Using a particular type of irrevocable trust can be especially valuable for married couples, according to a recent article from Advisor Perspectives, “Managing Wealth: Utilizing Spousal Lifetime Access Trust.”
SLATs allow one spouse to transfer assets into a trust for the other spouse's benefit. Assets may include cash, stocks, real estate property, life insurance policies, and other kinds of property. The beneficiary spouse has access to the assets while both spouses are living as well as when the grantor has passed.
Assets inherited from a deceased spouse to a surviving spouse are not subject to estate tax, but when the surviving spouse passes, there may be an estate tax due if proper planning is not done.
For example, consider a married couple with a net worth of $60 million. One spouse could transfer up to $13.61 million into a SLAT tax-free. The surviving spouse could receive distributions of the SLAT as income. When the surviving spouse passes, the remaining assets in the trust are then passed to children or whoever the named beneficiaries are, with no taxes due.
An experienced estate planning attorney must prepare SLATs to achieve their goals. They are structured as grantor trusts, meaning the spouse putting assets into the trust will need to pay the trust’s income taxes yearly. Doing so allows the assets in the trust to grow tax-free.
Another advantage of SLATs is the protection they give against claims made by creditors against the grantor and the spouse. Because the SLAT is an irrevocable trust, control has been relinquished, so creditors cannot attach them.
There are considerations before embarking on establishing a SLAT. The donor spouse must be comfortable giving up direct control and asset access. The donor spouse cannot be a trustee of the trust. And the donor spouse cannot be a beneficiary.
If the non-donor spouse predeceases the donating spouse, the donating spouse loses indirect access to the assets as the assets will pass to the beneficiaries. And if the couple divorces, the donor spouse loses access to the assets. Consider the stability of the marriage before setting up a SLAT.
Before creating a SLAT, a candid discussion with your estate planning attorney should occur. The stability of the marriage, how comfortable the donor spouse is with yielding control of assets, and the ability to pay taxes on the assets in the SLAT should all be considered.
Reference: Advisor Perspectives (July 1, 2024) “Managing Wealth: Utilizing Spousal Lifetime Access Trust”