Ken, age 65, a widower, has recently married Kellie, age 49. Ken has two adult children who are both very active in their family business. Kelly has an adult daughter, who is married with two children and currently lives in Europe.
Ken’s estate is valued at approximately $35 million. He wants to ensure that Kellie is financially cared for while still retaining the family business for his two children and reducing his overall tax burden.
What is a spousal lifetime access trust (SLAT)?
A spousal lifetime access trust (SLAT) is an estate planning tool used by married couples to transfer assets out of their taxable estate while still providing the beneficiary spouse access to the assets during their lifetime.
A SLAT is an irrevocable trust that allows the grantor spouse to make a gift of assets from the grantor spouse’s personal estate to the beneficiary spouse. These assets are then removed from the grantor’s taxable estate. The grantor reports the gift on a gift tax return.
One spouse can establish a SLAT for the other spouse, or both members of a married couple can establish a SLAT for the other. However, this requires careful planning, so the Internal Revenue Service (IRS) does not interpret the two trusts as constructively similar or interrelated and does not trigger the reciprocal trust doctrine.
How does a SLAT work?
The grantor spouse establishes the trust and transfers assets into it. For example, Ken may utilize the full value of his $12.92 million gift exclusion (2023) and transfer this amount into the SLAT. He has reduced the value of his estate by $12.92 million and has taken the full value of this generous exclusion before the law sunsets and reverts to $5 million per person on December 31, 2025.
The beneficiary spouse (and other beneficiaries such as children and grandchildren) can request distributions from the trust. However, doing so will reintroduce the assets back into the couple’s taxable estate.
The primary goal of a SLAT is to carefully determine how much of the grantor spouse’s estate can be put in the irrevocable trust while still allowing the couple to maintain their current standard of living.
The assets in the trust can appreciate outside of the donor’s estate and benefit the beneficiary spouse after the donor spouse dies or benefit their children or grandchildren.
What if the donor spouse needs the assets in the trust?
A SLAT is an irrevocable trust. Once assets are transferred into the trust, the grantor cannot take back or revoke them. This is essential to receive the estate tax benefits and to provide some degree of asset protection against future creditors and legal claims.
As long as Ken and Kellie are both alive and married, Ken can receive some indirect benefits from the assets in the SLAT. If Kellie requests a distribution from the trustee and it is approved, Kellie can share the assets with Ken.
What are the potential benefits of a SLAT?
A SLAT has several potential benefits, including:
- Reduction in estate taxes: Moving assets from the grantor’s estate using the gift tax exclusion can result in substantial estate tax savings.
- Asset protection: A revocable trust can protect from future creditors and potential lawsuits. The degree of asset protection depends on the trust’s terms and any applicable state laws.
- Access to assets: The beneficiary spouse can access the trust’s income throughout their lifetime. The grantor spouse may indirectly benefit.
- Secondary beneficiaries: A grantor can name secondary beneficiaries such as children and grandchildren, allowing the grantor spouse to pass wealth to the next generation while still financially providing for the beneficiary spouse.
- Utilize generous gift tax exclusion: The current gift/estate tax exclusion is $12.92 million (in 2023) per person. SLATs allow grantor spouses to use their lifetime gift tax exclusion now. Assets placed in a SLAT can appreciate outside of the grantor’s taxable estate.
Changing tax laws and the historically high gift tax exclusion means that SLATs may be an effective estate tax and wealth preservation strategy for married couples. It is essential to work with an experienced estate planning attorney if you are considering establishing a SLAT to ensure that it provides the benefits and protections you anticipate.
If you are a married couple and need to reduce your federal estate taxes or have questions about SLATs, schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.