What's a SLAT? 10 Things to Know on How Spousal Lifetime Access Trusts Work

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10 Things to Know About Spousal Lifetime Access Trusts

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Financial Planning > Trusts and Estates > Trust Planning

10 Things to Know About Spousal Lifetime Access Trusts

By Tom Nawrocki

Slideshow February 10, 2022 at 01:45 PM Share & Print

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Related: 10 Things Advisors Should Know About Grantor Trusts

For people who want to move assets out of their estate while also providing a legacy for their spouse and children, a spousal lifetime access trust can be the perfect vehicle.

A SLAT is an irrevocable trust set up while both spouses are still alive, in which the other spouse is the designated beneficiary. It can even help you avoid gift tax.

Read through the gallery above to learn how it works.

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10 Things to Know About Spousal Lifetime Access Trusts

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1. You, as the grantor, make a gift to the SLAT, giving up all your rights to the assets while gifting them to your spouse. It’s protected from gift tax as long as you use your federal lifetime gift exemption, which is a little over $12 million right now.

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2. If you and your spouse get divorced, the assets in the trust would remain with your now ex-spouse. To prevent this eventuality, you can set up the SLAT so that only your current spouse is the beneficiary of the trust. The SLAT can also give your spouse the power to direct the funds back to you upon her death, if needed.

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3. Other family members, such as children and grandchildren, can also be beneficiaries of the trust. You’ll want to name more beneficiaries than just your spouse, in case your spouse is the first one to die.

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4. If you want to fund the SLAT with something like real estate or a closely held business, you, the grantor, can still retain control of that entity. You can also set up the trust to limit the ability of the beneficiaries to control whatever entities are placed in the trust.

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5. Assets gifted to a SLAT do not receive a step-up in income tax basis at the grantor’s death since they are not included in your taxable estate. Instead, they retain the grantor’s carryover basis. This can incur sizable capital gains taxes if and when the beneficiaries choose to sell any appreciated assets from the trust.

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6. If you’re concerned about protecting the assets in the trust, an incomplete gift SLAT may make sense. If you get sued or divorced after setting up the trust, the incomplete gift SLAT protects the assets. One downside, though, is that since the gift is incomplete, the assets don’t get moved out of your estate for tax purposes.

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7. You, the grantor, have a lot of authority and flexibility with earmarking any spousal distributions from the trust. You can limit them to be used for specific purposes, such as medical care, or create a schedule when the distributions may be made.

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8. Any assets held jointly with your spouse must be separated well before they are put into the SLAT. Without a sufficient interval of time, The IRS may decide that the assets still technically belonged to your spouse, who may end up being responsible for taxes on the transfer.

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9. As the grantor of the trust, you are responsible for income taxes incurred on any appreciating assets held in the SLAT. But since you have no rights to the assets in the trust, you cannot use those earnings to pay the taxes. That money will have to come from somewhere else.

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10. For 2022, you can give a total of $12.06 million free of federal gift tax, but this is scheduled to revert back to $5 million per person (adjusted for inflation) at the end of 2025. So if the assets you are considering funding the trust with are significantly higher than $5 million, you may want to consider moving on this strategy in the next few years.

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