Understanding a Spousal Lifetime Access Trust (SLAT)

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A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust established by one spouse (the grantor spouse) for the benefit of the other spouse (the beneficiary spouse) during the beneficiary spouse’s lifetime. The beneficiary spouse may receive distributions from the SLAT according to the trust agreement, allowing the couple to maintain access to the assets held within the SLAT. Upon the beneficiary spouse’s death, the trust assets are distributed as specified in the trust agreement. 

The SLAT is designed to utilize the grantor spouse’s estate tax exemption while allowing the beneficiary spouse to use and benefit from the assets of the SLAT during their lifetime. However, the assets in the SLAT should generally only be accessed in cases of necessity, as the primary goal is to remove these assets from the couple’s taxable estates. The assets held in the SLAT, including any appreciation, are not included in either spouse’s estate for estate tax purposes.

• Access to trust assets:  The beneficiary spouse can access the trust assets. 
• Reduction of taxable estate: The SLAT reduces the taxable estate of the grantor spouse. 
• Asset protection: The SLAT provides asset   protection from potential creditors' claims for both spouses. 
• Tax-free   appreciation:  Assets in the SLAT can appreciate in value within the trust free of   additional transfer taxes. 
• Generational   transfer:  Property in the SLAT can pass tax-free to future generations, as permitted by   state law. 
• Beneficiary   spouse as trustee:  The beneficiary spouse can serve as the trustee. 
• Grantortrust benefits:  As a grantor trust, the SLAT's assets grow income tax-free because the income   taxes are reported on the grantor spouse's personal income tax return,   leveraging the estate tax and asset protection benefits. 
• State inheritance tax avoidance: The SLAT can help avoid state   inheritance taxes for future generations. 
• Income tax planning:  A SLAT can include a substitution/swap power, providing the grantor spouse with   additional income tax planning opportunities.

In many cases, each spouse creates a SLAT for the benefit of the other. To avoid invalidation under the Internal Revenue Code, the terms of the SLATs must differ. This can be achieved by implementing several variations, such as: 

• Creating each SLAT in different tax years.
• Granting different powers to the beneficiary spouse in each SLAT.
• Funding the SLATs with different types and amounts of assets.
• Including additional beneficiaries, such as children, in one of the SLATs. 

Once established, each grantor spouse funds their respective SLAT with their separate property – jointly owned property cannot be used. If only joint property is available, steps must be taken to convert it to separate property before funding the SLAT. After funding the SLATs, each grantor spouse must file a gift tax return to report the gifts made, even if the contribution does not exceed their remaining estate tax exemption.

A SLAT may be appropriate if any of the following apply:· 

• You are a married couple with a taxable estate or wish to plan for a possible estate tax liability while retaining some access to the assets in the SLAT during your lifetime.
• You are not yet ready to distribute wealth to your children or other beneficiaries but want to maximize the use of the estate tax exemption.
• You have sufficient cash flow outside of the SLAT to comfortably cover potential future expenses.
• You reside in a state that imposes a state-level estate tax.