There are many kinds of trusts that can be included in an estate plan to easily transfer assets from one person or generation to another. A Spousal Lifetime Access Trust (SLAT) is a trust that is used to transfer wealth outside of an estate, which can have certain tax advantages. A SLAT is an irrevocable trust in which one spouse makes a gift into a trust to benefit the other spouse, and possibly also children or grandchildren. The donor spouse benefits by reducing the size of both their own and their spouse’s estates and taking advantage of the federal lifetime gift and estate tax exclusion. It is possible for each spouse to fund a SLAT for the other, maximizing the tax benefits. In 2022, the federal lifetime gift and estate tax exclusion is limited to $12.06 million per person, or $24.12 million per married couple.
What Are the Advantages of a SLAT?
In addition to providing tax benefits by transferring wealth outside of an estate, a SLAT can allow the funds to remain indirectly accessible to the donor via the spouse in case of a serious need. In other words, the non-donor spouse can use the funds to benefit the donor or the family, or to take care of family or marital expenses. In this way, the donor can still benefit from the funds, even though they are held in trust for the spouse. The non-donor spouse can request distributions from the trustee, and these funds may be used in ways that benefit the donor spouse, such as maintaining the couple’s accustomed standard of living. It is most often recommended, however, that these distributions be taken only as a last resort if all other resources have been exhausted.
What Are Some Things to Consider Before Funding a SLAT?
While a SLAT may seem advantageous, there are things to consider before adding one to your estate plan, First, if the couple divorces or the non-donor spouse passes away, the donor spouse will no longer have indirect access to the assets. If you live in a state without estate taxes, carefully consider the other possible advantages of a SLAT before deciding if this kind of trust is right for you, since the tax advantages will not be as great as they would be for people living in states that do have state estate taxes. While a SLAT set up as a grantor trust will not need to file a separate tax return, if the SLAT is not structured as a grantor trust, a separate income tax return will be required. The transfer of property to the SLAT will cause the need to report the transfer on a gift tax return in the year of the gift.
What Kinds of Assets Can be Transferred into a SLAT?
A SLAT may be funded with many types of assets, as long as they are not jointly held by the spouses. If jointly-held assets are included in a SLAT, the gift will be treated as coming from both spouses, which negates the advantages of the SLAT. Some states consider all marital property jointly held (known as community property states), and SLATS funded in these states may require additional paperwork and documentation.
Does a SLAT Make Sense for My Situation?
It is impossible to determine who will benefit from a SLAT and who will not without a careful review of the couple’s unique situation. An experienced and knowledgeable estate planning attorney can help you decide if a SLAT is right for you, or whether there might be other estate planning tools that could benefit you.