A Spousal Lifetime Access Trust (SLAT) For Estate Planning

If you love your spouse and want to make them financially independent, one way to do so is to create a Spousal Lifetime Access Trust, or SLAT.

A SLAT is an irrevocable trust where one spouse makes a gift into a trust to benefit the other spouse (and potentially other family members) while removing the assets from their combined estates.

Because a SLAT is funded with a gift made during the spouse's lifetime, any post-gift appreciation will take place in the trust and be excluded from the estate of both spouses for federal estate taxation purposes.

Therefore, the sooner you create a SLAT and transfer assets, the higher the chance a greater percentage of wealth will be excluded from federal estate taxes. After all, over the long run, stocks, real estate, and other assets tend to go up.

Why Create A Spousal Lifetime Access Trust (SLAT)?

In 2022, the estate tax threshold is $12.06 million per person or $24.12 million per married couple. If you die with an estate worth more than these thresholds, you will have to pay a 40% death tax.

Therefore, the main reason to create a SLAT is to potentially save on estate taxes. Deciding where to give your money is more efficient than giving it back to the government. The government is often a black hole that wastes a lot of money on things you might not care about.

The other reason for creating a SLAT is take care of your spouse, financially, no matter what happens to you. If you die prematurely or get a divorce, a SLAT is irrevocable. The non-donor spouse who receives the SLAT can do whatever they want with the transferred assets.

Generally, the gift to the SLAT is not taxable because the donor spouse uses their federal gift and estate tax exclusion when transferring assets to the SLAT. Wealthier household will generally be given a heads up before they hit the threshold. If not, better late than never.

How The Donor Spouse Can Benefit From A SLAT

The donor's transfer of assets to the SLAT is considered a taxable gift. However, the gift tax may not be owed if the donor utilizes their Federal gift and estate tax exclusion. In other words, if the transfer of assets is under the $12.06 million threshold per person in 2022, there is no estate tax owed.

If structured properly, the assets and any future appreciation is removed from the donor’s taxable estate. Even though the non-donor’s spouse is a beneficiary of the SLAT, the trust is excluded from the non-donor's taxable estate as well.

SLATs are typically structured as grantor trusts for income tax purposes. This means the donor pays the income tax liability personally on the earnings, rather than the trust itself bearing the burden of income taxes. 

Strategies For Funding A SLAT

Strategically, it's wise to fund a SLAT before the estate tax threshold is lowered. For example, President Biden has openly said he wants to lower the estate tax threshold to $5 million or lower.

Funding a SLAT when your estate's value is higher the the estate tax threshold is suboptimal. However, the SLAT recipient still gets to benefit if assets continue to appreciate over time.

Further, a SLAT may also be designed to benefit the next generation only or be structured as a dynasty trust. A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes. Such taxes include the estate and gift taxes or generation skipping transfer tax.

Related: Use A 529 Plan For Generational Wealth Transfer Purposes

Negatives Of A Spousal Lifetime Access Trust (SLAT)

Although creating a SLAT is positive if you love your spouse and want to potentially lower your estate tax bill, here are some negatives of setting up a SLAT.

1. Non-donor spouse dies or leaves the donor in a divorce

If the non-donor spouse dies, the donor spouse no longer has direct access to the trust assets. Instead, the trust may either terminate and be distributed to or continue for the benefit of the donor's children and other family members. But if the donor's children and other family aren't in good standing, this may pose a problem.

In the event of divorce, a disadvantage of a SLAT is that the separated non-donor spouse will continue to benefit from the trust as a beneficiary. This may not be ideal if the non-donor spouse did something terrible to cause the divorce. Therefore, when setting up a SLAT, you may want to put in a provision that states the SLAT is terminated in case of divorce or death.

2. Cost to set up the Spousal Lifetime Access Trust (time and money)

It will likely cost at least $3,000 per spouse to set up a SLAT. Then it takes time to contact an estate planning attorney, talk to the attorney, sign the documents, file the SLAT documents in your death file and so forth. The more complicated your net worth, the more it will cost to set up the SLAT.

Because SLATs are typically structured as grantor trusts, they do not require the filing of a trust tax return each year while the donor spouse is living. However, if the SLAT is not structured as a grantor trust, a separate income tax return will be required. The transfer of property to the SLAT will cause the need to report the transfer on a gift tax return in the year of the gift.

