Insights

Maximizing Wealth Transfer: Spousal Lifetime Access Trust (SLAT)

04.03.24

When it comes to estate planning, one of the most common goals is to transfer wealth to loved ones in the most tax-efficient manner possible. One strategy that can help achieve this goal is the Spousal Lifetime Access Trust (SLAT).

What is a Spousal Lifetime Access Trust (SLAT)?

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust that is created by one spouse for the benefit of the other spouse (or other beneficiaries). The trust is funded with assets that are gifted by the spouse creating the trust, and the other spouse is named as the beneficiary. The trust is typically structured so that the beneficiary spouse has access to the trust’s income and principal during their lifetime, but the assets are distributed to other beneficiaries, such as children or grandchildren, upon the beneficiary spouse’s death.

How Does a SLAT Work?

To create a SLAT, the spouse creating the trust (known as the grantor) transfers assets into the trust, removing them from their estate for tax purposes. The grantor can give up to the annual gift tax exclusion amount to the trust without incurring gift taxes. The beneficiary spouse then has access to the trust’s income and principal, providing them with a source of income and financial security.

Upon the beneficiary spouse’s death, the assets in the trust are distributed to the other beneficiaries named in the trust. This allows for the transfer of wealth to future generations while minimizing estate taxes.

Why is a SLAT Beneficial for Wealth Transfer?

lifetime gift tax exemption

Use of Current Lifetime Gift Tax Exemption

Current federal estate and gift tax exemptions stand at $13.61M per individual for 2024 – but are set to expire on December 31, 2025. The IRS recently issued “anti-clawback” regulations confirming that individuals will be able to use current gift tax exemption amounts and not be penalized if the exemption is reduced in the future. SLATs help take advantage of this “use it or lose it” opportunity – permitting individuals to use their significant current lifetime gift tax exemptions now even though they will be reduced in the future.

Tax Reduction

Once assets are gifted to the SLAT, the gifted assets can grow estate tax free and are not included in either spouse’s taxable estate at death. For example, if an individual gifts $5M to a SLAT and the gifted assets grow in size to $20M, the entire amount escapes the estate tax. The Rule of 72 proves principal doubles in value every 10 years assuming a 7% return on investment. If the same individual otherwise retained the same $5M and the assets grew to $20M at death, the current estate tax exemption may only cover the first $13.61M. The remaining amount could be subject to federal estate tax (currently 40% or $2,556,000 in additional tax).

Asset Protection

Because the assets in a SLAT are held in an irrevocable trust, they are protected from creditors and lawsuits. This can provide peace of mind for the grantor and beneficiary spouse, knowing that the assets are secure.

Flexibility

A SLAT can be structured to provide the beneficiary spouse with access to the trust’s income and principal, providing them with financial security. However, the trust can also be structured to limit the beneficiary spouse’s access to the assets, ensuring that the assets are distributed to other beneficiaries.

Control Over Distribution

By creating a SLAT, the grantor can control how and when the assets are distributed to the other beneficiaries. This can be especially beneficial if the grantor wants to ensure that the assets are used for specific purposes, such as education or healthcare expenses.

How to Create a SLAT

trustee

Choose a Trustee

The trustee is responsible for managing the trust and making distributions to the beneficiary spouse. The trustee can be a family member, trusted friend, or a professional trustee, such as a bank or trust company.

Select Beneficiaries

The beneficiary spouse is typically the primary beneficiary of the trust, but other beneficiaries can also be named, such as children, grandchildren, or other beneficiaries. The utilization of a SLAT coupled with a generation-skipping plan design could save families significant money in estate taxes over several generations.

Draft the Trust Document

The trust document outlines the terms and conditions of the trust, including how the assets will be managed and distributed.

transfer assets to trust

Transfer Assets to the Trust

Once the trust document is drafted, the grantor must transfer assets into the trust, which can include cash, stocks, real estate, or other assets. This can be done through a formal transfer of ownership or by designating the trust as the beneficiary of certain assets, such as life insurance policies.

gift tax return

File Gift Tax Return

If the value of the assets transferred to the trust exceeds the annual gift tax exclusion amount, a gift tax return must be filed. However, no gift taxes will be owed unless the grantor has exceeded their lifetime gift tax exemption amount. In 2024, individuals can transfer $13,610,000 free of estate, gift and GST tax during their lives or at death; married couples can transfer $27,220,000 during their lives or at death.*

Considerations for SLATs

irrevocable

Irrevocable

Once assets are transferred into a SLAT, they cannot be removed or changed. This means that the grantor will no longer have control over the assets, so it’s important to carefully consider the assets being transferred into the trust.

tax consequences

Tax Consequences

While a SLAT can help reduce estate taxes, there may be gift tax consequences when funding the trust. It’s important to work with a financial advisor or tax professional to understand the potential tax implications.

state laws

State Laws

Trust laws vary by state, so it’s important to work with an attorney who is familiar with the laws in your state when creating a SLAT.

A Spousal Lifetime Access Trust (SLAT) can be a valuable tool for maximizing wealth transfer and reducing estate taxes. By working with an MAI financial advisor and an attorney, you can determine if a SLAT is the right strategy for your estate planning goals and create a plan that meets your needs. To learn more, reach out to an MAI advisor.


Information updated as of March 26, 2024. This is for educational purposes only.  The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

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