Estate Planning Insider: Benefits and Pitfalls of Spousal Lifetime Access Trusts

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Senior Advisor, Benjamin Trujillo J.D., LL.M. –

A spousal lifetime access trust (SLAT) is a type of irrevocable trust that offers numerous benefits for married couples. In general, the purpose of a SLAT is to provide financial security and estate planning benefits while also allowing the person creating the trust (the “Grantor”) to maintain some control over how the assets they contributed will be held and distributed to beneficiaries.  SLATs are also an effective tool for taking advantage of historically high estate tax exemptions before they are expected to drop after 2025.  In fact, depending on an individual’s net worth, it can make sense for married couples to create separate SLATs for each other.

Here are some of the key benefits of using a SLAT:

1. Estate tax savings: One of the primary benefits of a SLAT is that it can reduce estate taxes if properly structured. When assets are transferred into a SLAT, they are removed from the grantor’s estate for federal estate tax purposes, which can lower the value of the estate and reduce the tax liability.
2. Asset protection: Assets held in a SLAT may be protected from creditors and lawsuits. This can be especially beneficial for individuals in high-risk professions or those with a higher likelihood of being sued.
3. Protection against remarriage: If one spouse dies, the surviving spouse may choose to remarry. A SLAT can protect the assets of the deceased spouse by ensuring that they are not commingled with the new spouse’s assets and ensuring that assets make it to descendants if so desired.
4. Flexibility: A SLAT is customized to fit the needs of each individual couple. The trust can be designed to provide income or principal to the spouse, but can also include provisions for distributions to other family members or charitable organizations.
5. Taxation: A SLAT usually is a Grantor Trust, meaning the trust income is taxed to the Grantor. By doing this, the grantor is able to effectively reduce the grantor’s estate by paying taxes for the trust without being deemed to make a gift to the trust.
6. Privacy: When assets are held in a trust, they are not subject to probate, which can be a public process. This provides greater privacy and protection for the grantor’s family as a whole.
7. Control: While a SLAT is an irrevocable trust, the grantor decides when creating the trust how the assets will be distributed. Frequently, the grantor names his or her spouse as the trustee and, subject to some limits, gives the trustee some discretion for making distributions to the family.  This keeps control of the assets in the family and so long as the grantor and the grantor’s spouse are living and married, the assets in the trust can be used for the family’s benefit.

While a SLAT has many benefits, there are some potential risks and drawbacks to consider, including:

1. Loss of control: When the grantor transfers assets to a SLAT, he or she gives up control over those assets. While the grantor might still have some influence over how the trust is managed, it is very difficult to alter the disposition of the assets or claw them back.
2. Estate tax changes: While a SLAT is an effective tool for reducing estate taxes, changes in tax laws could impact the effectiveness of the trust. For example, if the estate tax is eliminated, the grantor might wish they hadn’t transferred the assets. Additionally, the government might enact sweeping changes to the tax code that reduce or eliminate the effectiveness of the trust.  While these outcomes are unlikely at present, they continue to be possible.
3. Reciprocal Trusts: If spouses create SLATs for each other, they must be very careful not to run afoul of the “Reciprocal Trust Doctrine” which would severely limit the effectiveness of the SLATs.
4. Divorce: If the grantor and their spouse divorce, the assets in the trust could be subject to division as marital property. Additionally, if the trust was created with the primary goal of providing for the spouse, the grantor may need to modify or revoke the trust to reflect the changed circumstances, which can be difficult and expensive.
5. Mortality: if the grantor establishes a SLAT for a spouse and the spouse dies unexpectedly, the benefit of the SLAT may be lost, as the assets in the SLAT will typically then pass on to the grantor’s children and the grantor’s ability to benefit from the assets will be severely constrained.
6. Changes in circumstances: The grantor’s financial or personal circumstances could change in unexpected ways that make the trust less effective. It is important to ensure that if you choose to create a SLAT, that you have access to other assets to ensure a comfortable life.
7. Cost: Creating and managing a SLAT can be expensive, and there may be ongoing costs associated with maintaining the trust.

In conclusion, a spousal lifetime access trust (SLAT) can offer numerous benefits for married couples but is not without risk. As you consider whether a SLAT is the right choice for you and your family, it’s probably worth consulting with a financial advisor or estate planning attorney to evaluate your options and find the best strategy for your needs.

If you would like to learn more, you can contact me at 314-735-9106 or at btrujillo@monetagroup.com.

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