DAPT or SLAT: Whose Access Survives?
A spousal lifetime access trust and a South Dakota asset protection trust can hold the same assets under the same tax rules. The difference is whether the donor's access depends on the marriage.
Clients who want to move assets out of their estates while keeping some access to them are usually offered one of two trusts: a spousal lifetime access trust, known as a SLAT, or a self-settled domestic asset protection trust, known as a DAPT. Put side by side, the two look more alike than different. Both can be grantor trusts for income tax purposes. Both can be sited in South Dakota. Both can hold the same assets, funded by a completed gift that removes the assets from the donor's taxable estate.
The real difference is whose access survives.
How each trust reaches the family
In a SLAT, the donor's spouse and the descendants are the beneficiaries. The donor is not. The household reaches the trust assets only through the spouse: the trustee makes a distribution to her, and the couple shares it. That indirect access is what makes the SLAT work, and it is also its weakness.
In a South Dakota DAPT, the donor and the donor's spouse are both discretionary beneficiaries, along with the descendants. The donor has access of his own, at the discretion of an independent trustee, so the plan does not depend on the marriage or on the spouse surviving.
When the spouse dies first
If the beneficiary spouse of a SLAT dies first, the donor loses the indirect access he was relying on, and because the trust is irrevocable, nothing can be changed. A couple that funded a SLAT in their fifties with a quarter of their net worth may find, twenty years later, that the survivor has no path to those assets at all. A DAPT donor remains a discretionary beneficiary for life.
When the marriage ends
A SLAT can be drafted to end the spouse's interest on divorce, but that provision has to be raised with both spouses at signing, and many SLATs omit it. Even where the spouse is removed, grantor trust status may continue as to the donor, so he keeps paying the income tax on a trust he can no longer reach, and unwinding a SLAT after a divorce is hard.1 In a DAPT, the donor never relied on the spouse for access, so a clause ending her interest on divorce costs him nothing.
One trust instead of two
Couples who want each spouse to have access often fund two SLATs, each for the other. The reciprocal trust doctrine can then pull both trusts back into their estates if the trusts leave the couple in roughly the same economic position they would have been in had each funded a trust for himself.2 Drafting around the doctrine means making the two trusts materially different, which is to say making one of them worse. A DAPT can name both spouses as beneficiaries, so a couple needs one trust rather than two with crossed interests.
The side by side
- Beneficiaries. SLAT: the donor's spouse and the descendants. DAPT: the donor, the spouse and the descendants.
- Donor's access. SLAT: only through the spouse. DAPT: direct, at the discretion of an independent trustee.
- Spouse dies first. SLAT: the household's access ends. DAPT: the donor keeps access.
- Divorce. SLAT: the spouse stays a beneficiary unless the trust ends her interest, and the donor loses access either way. DAPT: the spouse's interest can end on divorce and the donor keeps access.
- Reciprocal trusts. SLAT: two crossed trusts invite the doctrine. DAPT: one trust for both spouses.
A SLAT still has its place, particularly where the couple will not use a trust company or wants to keep the plan entirely within the family. But when a client asks for access that does not depend on the marriage, the honest answer is a South Dakota DAPT administered by an independent trustee, with the donor holding none of the roles that have cost settlors their protection in the reported cases.
Notes
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.