The present global circumstances of economic and political uncertainty, a high federal estate tax exemption, and a low-interest rate environment merit a focused examination of the trust entity which we call a SLAT. SLATs are a flexible and inexpensive lifetime estate planning tool for married couples wishing to shelter assets who see the family as a team. As part of an Estate Plan, SLATs are principally an Asset Protection Tool.
How Do I Form a SLAT?
Here is an example of how to use this type of trust. Let’s call the spouse who creates the trust the “Grantor Spouse” and the spouse who benefits from the trust the “Beneficiary Spouse.” The Grantor Spouse creates a Spousal Limited Access Trust by executing an Irrevocable Trust for the Beneficiary Spouse’s benefit, giving the Beneficiary Spouse limited access to the trust assets. Access is “limited” to provide shelter from creditors and death taxes.
What is the Purpose of a SLAT?
Simply put, the goal is to move assets into the SLAT and out of the Grantor Spouse’s name and estate so they can provide care for the Beneficiary Spouse with limitation rules that help to shelter the property from the Beneficiary Spouse’s future creditors, spouses and from being included in the Beneficiary Spouse’s taxable estate.
What should I Transfer to the SLAT?
It is important to have a financial advisor run scenarios to identify the type and extent of assets to be transferred to a SLAT. Neither the Grantor Spouse nor the Grantor Beneficiary should transfer all of their asset to the SLAT, and each should leave sufficient assets outside the slat in their own control, and in their estates to fund their daily living expenses.
SLAT Pros and Cons
- Provide asset protection. The amount of protection will depend on many things, including the trust’s terms.
- Provide an excellent savings vehicle for couples who regularly put aside assets for retirement over and above their 401k.
- Can provide a shelter for investments in a start-up company.
- Can be a Grantor Trust, allowing the Grantor Spouse to pay the trust’s income taxes, Gift Tax-free.
- Could have some federal death tax protection.
- Can avoid a state’s Inheritance Taxes for the Beneficiary Spouse.
- May reduce conflict in case of divorce. If each spouse forms a SLAT for the other and divides up assets while the marriage is healthy, then potentially there are fewer disputes during the divorce.
- Can provide income or principal not only to the Beneficiary Spouse but also descendants.
- At the Beneficiary Spouse’s death, the trust assets can immediately be available to provide care for descendants, despite the Beneficiary Spouse’s estate being mired down by lawsuits, or other tax or legal complications.
- If the Grantor Spouse dies, the SLAT assets are kept separate from the Beneficiary Spouse’s subsequent spouse.
- Is essentially a Credit Shelter Trust or Bypass Trust set up during life rather than at death. The SLAT’S shelters the gifted assets plus growth from the date of the gift onwards rather than starting at death.
- Can be arranged to avoid state income taxes.
- Can be drafted to keep assets within the family.
- Can serve as a Dynasty Trust, sheltering assets from children and grandchildren’s divorces, creditors and legal complications.
- Once transferred, the SLAT assets cannot return to the Grantor Spouse. But, of course, the Beneficiary Spouse can always voluntarily share distributions with the Grantor Spouse.
- If they divorce, the SLAT assets are for the Beneficiary Spouse. If divorce is a concern, there are drafting options such as defining “spouse” as the person to whom the Grantor Spouse happens to be married to at any time or the trust can shift at divorce from Beneficiary Spouse to children.
- If both spouses wish to form trusts for one another, care must be given to avoid the IRS’s Reciprocal Trust Doctrine. This doctrine allows the IRS to treat each trust as if the spouse formed the trust alone, under the theory that they created identical trusts for each other, which is the same as if they formed a trust for themselves. Careful drafting can help avoid this pitfall.
- If the Beneficiary Spouse dies, the Grantor Spouse might lose any indirect benefit to the trust. Life insurance and other tools can minimize this loss.
- The law is always changing, and nothing is guaranteed. Techniques that work today may not work tomorrow. Over the years the spouse will have to keep up with changes to make sure the SLAT is still providing the advantages they hoped.
