What is a Spousal Lifetime Access Trust (SLAT)?

What is a Spousal Lifetime Access Trust?

When creating an estate plan, one of the most appealing characteristics is ensuring their loved ones are cared for. The second common reason is to help alleviate tax implications for themselves or their loved ones.

Several options are available for families with all different levels of estates to choose how they wish to protect and disperse their assets. A Spousal Lifetime Access Trust (SLAT) is one of the great tools available to couples to add to their estate plan.

A SLAT is an irrevocable trust where one spouse makes a gift into the trust to benefit their partner, and vice versa. Some couples choose to create a SLAT for each other, and in some cases, other family members may be included in the SLAT.

Creating a SLAT allows either spouse to gift assets into the trust while removing those assets from the combined estate, thereby lessening the tax implications.

How Does a SLAT Work?

One of the advantages of utilizing a SLAT is allowing both parties to make sizeable gifts to reduce the amount of their total estate while maintaining a level of control over those assets. In general, assets such as real estate, cash, and life insurance can be gifted to the SLAT.

The “donor spouse” can use the federal and estate tax exclusion to mostly avoid taxes on gifts transferred to the trust. In many cases, spouses choose to elect different beneficiaries, such as children or grandchildren, in addition to their spouses.

While the donor spouse gives up their rights to the property gifted to the trust, the “beneficiary spouse” controls that asset.

Depending on your family’s specific needs, you can set up the trust so that the beneficiary spouse can utilize the assets while you are still living and provide an optional benefit to children or grandchildren upon death. In some cases, the SLAT trust can be set up so that both the beneficiary spouse and children or grandchildren can benefit from the assets before death by permitting scheduled distributions before death.

Main Advantage of a SLAT

As previously mentioned, one of the main advantages of creating a SLAT is the ability to avoid most or all estate taxes. The lifetime gift exemption rule applies to gifts transferred to the trust. While this amount fluctuates regularly, allowing couples to gift up to a certain amount each year as a tax exemption typically provides a substantial exemption of estate taxes.

Does a SLAT Provide Protection From Creditors?

Setting up a SLAT also provides additional protection of the assets for your spouse or other beneficiaries while protecting them from creditors. Generally speaking, the assets listed in the SLAT are protected from creditors of your spouse and the other heirs that may be listed, such as children or grandchildren.

Finally, creating a SLAT can provide the necessary protection of your assets from creditors. By naming the trust as the sole owner of the assets, you lose direct control of those assets but maintain indirect control through your spouse of the gifted assets. Keep in mind that some creditors are exempt from the protection of assets. Examples may include spousal support, child support, or federal tax liens.

Important Items to Consider When Creating a SLAT

Irrevocable – a SLAT is irrevocable and, therefore, can’t be changed once created. This idea can pose some risks depending on the situation and if there is an option for divorce at a future time.

Divorce – as mentioned above, if the couple is to divorce, the trust’s creator would lose their indirect access to the assets listed. However, the donor spouse, regardless of divorce, may still maintain some or all access to the gifted assets.

Beneficiaries – by creating a SLAT, the spouse is the primary beneficiary, but others can be listed and accounted for. This may get tricky depending on how you want to ensure children, grandchildren, or other relatives in the future can access the assets. It is essential to understand the tax implications for other relatives and your spouse during the life of the trust and after your death. Planning may be complex without a clear view of the future. Still, with the right estate planning attorney, you can ensure that you have reviewed several likely scenarios and planned accordingly.

Reciprocal Trust Doctrine – If both parties create a SLAT to benefit the other spouse, it is essential to ensure that the gifts are not jointly owned and that each SLAT is unlike the other. It may make sense to create similar SLATs that benefit both parties, but by doing so, you may negate the legality of the trusts and therefore avoid the tax benefits that you intended by creating the SLAT in the first place.

What Happens if the Beneficiary Spouse Passes Away?

Unfortunately, the donor spouse would lose indirect access to the assets listed in the trust upon the beneficiary spouse’s death. At this time, the trust may terminate, or the assets may be distributed to benefit the donor spouses, children, or other relatives named.

It is essential to understand this option so you can plan ahead effectively to ensure the assets are still accessible, even if indirectly, upon the beneficiary spouse’s death.

Estate Planning is Essential

Whether you feel that you have a substantial estate or not, almost everyone can benefit from effective estate planning. Experienced estate planning attorneys can be your best advocate to ensure you can continue to provide for your family long after you are gone.

Call our office today at (516) 928-6594 to examine all the options that may best suit your family and your needs.