What is a Spousal Lifetime Access Trust (SLAT) and How Does It Work?

A spousal lifetime access trust (SLAT) is a type of irrevocable living trust that was created by one spouse, the donor, for the benefit of the other spouse, the beneficiary. SLATs can potentially include other family members as well, but they’re generally used for the benefit of a spouse. They have become a very popular estate planning tool for couples with considerable wealth, since it allows you to transfer assets out of your estate and into an irrevocable living trust. The assets and the income they produce are no longer taxable during their lifetime. In this article, the Virginia Beach estate planning attorneys at the Law Office of Angela N. Manz will discuss how SLATs work and some of the benefits.

How do SLATs work? 

• Creating and funding the trust – The donor spouse creates an irrevocable living trust. They then transfer the assets from their own estate into the trust. This can include cash, securities, or real estate.

• Using the exemption – The donor uses their lifetime gift tax exemption to shield the gift from taxes.

• Beneficiary access – The beneficiary spouse can request distributions from the trustee to maintain their standard of living.

• Indirect benefit – The donor can’t access the assets directly, but they may be able to indirectly benefit through the beneficiary spouse.

• Avoiding estate taxes – Any asset placed in the SLAT and its subsequent appreciation are excluded from the donor’s taxable estate. This can potentially reduce or eliminate estate taxes once they pass.

• Inheritance for heirs – If the beneficiary spouse dies, the remaining trust assets are distributed to the other named beneficiaries (usually children or grandchildren).

What are the benefits of a SLAT? 

• Tax savings – SLATs reduce the size of the taxable estate, which potentially minimizes federal and state estate taxes.

• Asset protection – Assets held within the SLAT are generally protected from creditors and lawsuits.

• Flexibility – SLATs allow customized terms, including distribution schedules and contingent beneficiaries, to meet specific goals.

• Controlled inheritance – SLATs provide the donor spouse with control over how and when assets are distributed to their beneficiaries.

What are some of the drawbacks of SLATs? 

SLATs are irrevocable living trusts. That means that the donor spouse can no longer retrieve assets held in the trust or alter the terms of the trust once the assets have been transferred.

Another potential complication emerges when the beneficiary spouse dies. The donor spouse could lose indirect access to the trust assets.

SLATs tend to be more complex than the average trust and require careful legal planning.

Assets that are held in a SLAT do not receive a step-up in basis when the donor dies, which can result in higher capital gains taxes for beneficiaries.

If spouses create SLATs for each other that are substantially similar, the IRS might consider them one trust, which would potentially negate any tax benefits.

Talk to a Virginia Beach, VA, Estates and Trusts Attorney 

The Law Office of Angela N. Manz represents the interests of those who are planning their estates. Call our Virginia Beach estate planning lawyers today to schedule an appointment, and we can begin discussing your next steps right away.