Spousal Lifetime Access Trusts

If you’re a middle-class individual with significant assets, you may be exploring estate planning strategies that can help you protect and pass on your wealth. One option that has gained popularity in recent years is the use of a SLAT, or a spousal lifetime access trust. In this blog post, we’ll explore the pros and cons of SLATs to help you determine whether this type of trust is right for you.

What is a SLAT?
A SLAT, or spousal lifetime access trust, is an irrevocable trust that allows one spouse to transfer assets to a trust for the benefit of the other spouse, as well as their children or other beneficiaries. The trust is managed by a trustee, who has control over the assets and is responsible for distributing them according to the terms of the trust.

How Does it Work?

  1. Creation of the Trust: The first step in creating a SLAT is to establish the trust with the assistance of a qualified attorney. You will need to decide what assets to transfer into the trust, which can include cash, securities, real estate, or other property.
  2. Designation of Beneficiaries: You will need to designate your spouse as the primary beneficiary of the trust, which allows them to receive distributions from the trust during their lifetime. You can also name other beneficiaries, such as your children or other family members, who will receive any remaining assets in the trust after your spouse’s death.
  3. Appointment of a Trustee: You will need to appoint a trustee to manage the trust and its assets. This can be a professional trustee, such as a bank or trust company, or an individual trustee, such as a family member or friend.
  4. Funding the Trust: Once the trust is established, you will need to transfer assets into the trust. This can be done by gifting assets to the trust or selling assets to the trust in exchange for a promissory note.
  5. Access to Trust Assets: Although the assets in the trust are no longer considered part of your estate, your spouse can still access the assets during their lifetime if needed. This provides flexibility and security knowing that the assets are available if they are needed for unexpected expenses or emergencies.

Pros of SLATs:

  1. Tax Savings: One of the primary benefits of a SLAT is that it can help you save on estate taxes. When you transfer assets into the trust, they are no longer considered part of your estate for tax purposes, which can reduce your estate tax liability.
  2. Asset Protection: By placing assets in a SLAT, you can protect them from potential creditors or lawsuits. This can provide peace of mind knowing that your assets are secure.
  3. Flexible Access: With a SLAT, your spouse can access the trust assets during their lifetime, which can be helpful if they need funds for unexpected expenses or emergencies.
  4. Efficient Transfer: A SLAT can simplify the transfer of assets to your heirs. Instead of going through probate, with its costs, delays, and loss of privacy, the assets can be distributed outside of probate according to the terms of the trust.

Cons of SLATs:

  1. Irrevocable Nature: Once assets are transferred into a SLAT, you no longer have control over them. You cannot change your mind later and reclaim the assets.
  2. Loss of Step-up in Basis: When you transfer assets into a SLAT, the basis of the assets is carried over from you to the trust. When the assets are eventually sold, your heirs may be subject to capital gains taxes on the appreciation that occurred during your lifetime.
  3. Complexity: Creating and managing a SLAT can be complex. A qualified estate planning attorney should be involved.
  4. Cost: Establishing a SLAT can be expensive, and ongoing administration costs can add up over time.

Let Us Help
Overall, a SLAT can be an effective estate planning strategy for some middle-class individuals. It provides tax savings, asset protection, and flexible access for your spouse while simplifying the transfer of assets to your heirs. However, there are also drawbacks to consider, including the irrevocable nature of the trust, loss of step-up in basis, complexity, and cost. As with any estate planning strategy, it’s important to consult with a qualified attorney to determine whether a SLAT is right for you based on your unique circumstances and goals. Contact us to help you determine if a SLAT should be part of your estate plan.