There are many estate planning strategies out there, but which one is best? To be honest, it really depends on your situation. While most real estate strategies are designed to grow and successfully transfer assets, some are meant to look even further ahead to future generations. One of the latter, spousal lifetime access trust (SLAT) estate planning, is our focus in this article.

Estate planning experts are often asked about spousal lifetime access trusts and whether their clients should use the SLAT strategy. In this article, we’ll examine the SLAT trust, who it’s right for, and how you can make this key decision about your individual trust approach.

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What Is a Spousal Lifetime Access Trust?

A SLAT is an effective estate planning tool. It’s meant for a married person to create to benefit their spouse while also protecting the interest of their children and even generations yet unborn.

This type of irrevocable trust has a lot of uses. However, the most prominent is the opportunity to take advantage of the federal lifetime gift and estate tax exemption, which will sunset in 2026. This estate plan is created so you can use up your federal gift and estate tax exemption amount by taking up to $11.7 million from your taxable estate and putting it in the trust. Your spouse retains access to these assets while they are alive. When they pass, your children and grandchildren gain access to it too.

Types of SLAT Estate Planning

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There are two types of spousal lifetime access trusts. One is the completed SLAT, and the other is the incomplete gift SLAT. What is the difference between the two? To put it simply, one is kind of outdated, while another is kind of in vogue. Here’s a further explanation.

Completed Gift SLAT

In completed gift SLAT, the trust benefactor (donor spouse or grantor spouse) sets up the trust for one sole purpose: to take out assets from their estate while maintaining access to such assets. In this type of SLAT, the grantor spouse sets up the trust and makes a gift to it from their separate property for the benefit of their spouse and other relatives.

The gifted assets moved to the trust are protected from creditors and divorce through adequate planning. Most importantly, these trust assets aren’t subject to estate taxes if the couple passes away.

Remember that we said this type of trust instrument is kind of outdated? This is because the federal estate tax exemption is at a very high level now, so only the very rich minority of the society tends to take advantage of it. As a result of this, a much more accessible approach was adopted—the incomplete gift SLAT.

Incomplete Gift SLAT

This type of SLAT might be one of the wisest grantor trust arrangements available. Estate planning attorneys often recommend this type of trust language because the arrangement protects the trust assets from unexpected pitfalls.

Aside from the protection of the assets in the trust afforded by an incomplete gift SLAT arrangement, the donor spouse also gets an added advantage. In this kind of trust document, the donor can retain the testamentary powers of appointment to appoint either income or principal to anyone except themselves, their estate, or their creditors’ estate. This type of SLAT also grants the donor spouse some indirect benefit. These advantages have made the incomplete gift SLAT quite popular in recent years.

Importance of SLAT Estate Planning

For wealthy married couples looking to preserve their wealth for the generation unborn while protecting the interests of their spouse, SLAT estate planning is a great option. Here are some of the important benefits of the SLAT estate planning strategy.

Asset Protection: This estate planning strategy protects the donor’s assets from lawsuits.

Estate and Gift Tax Benefits: A SLAT enables the couple to take advantage of the estate tax lifetime exemption in their estate planning process, thereby doing away with estate tax liability. Also, it lets a donor make lifetime transfers of assets from their current estate into the trust principal at a low estate tax rate.

Potential Conflict Management: In the event of a divorce, a spousal lifetime access trust can be helpful in conflict reduction during asset division. The downside of this is the reciprocal trust doctrine, which we will explain further in this article (you can plan around this). Also, a SLAT can help reduce the conflicts that arise from the administration of a person’s estate at death

Protection of Family and Generational Interests: A spousal lifetime access trust is very useful in the protection of generational wealth. While the spouse is the primary beneficiary, the children’s and family members’ interests are also protected. The assets in the trust passed down to children and grandchildren are still protected from lawsuits against them and divorce. Also, the SLAT can be constructed to protect the bloodline and keep the assets in the family.

Probate Stress Avoidance: Setting up a spousal lifetime access trust is also an important way of transferring wealth without the beneficiaries having to go through the stress of the probate process. In the event of the trust beneficiary’s death, assets are immediately transferred, and beneficiaries can access them.

State Income Tax Minimization: Setting up a spousal lifetime access trust can be instrumental in estate tax planning. It’s a useful way to exploit estate tax savings.

