As part of the estate planning process, many spouses choose to establish trusts to protect their assets, minimize tax liabilities, and provide financial legacies for their surviving spouses and children after their eventual death. Spousal Lifetime Access Trusts (SLATs) are one option that may be especially appealing for high-net-worth families. If you have questions about setting up or customizing a trust, consider contacting a skilled estate planning lawyer with Roulet Law Firm, P.A., by calling (941) 909-4644 in Florida or (763) 420-5087 in Minnesota. Or you can fill out the form on this page and a member of our team will reach out to you to schedule your consultation.
What Are Spousal Lifetime Access Trusts (SLATs)?
Spousal Lifetime Access Trusts (SLATs) are specialized irrevocable trusts designed to help married couples protect their wealth and manage their liabilities for estate and gift taxes by keeping the principal of the trust out of both spouses’ estates. For this type of trust, the donor spouse, known as the grantor, sets up the trust and transfers assets into the trust, naming the other spouse as the primary beneficiary during his or her lifetime. The assets can include life insurance, securities, real estate, cash, and more.
This trust is generally structured in a way that allows the beneficiary spouse to receive regular income in the form of distributions from the principal assets of the trust. The structure provides a way to reduce the taxable estate of the donor spouse as well as the beneficiary spouse, protecting the family’s wealth.
Benefits of SLATs for High-Net-Worth Families
SLATs offer numerous benefits for high-net-worth families. One of the primary advantages is the potential for estate and gift tax savings. By transferring assets to a SLAT, the donor spouse can effectively remove those assets from his or her taxable estate, which can result in substantial tax savings. The beneficiary spouse will then have access to the regular income that the trust provides, and the donor spouse can benefit indirectly from that income while he or she is still living.
Another benefit is asset protection. The assets in an irrevocable trust are generally protected from creditors and legal claims. Knowing that the family’s wealth is safeguarded can provide peace of mind. Additionally, SLATs offer flexibility in terms of investment and distribution options, including replacing the trustee if the need arises. Spousal Lifetime Access Trusts allow families to customize the trust to meet their unique needs and goals.
Disadvantages of a Spousal Lifetime Access Trust
SLATs provide several benefits for high-net-worth families, but they may not be right for everyone. The potential risks and disadvantages of setting up a SLAT include the following
Loss of Control
The grantor must relinquish direct control over and access to the assets that he or she adds to an irrevocable trust. Those assets become the property of the trust to be controlled by the trustee. Since the donor spouse cannot also be the trustee, he or she will not be able to decide whether and when distributions are made to the beneficiaries beyond initially drafting the trust document. This loss of control can be difficult for some people.
Disruption From Divorce
Unfortunately, people and relationships can change over time, and marriages can end in divorce. When a couple divorces with a SLAT in place, the grantor spouse will lose the indirect benefits from the funds distributed to the beneficiary spouse, while the beneficiary spouse continues to receive distributions from the trust. This risk may be mitigated by including provisions in the trust documents that terminate a former spouse’s interest or limit beneficiaries to the current spouse.
Loss of Access
When the beneficiary spouse dies first, the grantor spouse will lose indirect access to the SLAT. At that point, the trust may begin distributing funds to children or other family members named as beneficiaries in the trust. When drafting the trust documents, it may be possible to include provisions that allow the funds to redirect upon the beneficiary spouse’s death.
According to Section 736.0505(3) of The 2024 Florida Statutes, the grantor of a trust that was created and funded after June 30, 2022, in Florida will not lose access to the benefits of the trust upon the original beneficiary spouse’s death. Instead, the original grantor spouse will be added to the trust as a beneficiary.
Customization Strategies for Maximizing SLAT Benefits
To maximize the benefits of a Spousal Lifetime Access Trust, it is important to customize the trust documents according to the family’s unique financial situation and goals. One strategy is to include a “power of appointment” clause, which allows the beneficiary spouse to direct how the remaining trust assets will be distributed upon his or her death. This can provide an additional layer of control and flexibility, which can be especially useful for high-net-worth families.
Another customization strategy is to structure the trust to allow for “sprinkling” distributions. This means that the trustee can distribute the trust’s income or principal to multiple beneficiaries, such as children or grandchildren, in a manner that aligns with the family’s financial and personal goals. A knowledgeable estate planning lawyer with Roulet Law Firm, P.A., may be able to help compile the most applicable options to ensure that the SLAT fits the family’s specific needs.
Potential Pitfalls and How To Avoid Them
While SLATs offer numerous benefits, there are potential pitfalls. Couples may want to create reciprocal trusts to prevent the potential problem of the donor spouse losing access to distributions if the beneficiary spouse passes away first. However, according to a U.S. Supreme Court Decision in Estate of Grace, when each spouse sets up a trust for the other, the dates, details, and funding must be different to avoid being subject to the “reciprocal trust doctrine,” which can negate the tax benefits of the irrevocable SLAT.
Another potential pitfall is the complexity of the legal and tax implications involved in setting up and managing a SLAT. Mistakes in creating or administering the trust can lead to unintended tax consequences or legal challenges. To avoid these issues, many couples choose to work with an estate planning attorney who can offer guidance throughout the process and ensure that the trust is set up correctly.
Contact an Estate Planning Attorney With Your SLAT Questions Today
Spousal Lifetime Access Trusts (SLATs) can be a powerful tool for couples who want to minimize gift and estate taxes and protect their assets. However, the process of setting up and maintaining a SLAT can be complex, especially for high-net-worth families. A lawyer will consider the legal and tax implications, help to customize the trust to meet your needs, and assist in avoiding potential pitfalls. If you are considering leveraging the benefits of a SLAT as part of your estate planning strategy, consider contacting an experienced estate planning attorney from Roulet Law Firm, P.A., by calling (941) 909-4644 in Florida or (763) 420-5087 in Minnesota to schedule a consultation today. Or you can fill out the contact form on this page and a member of our team will reach out to you to schedule your consultation.
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