What Is a Spousal Lifetime Access Trust (SLAT) and How Does It Work?

A Spousal Lifetime Access Trust (SLAT) is an advanced estate planning tool designed to reduce estate taxes, provide asset protection, and allow for wealth transfer while retaining indirect access to trust assets. This trust is particularly appealing for high-net-worth individuals who want to take advantage of the lifetime gift tax exemption while maintaining some level of control over the gifted assets.

Key Features of a SLAT

Irrevocable Trust

A SLAT is an irrevocable trust, meaning once it is established, the grantor (the person creating the trust) relinquishes control over the assets transferred to it. This characteristic ensures that the trust assets are excluded from the grantor's taxable estate.

Beneficiary Spouse

The grantor's spouse is named as the primary beneficiary of the SLAT. This allows the spouse to access trust distributions for their needs, indirectly benefiting the grantor during the spouse's lifetime.

Wealth Transfer

While the trust benefits the spouse, it is often structured to eventually transfer assets to the couple's descendants, ensuring multi-generational wealth preservation.

Creditor Protection

Assets held in a SLAT are typically shielded from creditors, providing an additional layer of financial security.

How Does a SLAT Work?

Funding the Trust

The grantor transfers assets into the SLAT, utilizing their lifetime gift tax exemption. For 2023, this exemption stands at $12.92 million per individual, though it is subject to future adjustments. Assets such as cash, securities, or real estate can be transferred into the trust.

Trustee Management

A trustee, who may be a third party or the beneficiary spouse, manages the trust assets according to the terms set forth in the trust document. This includes overseeing investments and making distributions to the beneficiary spouse.

Distributions to the Beneficiary Spouse

The beneficiary spouse can request distributions from the SLAT for their health, education, maintenance, or support (known as the “HEMS” standard). These distributions provide indirect access to the trust assets for the grantor, as they benefit the household.

Remainder Beneficiaries

Upon the death of the beneficiary spouse, the remaining trust assets are distributed to the designated beneficiaries, typically the couple's children or grandchildren. This allows for tax-efficient wealth transfer to future generations.

Read more: Beneficiary Designations: Why Are They Important?

Advantages of a SLAT

Tax Benefits 

By removing assets from the taxable estate, a SLAT reduces potential estate taxes. It also leverages the lifetime gift tax exemption, locking in current exemption amounts.

Flexibility with Indirect Access

Since the grantor's spouse is a beneficiary, the grantor retains some indirect access to the trust assets through their spouse's distributions.

Asset Protection

Assets in a SLAT are protected from creditors, divorce proceedings, and other financial risks.

Legacy Planning

A SLAT ensures that wealth is preserved and transferred to future generations in a tax-efficient manner.

Important Considerations

Irrevocability

Once established, the trust cannot be modified or revoked, so careful planning is essential.

Reciprocal Trust Doctrine

Couples creating SLATs for each other must ensure that the trusts are not too similar, or they risk being collapsed by the IRS, losing their tax benefits.

Loss of Control

The grantor loses direct control over the assets once they are transferred to the SLAT.

Final Thoughts

A SLAT is a powerful tool for estate planning when used correctly. However, it requires meticulous planning and guidance from estate planning professionals to ensure compliance with legal and tax regulations while meeting the family's financial goals.

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