Until Death Do Us Part: Exploring the Spousal Lifetime Access Trust (SLAT)
What is a Spousal Lifetime Access Trust (SLAT)?
The Spousal Lifetime Access Trust (SLAT) is an irrevocable trust that benefits the donor’s spouse and children. Through a SLAT, a donor may reduce a spouse’s exposure to estate taxes at death by taking advantage of the gift tax exemption.
What does a Spousal Lifetime Access Trust do?
The Spousal Lifetime Access Trust provides a living spouse with access to an income or principal. In cases of other estate planning tools, such as a bypass trust, the spouse usually has to be deceased in order for the survivor to access the trust. However, with a SLAT, the funds are received through the gift tax exemption. SLATs are also a way that Crummey letters can be avoided. In addition to having access and control over finances, the SLAT provides a way to avoid extremely high tax exemptions.
What are the benefits of a SLAT?
One of the major benefits of the Spouse Lifetime Access Trust is the ability to access funds under the gift tax exemption without taking a “permanent loss”. A SLAT allows access to just a spouse or their children. As a byproduct, this makes the assets you place in the trust unreachable by potential creditors, making it a solid tool for asset protection. Your spouse can then access the funds and share them with you.
A SLAT may also automatically distribute income or make income distributions discretionary, and may prevent any distributions of principal or allow principal distributions at the trustee’s discretion. SLATs gained popularity in 2012 as a way to transfer up to $5.12 million dollars under the gift tax exemption. The amount of gift tax exemption was 5.12 million back in 2012, and has risen to $11.2 million in 2018.
A SLAT also provides a way to avoid Crummey letters, although it is similar to a Crummey Trusts. A Crummey Trust is a trust that allows a parent to make lifetime gifts to his or her children, free from gift or estate taxes as long as the amount is equal to or less than the permitted amount (currently $15,000 per year), while protecting the money in a trust. Crummey letters are simply letters notifying the beneficiaries each year informing that they can withdraw the gifted amount during a specified window, usually 30 days. Usually, the beneficiary leaves the money in the trust.
What are the downfalls of a SLAT?
Though the SLAT has many benefits, of course with pros comes cons. One downfall is if you get divorced, you lose all of the enclosed assets. Of course divorces are typically sad within themselves. However, all of your partner’s assets will no longer be available. Death, another ominous topic, also plays a role in the SLAT. If your partner dies, you also may not be able to access your spouse’s property. Also, having this amount of access comes with a hefty price tag, as the approximate cost of setting up a SLAT is $2,000.00.
What Are Some Other Issues I May Run Into?
Aside from the issues listed above, another issue that may arise is the Reciprocal Trust Doctrine. The Reciprocal Trust Doctrine is a judicially-created doctrine developed in response to the perceived tax-avoidance where two parties create trusts for each other which, in effect, leave each other lifetime enjoyment over property while avoiding inclusion in the gross estates. This can cause conflict due to the Doctrine stating that if two people each create similar trusts for one another (such as SLAT’s for each one), the courts can “uncross” the trusts and treat the situation as if each person created a trust for his/her own benefit. So if two spouses each have 5 million dollar trusts funds, the IRS may not consider them as Spousal Lifetime Access Accounts and the enclosed assets may no longer be exempt from tax.
How Can I Avoid the Issues That Come with SLAT?
Some tips to avoid all issues and discrepancies:
- Have a set amount that you and your spouse want in your trust. Making sure it does not exceed a certain amount, preferably 11.2 million or higher, will secure that you do not exceed the limit for tax exemptions.
- Make sure the trusts have an equal amount of similarities and differences.
- Make sure to cover all aspects, including death, divorce, and children when it comes to your trust.