Couples and Capital: The Magic of a Spousal Lifetime Access Trust

In the quest for financial security, one powerful tool often stands out for couples: the Spousal Lifetime Access Trust, or SLAT. It’s an innovative solution that is becoming increasingly popular in estate planning, and for good reasons.

A SLAT allows you to provide for your spouse while shielding your assets from potential future creditors and estate taxes.

It’s a unique blend of protection and accessibility, designed to keep your wealth within your family while offering considerable flexibility.

In this article, we will peel back the layers of a SLAT, exploring its magic and why it might be an excellent addition to your financial plan.

Understanding Spousal Lifetime Access Trust

The Basics

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust established by one spouse for the benefit of the other spouse. When assets are properly transferred to a SLAT, they are removed from the married couple’s estates for federal gift and estate tax purposes. The donor spouse can transfer up to their available exemption amount without incurring gift tax.

The trust is set up while both spouses are still alive, and the beneficiary spouse can access the trust assets during their lifetime.

Purpose of The Trust

The main purpose of a SLAT is to provide financial support for the beneficiary spouse while also taking advantage of estate and gift tax exemptions.

By transferring assets into a SLAT, we can achieve significant estate planning goals, such as reducing our taxable estate and preserving family wealth.

It can be an appropriate solution for married persons who want to take advantage of the increased exemption from the estate and gift tax, but are not sure that they can irrevocably part with so much wealth.

In addition to tax benefits, SLATs offer the donor spouse the peace of mind that the beneficiary spouse will have access to the trust assets if needed, while still allowing those assets to eventually pass on to their children or other designated beneficiaries.

Setting Up a Spousal Lifetime Access Trust

Choosing The Trustee

When establishing a Spousal Lifetime Access Trust (SLAT), one of our first considerations is selecting a trustee. The trustee plays a crucial role in managing the trust assets and making distributions to the beneficiary spouse. It’s essential to choose someone who is trustworthy, responsible, and knowledgeable about financial matters. We may decide to appoint a professional trustee, such as a financial institution or a trust company, to ensure a high level of expertise and unbiased management of our SLAT.

Contributions and Deductions

Once we have chosen the trustee, we must consider the amount of wealth we want to contribute to the SLAT. It’s important to keep in mind the current federal gift and estate tax exclusion.

As of 2022, each spouse can gift up to $12.06 million to a SLAT without incurring the federal gift tax. However, the Tax Cuts and Jobs Act of 2017 increased the federal estate and gift exemption from an inflation-adjusted $5M per person to $10M per person, and this provision is scheduled to expire by the end of 2025 with the exemption reverting back to $5M per person, adjusted for inflation.

Therefore, there may be a “use it or lose it” opportunity to transfer additional wealth free of gift tax. It is important to note that Congress can also lower the exemption amount at any time prior to this scheduled expiration date.

Grantor’s Spousal Rights

As the grantor, we have certain rights and responsibilities in the context of the SLAT.

Firstly, we must ensure that the trust we establish is irrevocable, meaning that its terms cannot be altered or amended after it has been created. This ensures that the assets we contribute are truly transferred out of our estate for tax purposes.

Secondly, we must clearly define the conditions under which our spouse, as the beneficiary, can access the trust assets. One common method is to grant the beneficiary spouse the right to receive income from the trust, as well as the ability to request principal distributions for specific needs, such as healthcare, education, or maintaining their standard of living.

By carefully structuring these rights, we can maintain our spouse’s financial security while also maximizing the potential tax savings of the SLAT.

Operation of a Spousal Lifetime Access Trust

Asset Protection

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust that enables one spouse to transfer assets to a trust for the benefit of the other spouse. Its primary purpose is to protect assets and provide financial security for the beneficiary spouse, usually the less wealthy of the two. By transferring assets to a SLAT, we can safeguard them from potential creditors and lawsuits, as the trust’s assets are legally separated from the donor’s estate.

Inheritance and Estate Planning

One of the key advantages of a SLAT is its ability to address inheritance and estate planning concerns. We can utilize this type of trust to ensure that our intended heirs, such as our children or grandchildren, will ultimately receive the trust’s assets. This can be especially beneficial in cases of remarriage or blended families, as a SLAT can be tailored to meet our specific goals and priorities.

Additionally, a well-structured SLAT can help preserve our wealth for future generations while still providing financial support to our spouse. The trust’s income and principal can be made available to the beneficiary spouse on a discretionary basis, as determined by the trust’s terms and the trustee’s discretion.

Tax Implications

A significant advantage of creating a SLAT is its potential for tax savings. By transferring assets to a SLAT, we can effectively remove them from our taxable estate. This can significantly reduce our estate tax liability when the donor spouse passes away.

