According to the Vanier Institute of the Family, roughly half of all women who reach the age of 80 will be widowed. Although it might be difficult for spouses to consider this reality, it makes sense from a logical perspective. Spouses who pass away at approximately the same time are in the vast minority, and the surviving spouses can expect to spend years living out the remainder of their lives alone. According to the Centers for Disease Control and Prevention, the surviving spouse is usually female, as the life expectancy of an average woman is five time longer than the average male (75 vs. 80 years). Many estate planning strategies in Minnesota and Florida take these factors into account, creating lasting financial security for both spouses. Spousal lifetime access trusts (SLATs) represent one example, and an estate planning attorney can help families explore this option in more detail. Consider calling Roulet Law Firm, P.A. at (941) 909-4644 to reach our Florida office for more information. Alternatively, families can call (763) 420-5087 for our Minnesota office.
Spousal Lifetime Access Trusts Are Irrevocable Trusts
A spousal access lifetime trust is a type of irrevocable trust. Like all irrevocable trusts, SLATs cannot be altered directly by the grantors after establishing them. However, with the use of trust protectors, they may be altered indirectly. And like all trusts in general, a SLAT represents a separate legal entity. Once a grantor transfers assets into a SLAT, they no longer own these assets. This presents certain estate and tax planning benefits, as the transferred assets no longer fall under the taxable estate of the grantor. Once transferred, assets in a SLAT are managed by a trustee based on instructions created by the grantor. Different types of irrevocable trusts can perform many different functions, and a SLAT is an example of how flexible trusts can be.
SLATs Represent a Gifting Strategy
Although SLATs are irrevocable trusts, they also represent an estate planning strategy called “gifting.” As the name implies, this strategy involves strategically giving gifts in order to experience certain tax benefits. Generally speaking, Florida and Minnesota residents do not pay any tax on gifts they receive. State tax authorities do not treat gifts in the same way as income or capital gains. Although federal taxes may apply to gifts, the current estate and gift tax exemption is historically high thanks to the Tax Cuts and Jobs Act of 2017. Although slated to sunset in 2025, the new administration has vowed to extend it with a majority in Congress. This theoretically makes gifting a particularly effective estate planning strategy for the foreseeable future, as the lifetime federal exemption is now well over $13 million.
How do spousal lifetime access trusts implement gifting? First, a grantor creates the SLAT for the benefit of their spouse. After creating this SLAT, the grantor spouse gifts assets to the trust – making sure to report these transfers as gifts on their tax return. In this manner, the gifts pass through the SLAT before reaching the recipient. Like normal gifts, transfers to a SLAT are not taxable. In addition, these gifts reduce the taxable estate of both spouses. To learn about other gifting strategies, consider a consultation with Roulet Law Firm, P.A.
Why Not Just Give Gifts Normally Instead of Using SLATs?
Outright gifts to spouses offer many of the same benefits as spousal lifetime access trusts. So what is the difference between a normal gift and a gift to a SLAT? First, outright gifts do not offer the same level of control as spousal lifetime access trusts. Many grantors want to protect the financial security of their spouses for the foreseeable future. Sometimes, grantors need to protect spouses from their own financial irresponsibility. A lump-sum, seven-figure, outright cash gift might offer certain tax advantages – but there is no guarantee the spouse will use this cash responsibly. After the passing of the grantor, they may waste the family fortune within just a few years. Seniors can be vulnerable to scams in later life, and some make poor investment choices.
A SLAT addresses these problems with safeguards built into the trust. Depending on the instructions left behind by the grantor, the trustee may carefully distribute funds from the SLAT in a gradual, drip-feed manner. This can provide the surviving spouse with greater financial security, even if they outlive the grantor by decades. When the surviving spouse passes away, the remaining trust assets pass to other beneficiaries – such as children and grandchildren. These transfers may also be exempt from estate taxes.
What Are the Downsides of Spousal Lifetime Access Trusts?
Although SLATs offer numerous advantages, spouses should also consider the potential downsides. First, spouses lose the “step-up in basis” after transferring assets to the SLAT. Normally, capital gains taxes do not apply when beneficiaries inherit investment assets “outright.” Instead of considering capital gains, the Internal Revenue Service “steps up” the investment assets to their current market value. This advantage does not apply to investments held in irrevocable, non-grantor trusts, so gains that occur within an SLAT may be subject to capital gains taxes. However, they are outside of the estate of the gifting spouse for estate tax purposes.
In addition, there is no guarantee that the grantor will pass away before the beneficiary spouse. If the beneficiary spouse to a SLAT passes away first, the grantor spouse may lose control. If all goes to plan, the grantor spouse gets indirect access to the SLAT assets – as the beneficiary spouse can use these funds to maintain their mutual standard of living. The death of the beneficiary spouse removes this advantage, and the assets will likely pass to other beneficiaries. The same issue may occur if the spouses get divorced. However, with careful planning by a competent attorney, the trusts can be drafted to avoid these risks.
Learn More About Spousal Lifetime Access Trusts with Roulet Law Firm, P.A.
Spousal lifetime access trusts can be effective estate planning tools in certain situations, but they may not be suitable for all families. An online article may provide a comprehensive overview of certain trusts, but it cannot deliver targeted legal advice based on the unique circumstances of each reader. In contrast, an estate planning attorney in Minnesota or Florida may be able to listen to the specific goals and priorities of spouses before recommending certain courses of action. This guidance often occurs during a consultation, and spouses have the option to schedule an initial meeting with an experienced lawyer today. Consider calling (941) 909-4644 in Florida or (763) 420-5087 in Minnesota to learn about potential next steps with Roulet Law Firm, P.A. 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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