A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse during their lifetime. The Settlor of the trust makes an irrevocable gift of assets to the SLAT for the benefit of their spouse and descendants. The assets gifted to the SLAT and any appreciation are removed from both spouses’ taxable estate. A SLAT is a way to use the current high lifetime gift tax exemption amounts to gift assets outside of your estate to a trust for your spouse while still having indirect access to those assets through your spouse.
Most SLATs are grantor trusts for federal income tax purposes, meaning the Settlor will pay the income tax for the SLAT. If the SLAT is a non-grantor trust, it is called a SLANT - Spousal Lifetime Access Non-Grantor Trust. Determining whether a SLAT or SLANT is best for your situation depends on your tax situation, which state you reside in, and whether you would prefer to pay the income tax or have income taxed to the trust.
You may have heard of a Bypass Trust where a surviving spouse has access to principle and income after their spouse is deceased. The difference between a SLAT and a Bypass Trust is a SLAT is funded while both spouses are alive while a Bypass Trust is funded at the death of either spouse. The allure of a SLAT is that they are flexible and can be done while you are still living with so many benefits. We do not know what the exemption amount will be at our death, but we do know the exemption amount is high today and could be substantially reduced in the future.
Reciprocal Trust Doctrine - It is not uncommon for spouses to create SLATs for each other. In this case, it is important to make sure these trusts are distinct from each other. If both trusts are substantially the same, the IRS may claim that each spouse simply made a gift to themselves and pull the assets back into both spouses’ estates. A good drafting attorney can make sure this issue is avoided. Many attorneys recommend creating SLATs in different jurisdictions with different trustees.
Death or Divorce - At the death of either spouse, the beneficiaries have complete control of the trust, and the donor spouse may no longer have indirect access to the trust assets. In the case of divorce, the ex-spouse can still benefit from the trust assets and the donor spouse has most likely lost indirect access.
Trust Situs Matter – It is important to have your SLAT drafted under one of the 19 states that have a Domestic Asset Protection Statute. This will increase your asset protection and safeguard you against any argument that may come back and say you benefited personally from the trust.
We have seen this before. In 2012, commonly referred to as the “fiscal cliff,” the estate tax exemption, $5.12M at the time, was set to revert to $1M on January 1, 2013. Many clients were fearful that if they did not use their exemption amount, they would lose it, and clients rushed to set up SLATs and other irrevocable trusts. Congress eventually did not allow for the exemption amount to expire, but many clients had plans in place if they did. It is better to be safe than sorry.
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