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Estate Planning and Spousal Lifetime Access Trusts (SLATs)

Spousal Lifetime Access Trusts (SLATs) are an increasingly popular option for estate planning. When you transfer an asset into a SLAT, you lock in the current federal lifetime gift and estate tax exclusion (currently at $11,580,000 per person, a historically high figure) to avoid paying estate tax on the assets in the trust and any appreciation.

A compelling reason to use a SLAT is that the donor/grantor usually benefits from the trust during their lifetime because it’s payable to their spouse.

How a SLAT Works

The grantor/donor makes a gift to fund the trust. You can gift any type of asset that’s suitable for a trust, including cash, marketable securities, or life insurance.

After the value of the gift is determined, the grantor will file Form 709 (a gift tax return) that reports the gift to the IRS. It's possible to structure the gift to use the grantor's remaining gift exemption fully.

Any appreciation of assets in the SLAT are excluded from the grantor and their spouse’s estates upon their deaths.

While the grantor’s spouse is the beneficiary of the SLAT, it’s possible to name more beneficiaries in addition to the spouse, such as children, grandchildren, charities, and friends, by adjusting the trust's provisions.

Provisions governing the SLAT are flexible so you can customize them to your needs. If you want to preserve wealth, you’ll use your provisions to limit distributions.

However, if you’re using a SLAT for estate planning purposes, it’s possible to use the provisions to permit more liberal distributions than even include the principal.

The Tax Implications of a SLAT

For tax purposes, a SLAT functions as a grantor trust. The grantor will pay income taxes on any income earned by the SLAT; this results in another tax-free gift to the trust’s beneficiaries.

If the grantor’s spouse dies, it’s possible to restructure the SLAT so that it’s no longer a grantor trust. Or, new beneficiaries can be named if you prefer to maintain the SLAT’s grantor trust status.

It’s possible to create a SLAT that permits the grantor to exchange trust assets for another asset of equal value. If the grantor removes appreciated assets from the SLAT, these assets qualify for an income tax basis step-up upon the grantor’s death. This removes the unrealized appreciation of the assets in the SLAT.

Potential Drawbacks of Using a SLAT

Any assets in the SLAT at the time of the grantor’s death don’t qualify for the step-up in income tax basis. They’ll retain the carryover basis; this can mean there will be high capital gains when they are sold within the SLAT.

The grantor will no longer benefit from the trust when the beneficiary spouse dies. Since the income was payable to the grantor's spouse, the grantor will no longer benefit from this income.

Should the grantor and their spouse divorce, the grantor will no longer have access to the assets in the SLAT.

One potential workaround for spousal death or divorce is to define spouse in the SLAT agreement as the individual the grantor is currently married to.

How to Set Up a SLAT

Contact DPH Financial Services online or by calling 858-400-7410. We offer multiple services to assist with your estate and income planning.

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