If you wish to use your estate tax exemption during your lifetime to remove assets from your taxable estate, you must gift assets away and relinquish the beneficial interest and control over those assets. Considering this, a popular choice has been to gift assets to a Spousal Lifetime Access Trust (SLAT), which is an irrevocable trust naming your spouse as the beneficiary. If structured properly, the assets will be outside of the estate tax system. Your spouse will be eligible to benefit from the Trust, enabling you to receive an indirect benefit through your spouse. Further, your spouse can be the trustee over the trust with the ability to control the assets and distributions as long as such distributions are subject to an ascertainable standard1.
How a SLAT Works
1. Creation and Funding:
One spouse, known as the grantor or donor, creates the SLAT and transfers assets into it. These assets can include cash, marketable securities, real estate, business entities, or life insurance. It’s crucial that only assets owned solely by the donor spouse are transferred to the SLAT. It is possible to convert assets to be owned by a particular spouse, but care must be taken that this is done properly. Note that there is currently an unlimited marital deduction, meaning that there is no limitation or transfer tax when gifting assets directly to a spouse.
2. Beneficiaries:
The non-donor spouse is typically the primary beneficiary, with other family members, such as children or grandchildren, often named as secondary beneficiaries. The trust may provide that distributions can be made to the primary beneficiary at the exclusion of the secondary beneficiaries entirely.
Advantages of SLATs
Estate Tax Benefits
By gifting assets to a SLAT, the donor spouse removes these assets from their taxable estate, and the assets will no longer be subject to an estate tax at their death
Access to Assets
The non-donor spouse can still access the trust’s assets, providing financial flexibility while benefiting from the tax advantages.
Creditor Protection
Assets owned by the irrevocable trust may have the additional benefit of being protected against creditors.
Potential Drawbacks
Loss of Access:
If the non-donor spouse dies or the couple divorces, the donor spouse loses indirect access to the trust’s assets.
Loss of Stepped-Up Basis:
Under our current tax rules assets owned by an individual at death and subject to estate taxes will receive a stepped-up basis for the recipient. However, assets that are gifted during life, transfer the same basis to the recipient.
Complexity:
This trust requires an income tax return to be filed annually. It may be beneficial for you to structure this trust as a “Grantor Trust” which means that the donor spouse will be liable for all the income tax produced inside the Trust. Trusts are generally taxed at the highest income tax bracket, so this would help to reduce the income taxes.
Is a SLAT Right For You?
A SLAT can be a powerful tool for high-net-worth couples looking to reduce their estate tax burden while maintaining some access to and control over their assets. However, they are complex and require careful planning. Consulting with an estate planning attorney or financial advisor is essential to determine whether implementing these trusts in your estate plan aligns with your financial goals and circumstances.
By understanding the mechanics and benefits of a SLAT, couples can make informed decisions about their estate planning strategies, aimed at maximizing their financial legacy while mitigating tax liabilities.
1Limiting distributions of income and principal for their Health, Education, Maintenance or Support as authorized under IRC §2041(b)(1)(A)
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
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