3. Lose access to your funds.

Because a SLAT is irrevocable, once you transfer assets into the non-donor spouse's SLAT, you cannot retrieve them. You are essentially giving up control and rights to all assets transferred. If your non-donor spouse ends up cheating on you with your best friend, you will feel mighty pissed off and betrayed.

As a result, only transfer assets in a SLAT that you are fine to lose 100%. It's the same way with angel investing or investing in some highly speculative investment. Write off those transferred assets from your mind.

More Things To Know About The Spousal Lifetime Access Trust (SLAT)

1. The reciprocal trust doctrine

In order to fully utilize both exclusions, each spouse may create a SLAT for the benefit of the other. However, careful planning must be done to avoid the “reciprocal trust doctrine.” This doctrine applies when the IRS interprets the two trusts as constructively similar or interrelated. If the trusts violate the reciprocal trust doctrine, then the trusts may be undone. If so, you will have wasted your time and money setting up a SLAT.

Here are some ways not to violate the reciprocal trust doctrine. Creating and funding the trusts at different times. Including different classes of beneficiaries. Providing different terms for distributions to beneficiaries. Giving beneficiaries different rights of withdrawal. Finally, granting beneficiaries the power to change beneficiaries under certain restrictions.

Given the complexity and risks, consulting an estate planning attorney is highly recommended. You may be able to get a free consultation to hear of creating a SLAT is right for your situation.

2. Ability for non-donor spouse to serve as trustee

A beneficiary serving as trustee with the ability to make broad distributions to themselves beyond the ascertainable standard of “health, education, maintenance, or support” could trigger the inclusion of the trust assets in the taxable estate of the non-donor spouse, potentially unwinding the intent of the strategy.

In addition, distribution rights that are too broad may erode the creditor protection features that a trust generally provides.

3. Tradeoffs with respect to basis step-up at death

The transfer of assets to the SLAT is irrevocable and permanently removes the assets from the donor's taxable estate; therefore, the assets in the SLAT will not obtain a step-up in cost basis upon the donor's death.

However, this doesn't matter so much if your estate is already beyond the estate tax threshold. Or you plan for your estate to be way beyond the estate tax threshold due to asset appreciation.

4. Only assets owned by the donor spouse should be transferred

Make sure only assets owned by the donor spouse are transferred. This way, the gift is not treated as made by both spouses. If the gift is made by both spouses, it would negate the benefits of a SLAT.

Some assets owned only by a donor spouse may include a whole life insurance policy, a property only in the donor spouse's name, a fine wine collection, and valuable collectibles. If you live in a community property state, additional documentation will be required.

5. Reducing state estate tax exposure

If you live in a state that has state estate tax, then funding a SLAT may help reduce state estate tax liability as well as federal estate tax liability. Here are the states with no state estate tax and inheritance tax.

Should You Set Up A Spousal Lifetime Access Trust?

If you love your spouse and have a great estate planning attorney, then setting up a SLAT makes sense. If you believe your estate will grow far beyond the estate tax threshold, setting up a SLAT and a GRAT also makes a lot of sense.

My main concern is that Congress will change the rules of the SLAT in the future. Right now, it almost seems too good to be true that appreciation of the transferred assets is not subject to estate taxes. Can you imagine Elon Musk transferring $10 million in Tesla stock to a spouse before the stock went up 10X to $100 million? $87.94 million wouldn't be subject to an estate tax if the spouse were to die today.

Further, roughly 50% of marriages end in divorce. Therefore, you can spend a lot of time and money setting up a Spousal Lifetime Access Trust only to have to nullify it later on.

Related: Estate Planning Terminology To Know

Recommendation For All Parents

You may still not want to set up a Spousal Lifetime Access Trust after reading this article. However, at the very least, get affordable life insurance if you have debt and dependents.

The best place to get life insurance is through Policygenius. Policygenius will help you find the best plan for the lowest price tailored to your needs. Policygenius provides free, no-obligation quotes so you can get the best rate. 

In the past, you would have to get a life insurance quote by applying to individual carriers. The process was completely opaque. Now, you can have multiple qualified life insurance carriers compete for your business after applying on Policygenius. It's so much more efficient! 

If you don't have life insurance, please get life insurance before you need to. Life insurance gets more expensive the older you get. If you get sick, depending on the severity of your sickness, you might not be able to qualify.

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