Moreover, a SLAT can help us take advantage of gift tax exemptions – since many jurisdictions, including the United States, have a lifetime gift tax exemption, we can transfer assets to the trust without incurring immediate gift taxes. However, it is crucial to consult with a qualified estate planning professional to ensure that the SLAT is tailored to our specific tax situation and objectives.

Potential Challenges with Spousal Lifetime Access Trust

Legal Obligations

When establishing a Spousal Lifetime Access Trust (SLAT), it is important to be aware of the legal obligations that come with it. As the grantor, you must ensure that the trust is set up and managed in accordance with applicable federal and state laws. This may involve retaining the services of qualified legal professionals to assist in the trust’s creation and ongoing administration. Trust assets must be properly titled, and any relevant tax filings must be submitted on time.

Irrevocability Clause

One of the main characteristics of a SLAT is its irrevocable nature. Once you transfer assets into the trust, you generally cannot take them back or change the terms of the trust.

This means you need to be confident about the trust provisions, beneficiaries, and asset allocation at the time of establishment. Since a SLAT is designed to remove assets from your estate, it might be challenging if you later require access to the assets for unforeseen financial needs or other reasons.

Potential Conflicts between Spouses

A SLAT can sometimes lead to conflicts between spouses, especially if the trust is perceived as providing unequal benefits or flexibility. For example, the beneficiary spouse might have unrestricted access to the trust assets, while the grantor spouse would not have direct access. This disparity can create tension in the relationship if financial circumstances change or if there is a lack of communication about the trust’s purpose and limitations.

To avoid potential conflicts, it is crucial to have open and honest conversations about the trust and its implications for both spouses. In some cases, implementing a reciprocal SLAT strategy—where each spouse establishes a SLAT for the benefit of the other—may help balance the benefits and responsibilities, though care must be taken not to run afoul of the “reciprocal trust doctrine.”

Alternatives to Spousal Lifetime Access Trust

While Spousal Lifetime Access Trusts (SLATs) can be an advantageous estate planning tool, there are alternative trust structures to consider based on each individual’s unique circumstances. In this section, we’ll explore the following alternatives: QTIP Trust, Revocable Trust, and Irrevocable Life Insurance Trust.

QTIP Trust

A Qualified Terminable Interest Property (QTIP) Trust is another option that could provide benefits for surviving spouses. A QTIP Trust allows a spouse to place assets into a trust, with the surviving spouse receiving income generated by the trust for their lifetime. Upon the death of the surviving spouse, the assets in the trust can be distributed to the designated beneficiaries.

While a QTIP Trust provides income for the surviving spouse, the main advantage is that it can ensure the ultimate distribution of the trust assets according to the grantor’s wishes, which may be especially useful in cases of blended families or second marriages.

Revocable Trust

A Revocable Trust, also known as a Living Trust, can be an alternative to a SLAT. The main benefit of a Revocable Trust is the flexibility it offers, as the grantor can make changes to the trust or even revoke it entirely during their lifetime. However, Revocable Trusts may not provide the same tax advantages as a SLAT. Assets placed in a Revocable Trust are still considered part of the grantor’s estate for estate tax purposes.

Despite the potential tax drawbacks, Revocable Trusts do provide some benefits, such as avoiding probate, managing property during incapacity and ease of transfer of assets to the designated beneficiaries upon the grantor’s death.

Irrevocable Life Insurance Trust

An Irrevocable Life Insurance Trust (ILIT) is another option to consider as an alternative to a SLAT. An ILIT functions by holding one or more life insurance policies, with the trust as both the owner and beneficiary of the policies. Upon the insured’s death, proceeds from the life insurance policy are paid to the trust, which passes them to the named beneficiaries or even provides life-long benefits to the surviving spouse.

The key advantage of an ILIT is that it can help mitigate estate taxes. The life insurance proceeds paid to the trust are generally exempt from federal estate tax, resulting in better tax efficiency than a Revocable Trust. Additionally, an ILIT ensures that life insurance proceeds are directed to the intended beneficiaries and managed according to the grantor’s wishes. It’s important to note that creating an ILIT requires careful planning and is irrevocable, meaning changes to the trust’s terms cannot be made once established.

Spousal Lifetime Access Trust FAQs

 

In conclusion, the Spousal Lifetime Access Trust is a strategic tool that offers wealth preservation, tax benefits, and long-term financial security. It stands out for its unique blend of spousal accessibility and asset protection. Yet, no two situations are identical.

While our guide provides you a comprehensive overview, understanding and implementing a SLAT in your financial plan requires a thorough examination of your specific circumstances. To navigate this complexity, we recommend professional guidance.

At AVID Esq Group, we offer a free consultation to explore how a SLAT can be expertly tailored to meet your unique needs and goals.

Secure your future today by scheduling an appointment with our team. Your future self will thank you for it.