These are just some of the benefits and concerns of implementing a SLAT as part of a client’s estate plan. Whether a SLAT is right for a particular client and the client’s spouse depends on the particular circumstances. There are many considerations to be assessed in identifying a SLAT as an appropriate estate planning vehicle and the types of features to be included in drafting a SLAT instrument for a particular client.
If a Pennsylvania resident couple dies and leaves their $2M estate to their children, the Pennsylvania Inheritance tax due is $90,000.00 ($2M x 4.5% Tax). If instead, the Grantor Spouse forms a SLAT for the Beneficiary Spouse, puts into that trust $1,000,000, and both spouses die several years later, then the $1M and all the growth it may have incurred passes to the children, free of the Pennsylvania Inheritance Tax. At the second spouse’s death, the tax is on the remaining $1M x 4.5% = $45,000.00, a savings of $45,000 for the family.
The Grantor Spouse forms a SLAT for the Beneficiary Spouse by placing into the trust $1,000,000. The trust can benefit the Beneficiary Spouse for their life as allowed for in the SLAT. The SLAT trustee will have discretion on payment of debts and costs of the Beneficiary Spouse. Beneficiary Spouse runs over the neighbor’s $1,000,000 dog and gets sued, ending up with a $1,000,000 judgment against him. The creditor will try to take the $1,000,000 in the SLAT but will not be able to penetrate it because the terms of the trust will not allow the creditor to take the funds and the funds do not belong to the Beneficiary Spouse or to the Grantor spouse, thus, the assets are protected from creditors.
The Grantor Spouse forms a SLAT for the Beneficiary Spouse by placing into the trust $1,000,000. The trust can benefit the Beneficiary Spouse for their life as allowed for in the SLAT. The SLAT trustee will have discretion on payment of debts and costs of the Beneficiary Spouse. The investments in the SLAT do amazingly well, with 50% increase for the first year bringing the value of the SLAT estate to $1,500,000. Instead of the interest being taxed at the higher, irrevocable trust rate, the increase can be taxed at the Grantor spouse’s tax rate, reducing the tax burden on the estate.
Using a SLAT: Conclusion
The advantages of a SLAT are that both spouses have “gifted” away the maximum gift tax exemption amount ($11.7 million in 2021), while still enjoying the benefit of the assets in both trusts, assuming proper maintenance of the trusts and provided the spouses remain married. Each SLAT is a “grantor trust” for income tax purposes, meaning the grantors pay the income taxes on trust income which is itself a tax-free gift to the remainder beneficiaries of the trust (this may not feel like an advantage to the grantor but from a mathematical tax savings standpoint, it satisfies the income tax liability at a lower tax rate and without disturbing trust principal, thereby being more income-tax advantageous). 26 U.S.C. §677(a); Revenue Ruling 2004-64, 2004-1 C.B. 7.
On the flip side, when the Grantor spouse dies, the Beneficiary spouse’s access to the assets in the trust will be restricted. In addition, if the spouses divorce, unless it is amicable and agreed upon, each spouse loses access to the assets in her or his grantor trust. The SLAT can be drafted to disqualify the spouse as a beneficiary upon divorce or even separation or absence of cohabitation for a specified period of time. The SLAT can also include a provision that allows for the grantor’s then-current spouse to be a beneficiary, whomever that spouse may be. Thus, if the grantor divorces the spouse to whom she is married at the time the SLAT is executed, the SLAT can provide for the grantor’s subsequent spouse to be the beneficiary if and when the grantor divorces and remarries the second spouse. Similarly, a remarrying grantor could contemplate a pre-nuptial agreement in which the second spouse waives any rights in a pre-existing SLAT.
Ask Us. Let us Help.
If you have any questions about Spousal Lifetime Access Trusts or any other estate planning topics, please contact us to schedule a free consultation. For more than three decades Beyer, Pongratz, and Rosen has focused on Estate Law, Business Structuring, Asset Protection, and Long-Term Care. It would seem like we’ve seen it all, and this experience allows us to explain complex estate law and planning techniques clearly and concisely. We can make it easy for you to understand SLATs so you can make the best decisions for yourself and your family.