On January 19, 2023 in Estate Planning by Leighton Tyau

Spousal Lifetime Access Trust (SLAT)


What You Need to Know About the Spousal Lifetime Access Trust (SLAT)

Preserving intergenerational wealth means keeping costs low. The biggest costs most of us face are taxes. The estate tax will take a 40% chunk out of your wealth when it passes to the next generation and the generation skipping transfer tax will take an additional 40% if you skip a generation (go to your grandchildren). 

This article will focus on a strategy designed to take advantage of today’s unusually high lifetime exemption: the Spousal Lifetime Access Trust (SLAT). As you may have ascertained, the SLAT is an irrevocable trust whereby one spouse makes a gift in trust for the benefit of the spouse (and other remaindermen and/or contemporaneous beneficiaries). This transfer removes those assets from both spouses’ estates, so any growth therefrom will be estate tax free.

The wife may choose to create the SLAT for the benefit of the husband or vice versa. In addition, both spouses may create separate SLATs, taking care to not make them reciprocal. Prior to 2026, funding a SLAT creates a unique opportunity to lock in one or both spouses’ $12 million lifetime exemption, which is set to revert to ~$6 million in 2026.

In addition to sheltering the initial value of the gift, any further growth and appreciation of the assets held within the trust are excluded from both spouses’ estates as far as estate tax purposes are concerned.

How SLAT Trusts Work

A married couple can lock in the currently high lifetime exemption and reduce their taxable estate by making large, permanent gifts from their estate. However, this is a concern because these types of gift arrangements often involve the loss of control over the gifted assets during the grantor’s lifetime. They may be worried about whether or how the assets will be accessible in the future.

One solution to this problem is to use a “SLAT” (Spousal Lifetime Access Trust). This is a type of estate planning strategy that allows the grantor spouse to transfer property to an irrevocable trust for the benefit of the beneficiary spouse (and potentially children and grandchildren as well). By using their federal exemption when transferring assets to the SLAT, the grantor spouse can potentially address their conflicting goals of reducing their taxable estate while maintaining some control over the assets.

The grantor spouse can potentially benefit from the assets placed in the irrevocable trust if the beneficiary spouse is still alive and the marriage is still intact.

The spouse who was not the original creator of the trust (also known as the grantor) can request earnings from the trustee, just like any other beneficiary, during their lifetime. It is often acceptable for the trustee to distribute funds from the trust to the non-grantor spouse in order to maintain their standard of living.

The goal of a SLAT is to keep the trust assets out of the client’s estate. To ensure that the gift to a SLAT (Spousal Limited Access Trust) is appropriate and effective in preserving the lifetime exemption keep the transferred assets outside the estate, it is imperative that proper budgeting and forecasting is utilized before establishing a SLAT. If the non-grantor spouse is expected to receive distributions from the trust, these distributions will be added back to their taxable estate. In addition, the entire SLAT may be deemed to be void.

If any of the beneficiaries pass away, their share of the trust assets will either be given directly to their children or grandchildren, or placed into a trust for them.

SLAT Trusts: FAQs

Can the trust be part of my estate or the estate of my spouse?

No. If the SLAT trust is properly structured and administered, both spouses will have their taxable estates excluded.

My spouse could pass away, or we could get divorced. What happens then?

If your spouse passes away or gets divorced, you will no longer access the SLAT funds indirectly through your spouse. It should be drafted right for you to include only your current spouse as a beneficiary of the trust (not your former spouse). The SLAT can also be designed to allow your spouse to transfer funds back to you in the event of their death. It can also be designed to extend loans to you.

Would we be able to set up SLATs separately for each other?

In this case, the SLAT should not be almost identical. SLATs will be disregarded for gift tax purposes if that is the case. This can be avoided by creating SLATs funded on different dates, having different trust distribution rules, and funding them with different assets.

Who can be a trustee for the SLAT?

There are several options for naming a trustee for a SLAT, including your spouse. However, it is important to ensure that the standards for distribution of funds meet certain requirements, such as limiting distributions to healthcare, education, and maintenance. Another option is to name an independent trustee who is not a beneficiary in order to have more flexibility in distributing trust funds based on various considerations.

How do I fund my SLAT?

Funding a SLAT involves transferring ownership of your assets to the trust, which will then be managed by a trustee for the benefit of your spouse. To fund a SLAT, you will need to follow these steps:

Prepare the trust document: This document should specify the terms of the trust, including how the assets will be managed and distributed as well as the trustee(s).

Identify the assets you want to transfer to the trust: These assets could include cash, stocks, real estate, or other types of property.

Transfer ownership of the assets to the trust: This typically involves signing a deed or other legal document that transfers ownership of the assets to the trust.

It is important to consult with an attorney when setting up a SLAT to ensure that the trust is properly funded and that it meets all legal requirements.

How are a SLATs income taxes handled?

The specific tax treatment of the income from a SLAT depends on the type of income and the provisions of the trust agreement. A SLAT can even be taxed to the grantor via an intentionally defective grantor trust provision. Some types of income, such as capital gains, may be taxed at the trust level, while other types of income, such as distributed dividends and interest, may be taxed at the beneficiary level.

It’s important to note that the tax treatment of a SLAT can be complex, and it’s advisable to consult with a tax professional or an attorney with expertise in trust law to determine the tax consequences of establishing and maintaining a SLAT.

Do I need to hire a SLAT attorney?

Whether or not a SLAT makes sense for your situation requires the analysis of an expert. A lot of forecasting and analysis is required before determining whether a SLAT is the optimal solution for your situation.

It is always recommended to seek the advice of an attorney when creating a trust, particularly a complex trust like a spousal lifetime access trust (SLAT). An attorney can help you understand the legal and tax implications of such a trust and ensure that it is properly drafted and executed.

Creating a SLAT involves a number of legal and financial considerations, and it is important to understand how it will affect your overall estate plan. An attorney can help you navigate these issues and ensure that your trust is properly structured and administered.

Contact the SLAT experts at Copper State Planning to see whether a SLAT is right for you!

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