The SLAT Series, Part V: Grantor Trust Treatment of Beneficiary Spouse

Can a beneficiary spouse use grantor trust benefits to sell assets to a SLAT?

This is the fourth installment of an overview of spousal lifetime access trusts, or SLATs. For a series index, click here.

For the prior article in this series, click here.

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Table of Contents

1. Intro

2. Spousal Attribution Under Grantor Trusts

3. Intra-Spousal Sales and Exchanges

4. Promissory Note and Installment Sales

5. Assumption of Debt

6. Effects of Divorce and Death

7. Conclusion

Intro

As discussed in Part II of this series, a SLAT is usually a grantor trust.  This is not, however, an incomplete conclusion as grantor trust status lends itself to two problems.  One, is the SLAT a wholly-grantor trust under IRC Section 677(a), or should a substitution power be included under IRC Section 675(4)(C) as a belt-and-suspenders approach?  Second, is the grantor spouse in any way reliant upon the income or principal of the SLAT in order to pay the income tax attributable to the SLAT owing to grantor trust status (thus creating a possible issue under IRC Section 2036)? 

In this vein, however, we must also consider the grantor trust status with respect to the beneficiary spouse as well.  For example, could the beneficiary spouse avail themselves of grantor trust status to sell assets to the SLAT in exchange for a promissory note?  Or, alternatively, could a grantor spouse who has sold assets to the SLAT for a note then, in turn, transfer the note to the spouse without adverse income tax effects? 

In this vein, we explore a triangular relationship between grantor spouse, SLAT, and beneficiary spouse.  Are the grantor spouse and beneficiary spouse viewed as one economic unit for income tax purposes with respect to the SLAT?

This article focuses on the high-level income tax issues inherent in a sale by a beneficiary spouse to a SLAT.  Note, however, that this article does not explore the estate and gift tax issues which may apply to a beneficiary spouse with respect to such a sale (outside of a brief context under the grantor trust and loan rules).  Likewise, creditor protection issues with respect to the beneficiary spouse are not discussed. 

Spousal Attribution Under Grantor Trusts