TRUST & ESTATE PLANNING

SLAT: A Key Strategy for Married Couples Making Large Gifts

11.20.2020 - Bryan Kirk

Benefits of Spousal Lifetime Access Trusts
  • Use Exemption Amount Before You Lose It. You can make a gift using your estate and gift tax exemption before it potentially decreases.
  • Preserve Access for Spouse. Your spouse can be a beneficiary of the trust so there remains access to the assets at your generation after your gift.
  • Long-Term Tax Protection. The gift will remove future appreciation in the value of the gifted assets from your estate. And to the extent you allocate your GST tax exemption to the gift, the assets can avoid transfer taxes for multiple generations.

A Spousal Lifetime Access Trust (SLAT) is means of making a lifetime gift for future generations, while preserving the availability of the trust property for support of your spouse.  While not to be used without caution, a SLAT can be a good solution for married couples looking for a way to use their current gift and estate tax exemption while maintaining access to the assets placed into trust.

With a SLAT, you make a gift of assets to an irrevocable trust, naming your spouse as a beneficiary of the trust. Your children and other descendants can also be named as beneficiaries, along with charity. The trustee is typically given discretion to distribute income and principal among the beneficiaries of the trust, including your spouse during their lifetime.  Often, the trust is structured so that the children only become primary beneficiaries after the spouse’s death.  In addition, your spouse can have a power to appoint (that is, direct the distribution of) the trust property at his/her death to control how assets pass to your descendants.   

Generally, you would also allocate your generation skipping transfer (GST) tax exemption to the gift.  This allows the trust assets to pass from generation to generation transfer tax free. 

For a SLAT to work, you need to gift assets that belong only to you.  In other words, your spouse can’t make a gift to himself or herself of property they also own, like a joint bank account.  In community property states, you should only use your separate property to fund a SLAT. Distributions from the trust also should not be made to a joint account.  Instead, distributions should always be made to an account in your spouse’s name alone as the beneficiary of the trust.

It is important to recognize you are giving up property for the benefit of your spouse.  This can have adverse consequences in the event of divorce, or upon death when you will no longer control the disposition of the assets placed in trust, or have access.  In the case of divorce, your spouse may continue receiving benefits after the divorce unless provisions are written into the trust to mitigate this risk.

You and your spouse may consider creating SLATs for each other.  But if the two of you are left in the same economic position after the transfers to the SLATs, the IRS will disregard your gifts.  If you both wish to create SLATs, expert legal advice is required to confirm the trusts are materially different from one another and to advise on the risks of the trusts being disregarded.

Common situations where SLATs make sense include:

  • You own a business that you plan to sale. You want to make a gift to pass the appreciation out of your estate, but you also want your spouse to have access to funds after the sale. 
  • You and your spouse both have separate property that you want to gift to your children and grandchildren, but you do not want them to be immediate beneficiaries.
  • Your spouse is younger than you, so in making gifts to your children, you also want to make sure there are enough assets available for your spouse during their remaining lifetime

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IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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