Describe Spousal Lifetime Access Trust (SLAT) - how to use it, who should use it

A Spousal Lifetime Access Trust (SLAT) is an estate planning tool that allows wealthy individuals to transfer assets outside their taxable estate, while still providing indirect access to those assets through their spouse. It’s an irrevocable trust, meaning once assets are transferred, the grantor (the person creating the trust) no longer owns them and cannot take them back. However, the grantor’s spouse can access the trust's income or principal, making SLATs a unique way to preserve wealth for future generations while maintaining some financial flexibility.

Key Features of a SLAT

1. Irrevocable Trust: Once established, the trust cannot be altered or revoked, and the assets placed in it are removed from the grantor’s estate, reducing the size of the taxable estate.

2. Spousal Beneficiary: The trust is set up for the benefit of the grantor’s spouse, who can access the trust's income or principal during their lifetime. After the spouse's death, the remaining assets typically go to children or other beneficiaries.

3. Tax Benefits: By removing assets from the grantor’s estate, a SLAT reduces estate taxes. Since it’s an irrevocable trust, the transferred assets and their future appreciation are no longer subject to estate taxes upon the death of the grantor or their spouse.

4. Gift Tax Exemption: SLATs can use the grantor’s lifetime gift tax exemption. In 2024, the federal gift and estate tax exemption is $13.92 million per individual ($27.84 million per couple), which means high-net-worth individuals can gift up to these amounts during their lifetimes without incurring gift taxes.

5. Asset Protection: The assets in a SLAT are generally protected from creditors, as long as the trust is properly structured.

How a SLAT Works

1. Create the SLAT: The grantor establishes the SLAT and transfers assets into the trust. Once the assets are transferred, the grantor loses control and ownership of them, but the spouse can still access them as the beneficiary.

2. Spouse as Beneficiary: The grantor’s spouse has access to the trust's income or principal, depending on how the trust is drafted. This access can provide financial flexibility while the assets grow within the trust.

3. Distributions: The trustee can make distributions to the spouse for health, education, maintenance, or support. This allows the spouse to maintain a certain lifestyle while the assets remain in the trust and are excluded from the estate.

4. Remainder to Heirs: After the spouse's death, the assets typically pass to the couple’s children or other named beneficiaries, free of estate tax.

5. Avoiding Double Use: To avoid potential issues with estate tax or reciprocal trust doctrines (which could invalidate the tax benefits if both spouses create similar trusts for each other), the SLATs must be structured carefully. Often, only one spouse creates the SLAT, or each spouse creates different types of irrevocable trusts.

Who Should Use a SLAT?

1. High-Net-Worth Individuals: SLATs are primarily designed for individuals or couples with significant wealth who want to reduce estate tax exposure and preserve their wealth for future generations. By moving assets into the trust, they can take advantage of the current high federal estate tax exemption.

2. Individuals Concerned About Future Estate Tax Law Changes: The federal estate and gift tax exemption is scheduled to decrease after 2025 unless Congress extends it. High-net-worth individuals may wish to take advantage of the current high exemption while it is available.

3. Those Seeking Asset Protection: Because the SLAT is irrevocable, it can protect the trust’s assets from creditors, lawsuits, and divorce, which is a key consideration for many wealthy families.

4. Couples with One Spouse Who May Need Access to Assets: The grantor loses access to the assets, but their spouse can still use the trust's funds if needed. This feature provides more flexibility than other irrevocable trusts that entirely restrict access to the trust assets.

5. Individuals Who Want to Preserve Wealth for Future Generations: The trust can be structured so that, after the spouse’s death, the remaining assets pass to children or other beneficiaries, shielding them from estate tax and continuing to protect the family’s wealth.

Benefits of a SLAT

• Estate Tax Reduction: Assets placed in a SLAT are removed from the grantor’s taxable estate, helping reduce or eliminate estate tax liability.
• Preservation of Family Wealth: SLATs allow wealth to grow in the trust free of estate tax, ensuring more of the family’s assets are passed on to future generations.
• Spousal Access: The grantor’s spouse can still receive distributions, providing indirect access to the trust’s funds for the couple.
• Creditor Protection: The assets in the SLAT are protected from creditors, providing an additional layer of security.

Potential Drawbacks and Considerations

1. Irrevocable: Once assets are placed in a SLAT, the grantor loses ownership and control over them, which may be a drawback for individuals who want more flexibility.

2. Spousal Access Only: Only the spouse has access to the trust’s assets, not the grantor. If the spouse predeceases the grantor, the grantor loses indirect access to the funds.

3. Reciprocal Trust Doctrine: If both spouses set up identical trusts for each other, the IRS may view this as an attempt to circumvent estate tax rules, potentially leading to both trusts being included in the taxable estate. Proper legal planning can mitigate this risk by making each trust distinctly different in terms of structure or timing.

4. Divorce Risk: If the grantor and spouse divorce, the spouse is still entitled to the trust's income and assets, potentially complicating financial plans.

5. Generation-Skipping Transfer Tax (GST): Depending on how the trust is structured, GST tax may apply if assets pass to grandchildren or other younger generations. This can be avoided with proper planning.

Example of How a SLAT Works

Suppose a couple has $20 million in assets. One spouse (the grantor) transfers $10 million into a SLAT for the benefit of the other spouse. This removes the $10 million from the grantor’s estate, reducing their taxable estate. The spouse can still receive distributions from the trust for living expenses, providing financial flexibility. When the spouse dies, the remaining assets pass to their children free of estate taxes.

Would you like to explore how a SLAT might fit into your estate planning, or do you need further details on any specific part?