Top Four Reasons to Set Up a SLAT Now

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There are many reasons why you should consider a spousal lifetime access trust. If you’re from a family with a high net worth, a SLAT can help you in many ways. Let us take a look at four of them.

1. Enjoy Lifetime Gift and Estate Tax Expiration

With a spousal lifetime access trust, you have the opportunity to take advantage of the increase of the lifetime gift and estate tax current exemption amount. This is currently at a very high amount of $11.7 million (reduced from $11.28 due to inflation) before it ends. No one can tell for sure if the exemption levels will rise or fall.

The SLAT helps you avoid the payment of exorbitantly high amounts of money in estate taxes. Not only that, but the SLAT also helps minimize taxes incurred when transferring wealth to any of your beneficiaries. This makes it among some of the valuable gifting strategies and estate planning strategies available to wealthy people who want to retain a level of control over their estate taxes.

Assets put in a SLAT don’t incur estate taxes or transfer taxes when they flow down to your beneficiaries. You can also set up a SLAT as a grantor trust for income tax purposes. This way, as the donor, you only pay income tax on the earnings of the trust, not the trust itself. Therefore, the future appreciation of SLAT funds in the trust (such as real estate) will be protected from taxation.

2. Access Funds

Having a spousal lifetime access trust in place is a way of maintaining access to the trust assets indirectly. Although as a grantor spouse you cannot be a SLAT beneficiary, the non-donor spouse can share the principal distributions of the trust with the donor spouse indirectly. This can help you maintain your standard of living while maximizing beneficial income tax treatment. Talk about a way to have your cake and eat it too!

3. Deter Creditors

Setting up a spousal lifetime access trust is a clever way of protecting the assets from creditors. Since it is an irrevocable trust, a carefully administered SLAT can protect funds from your beneficiaries’ future creditors. With a SLAT, the assets also enjoy protection from lawsuits under the terms for distributions.

4. Benefit Future Generations

The spousal lifetime access trust is an effective tool to transfer wealth to your descendant beneficiaries without them having to worry about estate tax exposure. This is because the SLAT assets are different from the beneficiary spouse’s. Upon the beneficiary spouse’s death, the remaining assets in the trust simply flow down to the donor’s future beneficiaries estate tax-free. This kind of SLAT income can be invaluable for beneficiaries.

Are There Drawbacks to SLATs?

Most estate planning strategies have their pros and cons. Although the pros often outweigh the cons, one should be very careful and cautious to avoid setbacks. In the case of spousal lifetime access trusts, there are certain drawbacks that should be considered and planned for. We’ll take a look at these drawbacks.

Spousal Control: In the event of divorce, SLAT assets automatically become the beneficiary spouse. Therefore, when setting up a SLAT, a good option is to define the “spouse” in the trust as the current spouse to whom the donor spouse is married. Carefully drawing up beneficial distribution terms also helps prevent trust income from going to the wrong person.

Beneficiary Death Complications: In the event of death (of the beneficiary spouse), the donor spouse may lose indirect access to the trust. To curtail this, you can fund the trust with a life insurance policy. That way, you won’t experience the same loss of control.

Complications for Separate SLATs: Let’s say both spouses create a separate trust for each other. If you don’t actively avoid the IRS reciprocal trust doctrine, the separate SLATs may be seen as identical trust. This means both spouses created the individual trusts for their joint benefit, which can rid the trust of some of the estate tax benefits. An estate planning expert can help you avoid this scenario.

Limitations for SLAT Assets: Not all types of assets can be added to a SLAT. Joint assets owned by both you and your spouse cannot be added to the assets in a trust, for example, Community property cannot be added either unless you get a separate property status agreement.

Summarily, legal advice and consultation with a tax advisor, financial advisor, estate planner, or any tax professional goes a long way in helping you decide on the kinds of trusts to set up and their potential benefit. However, for many, a SLAT is well worth these potential setbacks.

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At A People’s Choice, we dedicate our time to your legal needs. We derive great satisfaction from providing our clients with adequate comprehensive legal documents that ease their legal stress and save them lots of money in attorney fees. Just ask, and we can get your spousal trust documents and much more ready for you. Reach out to us today!

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