Spousal Lifetime Access Trust
What is a spousal lifetime access trust?
A spousal lifetime access trust (SLAT) is an irrevocable trust that is created by one spouse for the benefit of the other spouse. Here are the key features of a SLAT:
- Irrevocable. A SLAT is an irrevocable trust, which means that once it is created, the assets transferred to the trust cannot be taken back by the grantor.
- Gift Tax Benefits. By transferring assets to a SLAT, the grantor can use their lifetime gift tax exemption to transfer assets to the trust without incurring any gift tax. This can help reduce the grantor’s estate tax liability and transfer wealth to the next generation.
- Lifetime Access. Despite being an irrevocable trust, the spouse who is the beneficiary of the trust can receive distributions from the trust during their lifetime, providing a source of income and financial security.
- Asset Protection. Assets held in a properly structured SLAT can be protected from the claims of creditors, including bankruptcy, divorce, or lawsuits.
- Estate Tax Benefits. If the spouse who is the beneficiary of the trust predeceases the grantor, the assets in the trust will not be included in the grantor’s estate for estate tax purposes, potentially reducing the grantor’s estate tax liability.
It’s important to note that SLATs are complex estate planning tools and should be created with the help of a qualified estate planning attorney. Additionally, SLATs may not be appropriate for everyone, as they involve transferring assets out of the grantor’s control and have other potential tax and legal implications.
What are the benefits of SLATs?
SLATs have several potential benefits, including:
- Estate tax savings. Assets transferred to a SLAT are generally removed from the grantor’s taxable estate, reducing the amount of estate tax owed upon the grantor’s death.
- Gift tax savings. SLATs can be used to leverage the grantor’s gift tax exemption and make larger tax-free transfers to their spouse. This can be especially beneficial if the grantor has used up their annual gift tax exclusion or lifetime gift tax exemption.
- Asset protection. Assets in a SLAT are protected from creditors and other potential claimants. This can be particularly important for individuals in high-risk professions or who are exposed to potential lawsuits.
- Income tax savings. If the trust is structured properly, income generated by the assets in the SLAT may be taxed at the lower income tax rates of the grantor’s spouse, reducing the overall tax burden.
- Spousal support. The grantor’s spouse can receive income and/or distributions from the trust during their lifetime, providing a source of financial support and security.
- Flexibility. SLATs can be structured in a variety of ways to meet the grantor’s specific needs and goals, including the ability to add additional beneficiaries or include provisions for the grantor’s children or grandchildren.
Overall, a SLAT can be a powerful estate planning tool for married couples looking to minimize taxes, protect assets, and provide for their spouse’s financial well-being. However, it is important to carefully consider the potential pitfalls and consult with a qualified estate planning attorney to ensure that a SLAT is the right strategy for your specific situation.
What are the pitfalls to SLATs?
While there are many potential benefits to a SLAT, there are also several pitfalls to consider:
- Loss of control. Once assets are transferred to a SLAT, the grantor loses control of them. The trustee manages the assets and makes all investment and distribution decisions.
- Irrevocability. A SLAT is an irrevocable trust, meaning that the grantor cannot change or revoke the trust once it is established. This lack of flexibility may not be desirable for some individuals.
- Estate tax inclusion. While assets in a SLAT are generally removed from the grantor’s estate for estate tax purposes, if the grantor dies within three years of transferring assets to the trust, the assets will be included in their estate.
- Gift tax consequences. When a grantor transfers assets to a SLAT, it is considered a gift for gift tax purposes. Depending on the value of the gift, the grantor may need to pay gift tax or use some of their lifetime gift tax exemption.
- Spousal benefit only. As the name suggests, a SLAT is designed to benefit the grantor’s spouse. If the marriage ends in divorce or the spouse predeceases the grantor, the trust may not be as useful or effective as originally intended.
- Administrative costs. Like any trust, a SLAT requires ongoing administrative and management costs, including trustee fees, tax filings, and legal fees. These costs can eat into the assets transferred to the trust and reduce the benefits to the grantor’s spouse.
Need to set up a spousal lifetime access trust?
A spousal lifetime access trust can provide financial security for your spouse and minimize your estate tax liability, but it is important to carefully weigh the potential benefits and pitfalls of a SLAT before deciding whether it is the right estate planning tool for your needs. Choosing an attorney with experience in setting up SLATs is crucial to ensure that your trust is structured properly and operates as intended.
A skilled attorney can help you avoid potential pitfalls such as loss of control, irrevocability, and estate tax inclusion. By carefully crafting the trust documents and advising on the selection of a trustee, your attorney can ensure that you retain some measure of control over the assets in the trust while still receiving the maximum tax benefits.
In addition, an experienced attorney can help you navigate the gift tax consequences of transferring assets to a SLAT and help you optimize your use of the gift tax exemption. They can also advise on strategies for minimizing administrative costs and maximizing flexibility in the trust structure.
Our attorneys have years of experience in estate planning, including setting up SLATs for our clients. We understand the complexities involved in this type of trust and are dedicated to providing personalized, strategic advice to help you achieve your goals.
Don’t leave your financial future and that of your spouse to chance. Contact us today to schedule a consultation and learn more about the importance of choosing an experienced attorney to set up your SLAT. We’re here to help you navigate the complexities of estate planning and provide the peace of mind that comes with having a well-crafted plan in place.