revoke the trust. Section 677(a) will cause grantor treatment if the donor or a non-adverse party has the power to distribute income to, or accumulate income for, the beneficiary. Accordingly, a SLANT must ensure that no distribution to the spouse can occur without the substantive involvement of an adverse party.
Determining who qualifies as adverse is nuanced. Section 672(a) defines an adverse party as anyone who has a substantial beneficial interest that would be adversely affected by the exercise or non-exercise of the power which is possessed with respect to the trust. Some practitioners designate a clearly non-related and non-subordinate individual as both a beneficiary and trustee to create an adverse party with a meaningful economic interest, and to require that adverse person to have full control over distributions to the beneficiary-spouse. This structure requires a high degree of confidence in the adverse person but is necessary to preserve non-grantor status. A trust company or other professional trustee cannot qualify as an adverse party because an adverse party must hold a beneficial interest that would be materially affected by the exercise of the relevant power. Alternatively, a remainder beneficiary whose interest has material economic value may qualify as an adverse party if discretionary distributions to the spouse would meaningfully diminish that remainder interest. A financially interested, genuinely adverse party is often the most practical solution.
Ultimately, a SLANT requires two main structural features. First, an adverse party must hold substantive discretionary authority. Second, all discretionary distributions must require the prior consent of the adverse party. Whether a person holds an adverse interest is a factual determination based on the nature of the interest created by the trust agreement, and the relative significance of that interest. Because the potential loss of an adverse person could cause the trust to lose its non-grantor status, it is important for the trust agreement to include mechanisms for replacing individuals who satisfy the adverse-party requirements.
A properly drafted SLANT offers benefits for a beneficiary-spouse without the donor-spouse assuming grantor-level income tax liability. Careful drafting and adherence to the attribution principles and adverse-party requirements under Subchapter J are essential to creating a successful SLANT.
