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Spousal Lifetime Access Trust (SLAT)

What Is A Spousal Lifetime Access Trust?

Article Highlights

  1. Discover the Spousal Lifetime Access Trust (SLAT), a powerful estate planning tool for wealthy couples seeking tax efficiency, asset protection, and financial support for themselves and future generations.
  2. Uncover the significant tax benefits of SLATs, allowing you to transfer assets and their future appreciation out of your estate, minimizing gift and estate taxes while keeping assets accessible to your spouse.
  3. Experience enhanced asset protection and control with SLATs, shielding your wealth from creditors and lawsuits, while customizing the trust management to align with your wishes and intentions.

A Spousal Lifetime Access Trust (SLAT) is a type of trust that is used to provide a financial benefit to a spouse while also protecting assets in the trust (and their appreciation) from estate taxes. A SLAT can be a useful tool for married individuals who want to ensure that their assets are distributed in a way that takes care of their spouse and then children while being tax efficient. It is one of the most commonly used irrevocable trusts for couples worried about the paying gift and estate taxes when they pass on their assets to their children.

Tax Benefits of a SLAT

One of the main benefits of a SLAT is that it allows you to transfer assets out of your “estate” so that (1) their future appreciation will not be subject to gift or estate taxes while (2) the assets remain accessible to your spouse but are not directly accessible by you. This can be especially useful for couples who have a significant amount of assets and are concerned about the potential tax burden on their estate.

How that works is simple. When one spouse transfers assets to a SLAT, any gift up to their available lifetime gift exemption amount is free of federal estate taxes. Then, because the assets have left the first spouse’s possession, any growth on the value of those assets — or their reinvestment — will belong to the recipients and, as a result, will also not be subject to estate tax now or when the first spouse passes away.

And because only the first spouse has given those assets away — to the second spouse and the kids — the couple can effectively reduce the size of their taxable estate while ensuring that the second spouse can directly access the assets and, therefore, that the first spouse can indirectly benefit. The trust can be structured in a way that provides regular income to the second spouse, while also allowing for the eventual distribution of assets to children or other beneficiaries. This can be a useful way to provide for a spouse without sacrificing the long-term financial security of children or other heirs. In addition, while the spouse setting up and gifting assets to the trust cannot withdraw assets from the trust, they can indirectly benefit from their spouse withdrawing assets from the trust for their own financial needs. (See below for more on how the beneficiary spouse can spend the money.)

Asset Protection and Control

In addition to those significant tax and spending benefits, SLATs provide a layer of asset protection. Because the trust is irrevocable, the gifting spouse has given up control of the assets, and the beneficiary spouse has only limited control, these assets are generally protected from creditors and lawsuits. This can be especially beneficial for couples with a high net worth or those in professions with a significant risk of litigation.

The grantor spouse can also exercise a degree of control over the trust assets by selecting a trustee who will manage the assets and make distributions to the beneficiary spouse. This allows the grantor spouse to ensure that the assets are used in a manner consistent with their wishes and intentions.

Flexibility in Estate Planning

SLATs offer flexibility in estate planning by providing financial support for the beneficiary spouse while preserving assets for future generations. The trust can be structured to provide income to the beneficiary spouse and, if needed, access to the principal for specific purposes, such as health care, education, or maintenance.

Additionally, SLATs can be tailored to address various family dynamics, such as blended families or couples with significant age differences. For example, a SLAT can provide for a current spouse while also preserving assets for children from a previous marriage.

Risks and Disadvantages of Spousal Lifetime Access Trusts

There are also some potential risks and drawbacks to consider. The most common issues are:

  1. You are giving away your assets. It is critical for the gifting spouse to understand that they are giving up all control of the assets. That is not usually a problem if the couple stays married, for the reasons described above. But if the spouses get divorced, the recipient spouse and, eventually, the named children will have access to the funds, and the gifting spouse — and any new spouse or additional children — will not. With that said, you can include a provision in your trust that allows you to revoke spousal rights in case of divorce, though that is, of course, a fraught decision that you’ll have to consider thoroughly.
  2. Creating duplicative trusts for each spouse. If each spouse creates a SLAT for the other spouse and the trusts are considered duplicative, or too similar, in their structure and assets, both trusts may be invalidated.
  3. The trust is irrevocable. As with all irrevocable trusts, you have limited to no ability to change the trust structure or assets after setting it up and funding it.
  4. Limited access to assets: Although the beneficiary spouse has access to the trust’s income and, in certain circumstances, the principal, you as the grantor do not have direct access to the trust assets.
  5. Cost. It can be expensive to establish and maintain a SLAT. A professional trustee must administer the trust, and the costs of this can be high. (Valur, of course, is aiming to change that!)
  6. Legal risk. The SLAt is subject to the laws of the state in which it is established, which may limit the type of assets or investments that can be used and the types of distributions that can be made. In addition, the trust may not protect assets from creditors or taxation, depending on how it is structured and what state law provides.

Which Assets Should Go into a Spousal Lifetime Access Trust?

Assets that can be put into a SLAT include cash, public stocks, private company shares, bonds, real estate, life insurance policies, and other investments.

SLAT Example

John and Mary are a married couple who have been together for over 30 years. Over the course of their marriage, they have built a successful business and accumulated a significant amount of assets. As they approach retirement, they are concerned about the potential tax burden when they pass assets on to their children and want to find a way to provide ongoing support to each other while also protecting their assets.

John sets up a Spousal Lifetime Access Trust (SLAT) for Mary. John transfers shares of their illiquid business that are currently valued as $12 million into his trust of which Mary is the first beneficiary and their kids are the second beneficiary. The trusts also include provisions so that they will last for an indefinite period and distribute assets to their children and their future heirs. In 10 years the shares of their business in the trust are worth $45 million dollars. Critically because that appreciation tool place inside the SLAT, they are able to avoid estate taxes on that appreciation which potentially can save them more than $14 million that they can pass on to their children.

By setting up a Spousal Lifetime Access Trust, John and Mary are able to reduce the size of their taxable estate and minimize the amount of taxes that will be owed upon their death as appreciation on the assets gifted to the SLAT won’t be subject to the estate tax. Additionally, the trust provides ongoing support to Mary, ensuring that she will be financially secure in their retirement years.

Next Steps

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About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook’s founder), Phil Knight (Nike), and others. Valur makes it simple and seamless for our customers to utilize these tax-advantaged structures, which are otherwise expensive and inaccessible, to build their wealth more efficiently. From picking the best strategy to taking care of all of the setup and ongoing overhead, we make it easy.