A Spousal Limited Access Trust, or SLAT, is an irrevocable trust formulated by one spouse to benefit the other. An irrevocable trust typically doesn’t allow you to be a trustee and can’t be modified once you’ve signed the document. Due to this, the trusts generally are much more specific in their designations and procured for a particular purpose.
Assets transferred through a SLAT are generally life insurance policies or investment accounts. A SLAT is essential for some because it allows one spouse to protect the other from tax implications when utilizing the assets within the trust. There are exemptions in place today that you can help secure by creating one now and avoiding adhering to significant changes in exemptions that could occur in the future, making your taxes higher.
What Are the Main Benefits of a SLAT?
In most cases, a significant amount of assets can be transferred to a spouse as a gift without the gift tax. Those assets are also primarily exempt from the estate tax when the donor spouse passes away. In many cases, an estate tax can cut a significant chunk out of what is left to spouses, and a SLAT can help your spouse avoid paying those taxes, thereby securing more assets.
Generally speaking, your spouse can access the assets within the trust for their lifetime as a beneficiary while maintaining protection of those assets from future creditors.
What are the Risks Associated with Creating a SLAT?
A SLAT isn’t for everyone. One of the main risks is that it is an irrevocable trust. Having an irrevocable trust in place means that should you and your spouse divorce or pass away, you may no longer be able to utilize the tax benefits of the SLAT. Because of this reason, some spouses choose to set up a trust for each spouse, ensuring that both are protected. However, these trusts will need to have distinct differences to avoid infringing on the guidelines of a reciprocal trust doctrine, which is in place to ensure couples aren’t essentially setting up duplicate trusts.
It can also be essential to set up trusts at different times. If tax courts view two separate trusts as duplicates explicitly created to help you avoid tax ramifications, they may not be upheld. You could risk losing the security you put in place to avoid estate taxes for you and your spouse.
Due to structuring reasons, some couples choose not to have their spouse as the trustee and, instead, a non-spouse trustee. You also should practice extreme caution when determining your trustee. You can generally reserve the right to replace the trustee, but having the right one in place from the start can save you unnecessary stress and potential costs. Absolute trust must be placed in the trustee that you choose.
Why is Forming a SLAT Especially Important Currently?
The Tax Cuts and Jobs Act of 2020 stipulate that each spouse may gift or transfer up to over $11 million without incurring a gift or estate tax. This amount is subject to change in 2025 and is projected to decrease considerably, making the tax implications significantly greater.
The Internal Revenue Service has explained that those individuals that take advantage of the increase in the gift tax exclusion now will avoid the tax implications when changes are made in 2025.
What does this mean for you? If a SLAT works for your family and your estate plan, acting now can be incredibly beneficial.
Is a SLAT Right For My Spouse and Me?
Every family and their assets are structured differently. Many reasons make forming a SLAT appealing; for others, it’s unnecessary.
It is beneficial to learn the facts and work with a trusted financial advisor and estate planning attorney to help you review your current assets, know where you wish to transfer them upon your death and your spouse’s, and formulate a strategy that best suits your wishes.
It is important to note that a SLAT can also hold trust assets for future generations, referred to sometimes as “skipping generations.” In many cases, this can also help future generations avoid unnecessary estate taxes.
Another item of importance is that creating a SLAT should typically only be an option for spouses with solid marriages. The donor spouse could lose indirect access to the trust assets through the beneficiary spouse should they divorce.
How Can an Estate Planning Lawyer Help?
It can be difficult to conceptualize or want to plan for our morbidity. What is crucial to understand about estate planning is that by having a plan in place, you are not only protecting yourself and your assets but providing a clear map for your surviving family members as to how you want your assets distributed.
You can include specific actions that directly address items of concern for you and your future. The process is thorough and compassionate, as well as private. We have several years of experience helping families ensure their loved ones are looked out for long after they are gone.
This process can bring peace of mind that you have taken extra steps to prepare future generations for life even after you can no longer be there in person to guide them.
Contact our office today at (781) 606-9002 to speak confidentially with one of our experienced and compassionate lawyers, who can walk you through your questions and help determine the next steps. We look forward to working with you.