In a previous article we discussed the sunset of the lifetime exclusion. As a recap, unless a change in the current law takes place, after 2025 the lifetime exclusion for the estate and gift tax exemption will revert from $13.61 million to $5.49 million (adjusted for inflation). Spousal Lifetime Access Trusts (SLATs) are rising in popularity as people take advantage of the current exemption by creating and funding their SLAT before the reset. A SLAT allows access to the assets within the marital unit and facilitates passing of the assets to beneficiaries while avoiding the 40% estate tax that would apply if the assets were to remain in the taxable estate. In this article we will go over the main components, benefits, and crucial considerations when deciding if this type of trust falls in line with your estate planning goals.

What is a Spousal Lifetime Access Trust?

A SLAT is an irrevocable trust created by one spouse (the settlor or grantor) for the benefit of the other spouse (the beneficiary). The ultimate goal of a SLAT is to reduce the taxable estate of the grantor's spouse by transferring assets from the grantor to the spouse, and consequently removing any appreciation, while still allowing the grantor to indirectly benefit from the trust through their spouse.

Features of SLATs

  • Irrevocability: Once established, a SLAT cannot be altered or revoked. This permanence is crucial for the trust's ability to remove assets from the grantor's estate.
  • Beneficiary: Typically, the grantor's spouse is the primary beneficiary, but the trust can also benefit descendants or other family members.
  • Lifetime Access: The beneficiary spouse has access to the trust's income and principal during their lifetime, providing financial security.
  • Asset Protection: Assets within the SLAT are generally protected from creditors, offering an added layer of security.
  • Grantor Trust: All income from the assets is taxed to the grantor personally. During the grantor's life the trust is essentially ignored for tax purposes.

Benefits of a SLAT

  • Estate Tax Reduction: By transferring assets to a SLAT, the grantor reduces the size of their spouse's taxable estate, potentially lowering estate taxes.
  • Indirect Access to Assets: Although the grantor cannot directly access the trust assets, they can benefit indirectly through distributions made to the beneficiary spouse.
  • Asset Growth Outside of Estate: Any appreciation of the assets within the SLAT occurs outside of the grantor's estate, further reducing potential estate taxes.
  • Gift Tax Exclusion: Funding a SLAT can utilize the grantor's lifetime gift tax exclusion, allowing significant wealth transfer without immediate tax consequences.

Crucial Considerations

  • Irrevocable Nature: Once assets are transferred to a SLAT, the grantor relinquishes control. This lack of flexibility should be carefully considered.
  • Potential Loss of Benefits: If the beneficiary spouse passes away before the grantor or if the couple divorces, the grantor could lose indirect access to the trust assets while still being personally responsible for the tax bill.
  • Complexity and Costs: Establishing a SLAT involves complex legal and tax considerations, necessitating the guidance of experienced estate planning professionals.
  • Gift Tax Implications: Funding the SLAT is considered a taxable gift, potentially subject to gift taxes if it exceeds the grantor's lifetime exclusion amount.

In conclusion, a Spousal Lifetime Access Trust can be a powerful tool for high-net-worth individuals looking to reduce estate taxes and protect assets while still providing financial benefits to their spouse. However, due to its irrevocable nature and the complexities involved, careful consideration and professional guidance are essential. By understanding the basics and working with experienced advisors, individuals can effectively integrate a SLAT into their estate planning strategy.