Did you know that many, if not most, estate plans are designed to protect and transfer assets? For some high-net-worth individuals, there may be many kinds of trusts that can be used to transfer wealth to the next generation. One of those trusts is a Spousal Lifetime Access Trust, or SLAT.
A SLAT is an irrevocable trust where one spouse makes a gift into a trust to benefit the other spouse while removing the asset from their combined estate. For married couples, whose combined estate may exceed the federal estate tax exemption of $23.16 million ($11.58 million per person), making large and permanent gifts to reduce the size of their estate may reduce their estate tax burden. These gifts, however, are permanent, which means the giver loses control of the asset. Many couples may be reluctant to gift an asset into a trust when they are unsure whether they may need that asset in the future. A SLAT can reduce the friction of these competing objectives.
In a SLAT, the donor spouse gifts property into an irrevocable trust for the benefit of the other spouse, the non-donor spouse. The donor spouse may also include other family members like children or grandchildren as beneficiaries. The donor spouse uses his or her federal estate tax exclusion when transferring the assets into the SLAT. While the SLAT is irrevocable, the donor spouse may indirectly benefit from the property gifted to the trust so long as the non-donor spouse is living and remains married to the donor. The indirect benefit arises when the non-donor spouse requests distributions from the SLAT. A trustee may approve this request and distribute income or principal to the non-donor spouse, often to maintain the accustomed standard of living. You may only want to make this request as a last resort, as those distributions to the non-donor spouse will be included in his or her taxable estate.
Possible benefits of a SLAT include the opportunity to take advantage of the historically high estate tax exclusions. Additionally, SLATs are typically structured as grantor trusts for income tax purposes, which may allow the trust to appreciate without affecting income taxes. It can also be an excellent tool for multi-generational planning, like a dynasty trust.
There are many considerations to discuss with a knowledgeable estate planning attorney before creating a Spousal Lifetime Access Trust. Consult with us today to see if a SLAT might be useful for your estate.