Spousal Lifetime Access Trusts (SLAT): Pros and Cons

Understanding Spousal Lifetime Access Trusts

A properly-drafted trust can be a powerful estate planning tool, providing care and comfort for loved ones while minimizing taxes for surviving family members. In the case of the Spousal Lifetime Access Trust (SLAT), you could be able to provide your surviving spousepartner with income for the rest of their lives (or vice versa). However, you need to know the full implications of a SLAT before you revise your estate plan.

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What is a Spousal Lifetime Access Trust?

Under the terms of a SLAT, the donor spouse gives certain assets to the trust for the benefit of the other (the beneficiary spouse). SLATs are irrevocable trusts, so the transferred assets are excluded from the donor spouse’s estate for estate tax purposes. 

The beneficiary spouse may access the trust income and principal for their health, education, maintenance, and support. However, the beneficiary spouse does not have direct control over the funds. Instead, a trustee manages the trust’s assets according to the terms set forth by the donor spouse.

A SLAT is almost always created during the grantor’s lifetime. It is a powerful tool that provides the family a high level of asset protection and tax advantages when it is properly drafted. As of this writing, it’s one of the most popular; yet slightly misunderstood, irrevocable trusts available.

Spousal Lifetime Access Trusts: Pros and Cons

The key advantage of a SLAT as an estate planning strategy is its ability to reduce estate tax liability. Spouses may also leverage the annual gift tax exclusion and lifetime exemption to cover larger transfers without incurring taxes.

Pros of a SLAT

  • Security. The beneficiary spouse may access income from the trust to cover personal expenses, making the SLAT an effective vehicle for providing ongoing financial support while reducing estate taxes.
  • Asset Protection. If the donor spouse faces potential creditors or liabilities, transferring assets to a SLAT may help protect those assets from claims, as long as the trust is properly structured and not deemed a fraudulent transfer.
  • Flexibility. The SLAT can be structured to allow for distributions to other family members, such as children or grandchildren, either during the lifetime of the beneficiary spouse or upon the spouse’s death. 
  • GST Tax Exemption. Transfers may fall under the generation-skipping transfer (GST) tax exemption if the trust benefits grandchildren or more remote descendants.  

Cons of a SLAT

  • Irrevocability. A SLAT is an irrevocable trust, meaning once assets are transferred, the donor spouse cannot retrieve or alter the terms of the trust. This inflexibility can be a significant downside for individuals who might need access to those assets in the future.
  • Loss of Access. If the beneficiary spouse passes away first, the donor spouse loses indirect benefits of the assets in the trust, which the trustee must distribute to successor beneficiaries. If the couple divorces, the beneficiary spouse could lose those assets forever.
  • Complexity. Structuring and managing a SLAT can be complex and may require ongoing legal and financial advice. Mistakes in drafting or administration could lead to unintended tax consequences.
  • Income Tax. Because the SLAT is an irrevocable trust, the trust itself may be liable for paying income taxes on any income generated by the trust’s assets. Alternatively, income may be passed through to the beneficiary spouse, who will report it on their tax return.  
  • Capital Gains Tax. Assets in a SLAT do not receive a step-up in cost basis upon the donor spouse’s death, which could increase capital gains tax liability for beneficiaries.

SLATs and the Reciprocal Trust Doctrine

High-net-worth spouses may want to cover their bases by setting up SLATs for each other. Unfortunately, if this isn’t done by a professional, the reciprocal trust doctrine could apply. This legal doctrine states that the IRS can treat the trusts as if they are not separate for estate tax purposes. If the IRS determines that the trusts are essentially reciprocal, it may treat the assets in both trusts as though they belong to the spouses’ estates, thereby negating the intended tax benefits.

The main consideration when creating couples’ SLATs is they must differ in some material respect to avoid triggering the reciprocal trust doctrine. The IRS has established specific guidelines on how to avoid reciprocal trusts. For example, one spouse may have greater control over the trust or may have a different class of beneficiaries. The goal is to ensure that the trusts are not considered mirror images of each other.

Unfortunately, I’ve seen and heard about reciprocal trusts more often than I’d like to admit. 

Alternatives to a SLAT Irrevocable Trust in Florida

While a SLAT is a powerful tool, it may not always be the best choice for every couple. There are several alternatives to consider when planning for wealth transfer and minimizing estate taxes:

  • Charitable Remainder Trust (CRT). A CRT allows donors to receive income from the trust for some time, after which the remaining assets pass to a charity. 
  • Dynasty Trusts. A dynasty trust is a long-lasting irrevocable trust that distributes wealth to multiple generations without incurring estate taxes—a powerful way to preserve family wealth over time.
  • QTIP Trusts. A Qualified Terminable Interest Property (QTIP) trust leverages the unlimited marital deduction between spouses to defer estate taxes until the surviving spouse’s death.

Choosing a Trustee for Your SLAT

Choosing the right trustee is crucial to your spouse’s future happiness. The trustee of your SLAT is responsible for managing the trust’s assets, making distributions, and ensuring compliance with the terms of the trust. Your appointee should rank highly on:

  • Expertise. The trustee should understand trust administration, tax laws, and investment management.
  • Neutrality. While it’s common for the beneficiary spouse to serve as the trustee, selecting an independent trustee (e.g., a corporate trustee or a trusted advisor) may be wise to avoid potential conflicts of interest or complications with the reciprocal trust doctrine.
  • Judgment. The trustee may need flexibility to manage investments, make distributions, and adjust the trust structure as needed.

Finally, you should carefully consider what powers the trustee should have. The more information you provide, the more likely your wishes will be followed. Ensure the trust has a clear succession plan in case the trustee is unable or unwilling to serve.

Asset Protection That Leaves No Stone Unturned  

A trusted estate planning lawyer can ensure your trust is properly funded, structured, and administered in line with legal requirements and family goals. Email us at [email protected] today or schedule a 15-minute call to see how we can help.

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