You have many options for estate planning, and a spousal lifetime access trust, SLAT, is a strong contender. It helps protect and transfer assets today and in the future. In addition, it can provide you and your spouse with future income without tax implications.
Here's everything you must know about SLAT.
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What Is a Spousal Lifetime Access Trust
A spousal lifetime access trust is a type of irrevocable trust created by one spouse to benefit the other. Sometimes the trust includes other family members too. The spouse creating the trust makes a gift to the trust for the other spouse. Spouses can have a SLAT for each other, or only one spouse create one.
How They Work
SLATs seem complicated, but the process is simple. You have a donor spouse, the person who creates and funds the trust, and a non-donor spouse, or the beneficiary spouse. This is the person who receives the trust funds.
After creating a spousal lifetime access trust, the donor spouse can contribute by gifting money, real estate, securities, life insurance, or any marketable asset. The donor spouse must be the sole owner of the assets and then gives up ownership of the asset, reporting it on their gift tax return.
The non-donor spouse can request distributions from the trust assets, either income or principal, throughout their lifetime. In addition, a donor spouse may benefit because the assets benefit both spouses if they're still married to the non-donor spouse.
The SLAT doesn't terminate until the beneficiary spouse dies. At that point, the funds go to the non-donor spouse's beneficiaries.
Different Types of SLAT Estate Planning
There are two types of SLAT estate planning to consider - complete and incomplete gift.
A complete gift moves the asset's ownership from the donor spouse to the non-donor spouse's trust. They gift the funds to the non-donor spouse, who has the right to ask for distributions throughout their lifetime.
The funds aren't subject to federal estate tax when either spouse dies.
The incomplete gift doesn't have the same tax benefits. An incomplete gift has creditor protection, and all trust assets are protected from any litigation. However, the donor spouse still plays a role in determining where to distribute income. They cannot distribute it to themselves or their creditors but can veto certain payout requests.
Another large difference is an incomplete gift isn't a part of the gift tax exemption. Instead, the donor spouse must include the funds in their taxable estate.
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Why a Spousal Lifetime Access Trust Is Beneficial
A spousal lifetime access trust has several benefits, including the following.
Trust assets in a SLAT are protected from creditors and lawsuits. Only the beneficiary spouse has access to the funds.
A SLAT allows couples to take advantage of the estate tax exemption, which is currently $12.92 million for single filers and $25.84 million for married couples. This eliminates the estate tax liability.
A SLAT is a simple way to minimize tax liabilities for married couples and can be a lucrative estate planning tactic.
Spousal lifetime access trusts can minimize conflict during divorce proceedings and asset division. It can also minimize conflict upon the passing of a spouse, ensuring all funds go where you planned.
Generational and Family Interest Protection
All assets transferred to the trust are protected from creditors and lawsuits. This includes assets meant for spouses, and other beneficiaries, such as children and grandchildren, protecting your generational wealth.
Avoid the Probate Process
Setting up a SLAT reduces the risk of your beneficiaries facing the probate process. Assets transfer immediately upon death without any delay for court proceedings.
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Additional SLAT Trust Considerations
Before opening a SLAT, consider these factors.
Funding a Spousal Lifetime Access Trust
All assets transferred to the spousal lifetime access trust, SLAT, must be solely owned by the donor spouse. If they are jointly owned, you won't get the same benefits of setting up a SLAT because you lose the tax benefits.
Non-Donor Spousal Trustee
The non-donor spouse can be the trustee, but this comes with some complications. For example, the power to approve distributions should be limited, or it could cause the trust assets gifted to the SLAT to be included in the non-donor spouse's taxable estate. Therefore, it's often best to have a third-party co-trustee.
Asset Transfers at Death
If the non-donor spouse dies, the donor spouse cannot access the assets. Instead, the assets transfer at death to the named beneficiaries. In some cases, the trust continues in the name of the beneficiaries.
Reduction of Tax Exposure
If your state has estate tax requirements, removing the assets from the estate and gifting them to a SLAT can reduce your tax liabilities.
Tax Filing Requirements
SLATs don't require a separate tax filing while the donor spouse is alive if they are structured as a grantor trust. But if it's structured any other way, it requires a separate tax return.
It's important to fund a SLAT only with solely owned assets. If you fund with commingled funds, aka funds used to benefit both spouses, you lose the taxable estate tax exemption.
Choosing a SLAT Beneficiary
The beneficiary of a SLAT is your spouse, hence the name spousal lifetime access trust, SLAT. However, you can add additional beneficiaries, such as children or grandchildren, to provide generational wealth.
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4 Reasons to Get a SLAT Sooner Than Later
If you're considering a SLAT, here are four reasons to consider it now.
1. Transfer of Generational Wealth
A SLAT allows you to create generational wealth for your kids and grandkids without creating estate tax issues. Instead, the assets get passed down to future generations when the beneficiary spouse dies.
2. Protect Funds From Creditors
A SLAT provides creditor protection and is a smart way to protect your estate. In addition, all assets transferred to the SLAT aren't subject to lawsuits.
3. Access to Trust Asset Funds
While you can't be the beneficiary of your spouse's trust, if you're married, it's like putting your assets in a trust for yourself. If the beneficiary spouse withdraws funds, you can benefit from them too.
4. Lifetime Gift and Estate Tax Expiration
With a SLAT, you get the benefit of the gift and estate tax exemption and the latest limits. Unfortunately, there's no way to tell if it will increase or decrease each year, but it works to your advantage when it increases.
Negatives of Spousal Lifetime Access Trusts
Like any financial decision, there are negatives of spousal lifetime access trusts.
Spousal Control in Divorce
When you set up a SLAT, the funds automatically go to your spouse, whoever that may be at the time. Name the spouse in your trust to avoid this, and give distinct directions for any other distributions to ensure the funds go to the right person.
Death of Beneficiary Spouse
If the beneficiary spouse dies, the donor spouse loses control of the money. However, funding the SLAT with a life insurance policy can sidestep this issue.
Reciprocal Trust Doctrine on Separate SLATs
The Reciprocal Trust Doctrine is an IRS rule that stops spouses from setting up identical SLATs, as this creates a joint benefit versus a benefit for one spouse. This can cause you to lose the taxable estate tax exemption.
Limits to Additional Assets
You may not be able to add all assets you want. For example, jointly owned assets aren't eligible, nor are community property assets. It's best to talk with your financial advisor to determine eligible assets.
Create Your SLAT With Caution
A spousal lifetime access trust, SLAT, may help you save money on taxes and protect your assets. However, there are downsides. Working with your legal and tax advisors is always best to ensure you're on the right path.
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When Is It Appropriate to Have a SLAT?
There are many reasons a SLAT is the right estate planning method for you, but the largest reason is to protect your assets from creditors or lawsuits.
How Much Can You Gift to a Spousal Lifetime Access Trust Account?
You can gift up to the estate taxes tax exemption amount in your lifetime. In 2023, the limit is $12.92 million for individuals.
Do Slats Count as Part of My Estate or the Estate of My Spouse?
The donor spouse owns the assets for income tax purposes, as it's a grantor trust.
Who Can Be a SLAT Trustee?
The non-donor spouse can be a SLAT trustee; however, it's usually best to have a neutral third-party trustee to oversee the process and to keep it fair.
Spousal Lifetime Access Trust - The Bottom Line
A spousal lifetime access trust is a great estate planning strategy in the right situations. Talk to your financial and legal advisors to ensure it's right for you, as every situation is different and warrants different strategies.