Spousal Lifetime Access Trust (SLAT) California

What you Need to Know About Spousal lifetime access trust (SLAT)

Many estate planning tools are designed mainly to protect and move assets tax-free into the future. There are endless types of trusts for high-net-worth persons to send wealth to the next generation. Here we focus on one underexploited strategy: The Spousal Lifetime Access Trust (SLAT). From the name, a SLAT is an unchangeable trust where one marriage partner makes a gift into a trust to benefit their spouse (and family members). In the process, the assets are removed from their joined estates.

The husband can choose to finance a SLAT for the benefit of the wife or vice versa. Both spouses can also fund the SLAT in tandem. For couples, this trust offers a way to use the federal government lifetime gift and estate tax exemption, which now stands at $11.7 million for individuals and $23.40 million for a married couple. This is possible while also retaining some degree of access to the trust assets if the need arises.

Considering that a SLAT is financed with gifts during the spouse’s lifetime, all forms of appreciation that occur in the trust are excludable from both spouses’ estate for estate tax purposes.

How SLAT Trusts Work

One way for married couples to reduce their taxable estate is by making massive permanent gifts from the estate. Nonetheless, concerns arise over how most gift arrangements involve losing control of the wealth during their lifetime. They may be uncertain whether or how the assets will be accessible in the future.

A SLAT is a unique estate planning strategy that can potentially address these conflicting goals. The trust is formed by a grantor spouse who bequeaths property to an irrevocable trust for the beneficiary spouse.

It is also possible to include children and grandchildren as beneficiaries. The grantor spouse utilizes their federal exemption when moving assets to the SLAT.

Even though this trust is irrevocable, the grantor spouse can indirectly profit from the assets gifted to the trust if the beneficiary spouse is still alive and still in the marriage.

Since the primary beneficiary of the trust is the spouse who was not a grantor, he /she can request earnings from the trustee like an ordinary beneficiary during his or her lifetime. It may be acceptable for the trustee to approve distributions from the trust to the non-grantor spouse to maintain their living standard.

If there are distributions to the non-grantor spouse estimated to be spent before their death, the distributions will be reintroduced to their taxable estate. To determine the appropriate gift to a SLAT, proper planning and proper budgeting should be done. The SLAT objective is to continue preserving the assets of the trust outside of a client’s estate.

In the event of deceased beneficiaries, the remaining trust assets are transferred either outright to their kids or grandchildren or, in the alternative, put into trust for them.

SLAT Trusts FAQ

Can the trust be part of my estate or the estate of my spouse?

No. If the SLAT trust is properly structured and administered, both spouses will have their taxable estates excluded.

My spouse could pass away, or we could get divorced. What happens then?

If your spouse passes away or gets divorced, you will no longer access the SLAT funds indirectly through your spouse. It should be drafted right for you to include only your current spouse as a beneficiary of the trust (not your former spouse). The SLAT can also be designed to allow your spouse to transfer funds back to you in the event of their death. It can also be designed to extend loans to you.

Would we be able to set up SLATs separately for each other?

In this case, the SLAT should not be almost identical. SLATs will be disregarded for gift tax purposes if that is the case. This can be avoided by creating SLATs funded on different dates, having different trust distribution rules, and funding them with different assets.

Who can be a trustee for the SLAT?

Several options are possible, including naming your spouse, but distributions should be made to meet precise standards comprising allocations for health, education, or maintenance. If an independent trustee is named who is not a beneficiary, the trust can be more flexible since he can distribute trust funds on any grounds.

For the best legal help setting up, administering, or litigating a SLAT trust, contact Hess Verdon SLAT attorneys at (949) 706-7300 or contact@hessverdon.com.