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Spousal Lifetime Access Trust (SLAT): In-depth Overview

What Is A Spousal Lifetime Access Trust?

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 couples 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 by 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 the transfer of assets out of your ‘estate’ so that the transferred assets and their future appreciation will not be subject to gift or estate taxes while the assets remain accessible to your spouse. 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. A SLAT allows the spouse to transfer up to their available lifetime gift exemption amount without a gift tax to the trust. Critically the the value of the assets in the SLAT, including the future appreciation on the assets gifted to the trust, are able to avoid the federal estate tax when the original creator of the trust passes away and when these assets are passed on to future generations.

By transferring assets to a SLAT trust, couples can effectively reduce the size of their taxable estate, minimizing the amount of estate taxes that will be owed upon their death while ensuring their spouse can directly access the assets and they can indirectly benefit. This is because another benefit of a SLAT is that it allows for the creation of a trust that can provide ongoing support to a spouse. The trust can be structured in a way that provides regular income to the 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.

Risks of Spousal Lifetime Access Trust

Despite the potential benefits of a SLAT, there are also some potential risks and drawbacks to consider. The most common risks are:

  1. You are giving away your assets. The spouses get divorced and the spouse who set up the trust won’t have access to the trust assets. The original spousal beneficiary will have primary access to the trust assets. It’s important for the spouse creating the trust and giving away their assets to know this
  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 the gifted assets, both trusts may be invalidated.
  3. The trust is irrevocable. Like with all irrevocable trusts, you have limited to no ability to change the trust structure or assets in the trust after setting it up and gifting assets to the trust.

What are the disadvantages of a SLAT?

  • It can be expensive to establish and maintain. A professional trustee must administer the trust, and the costs of this can be high.
  • It 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.
  • The beneficiary must be married to the trust’s grantor to access the funds, so if the marriage ends, access to the funds may be limited or prohibited.
  • It 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, stocks, bonds, real estate, life insurance policies, and other investments. The trust must also contain language that allows for the confidence to be modified if certain circumstances change.

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 and Mary each decide to set up a Spousal Lifetime Access Trust (SLAT) for the other spouse. They transfer a portion of their assets into the trust, John transfers shares of their illiquid business into his trust of which Mary is the first beneficiary while Mary gifts stocks and real estate to the SLAT she sets up of which John is the first beneficiary. The trust also includes provisions so that it will last for an indefinite period and distribute assets to their children and their future heirs.

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 their respective SLATs won’t be subject to the estate tax. Additionally, the trust provides ongoing support to both of them, ensuring that they will be financially secure in their retirement years. Overall, the SLAT is a useful tool for John and Mary, allowing them to protect their assets and provide for each other in a tax-efficient manner.

About Valur

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