Basics of Spousal Lifetime Access Trusts (SLATs)

May 19, 2021 By Cheryl Langston, CFP®
Seven multi generational family members sitting on a stone fence and looking over the valley. West Financial Services

One of the most common questions we receive from high net worth clients is how to protect and effectively transfer assets. While there are many different ways to accomplish these objectives, one specific strategy has recently garnered some interest for married couples. A Spousal Lifetime Access Trust (SLAT) allows one spouse (the donor spouse) to gift to an irrevocable trust for the benefit of the other spouse (the beneficiary spouse). This gift removes assets and future appreciation from the couple’s gross estate, thereby avoiding any potential federal estate tax. This can be a particularly attractive strategy to implement now, while the federal lifetime gift and estate tax exclusions are at an all-time high, $11.70 million per person ($23.40 million per couple) in 2021.1 Even if you do not have a federal estate tax issue, this strategy may be appropriate if your state estate tax exclusions are lower.

A SLAT is typically set up as a grantor trust, during the donor spouse’s lifetime. This is advantageous because grantor trusts are usually not required to file a trust tax return. Assets transferred into the trust should be owned by the donor spouse. In other words, any jointly owned accounts or property will not be considered allowable gifts to the SLAT. Ideally, the value of transferred assets will be no more than the amount of the donor spouse’s available gift tax exemption, thereby sheltering the transfer from any gift tax. However, the donor spouse will pay income tax on any SLAT income, allowing assets in the SLAT to grow.

The beneficiary spouse can request distributions from the SLAT. These distributions are usually for the spouse’s health, education, maintenance and support. The donor spouse may indirectly benefit from these assets during the beneficiary spouse’s lifetime. However, distributions to the beneficiary spouse are included in his/her taxable estate. It is therefore advisable to use other resources before requesting distributions, thereby preserving SLAT assets. It is best to check with your attorney or advisor before requesting a distribution from a SLAT; certain distributions may create estate tax implications.

A SLAT can have additional beneficiaries, such as children or grandchildren, making it an attractive tool for multi-generational planning. SLATs can offer some creditor protection for the donor and beneficiaries. Since creditor rights are governed by state law, you should consult an estate attorney familiar with your state’s creditor laws.

There are several considerations to note before establishing a SLAT. Upon the non-donor spouse’s passing, the trust will either terminate or continue for remaining beneficiaries, thereby eliminating any indirect benefit the donor spouse may have. A divorce can also unravel some of the SLAT’s benefits for the donor spouse. The non-donor spouse can often serve as an individual trustee, but an independent trustee may be needed for certain discretionary distributions. Finally, while no gift tax may be due, a gift tax return must still be filed by the grantor when the SLAT is funded.2

SLATs are relatively easy to create, understand and maintain. Additionally, SLATs allow some flexibility with distributions. Costs for a SLAT are typically reasonable when compared to other, more complex trusts. The pending sunset on the current gift and estate tax exclusions, currently set for 2026, make SLATs an attractive option for effective asset transfer. However, this is a strategy to implement prior to these exclusions being lowered. For those who want to take advantage of the increased exemption amounts, but are not sure they can irrevocably part with their wealth, a SLAT may be a good solution to discuss with your estate planner.

Read the Financial Planning Focus May 2021: 

1PNC Insights. March 24, 2021. The Spousal Lifetime Access Trust. https://www.pnc.com/insights/wealth-management/transferring-family-wealth/the-spousal-lifetime-access-trust.html

2Thomas C. Hoffman II, Nadia A. Havard and Elizabeth A. Damm. Knox McLaughlin Gornall & Sennett, P.C. October
2016. Knox Law. Spousal Lifetime Access Trusts (SLATS): https://www.kmgslaw.com/knox-law-institute/publications/spousal-lifetime-access-trusts-slats-not-just-for-the-rich-and-famous

 

Important Disclosures

  • West Financial Services, Inc. (“WFS”) offers investment advisory services and is registered with the U.S. Securities and Exchange Commission (“SEC”). SEC registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the firm has attained a particular level of skill or ability. You should carefully read and review all information provided by WFS, including Form ADV Part 1A, Part 2A brochure and all supplements, and Form CRS.
  • Certain information contained herein was derived from third party sources, as indicated, and has not been independently verified. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. Where such sources include opinions and projections, such opinions and projections should be ascribed only to the applicable third party source and not to WFS.
  • This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product, security, or concept. These materials are not intended as any form of substitute for individualized investment advice.
Categories Financial Planning Focus