A spousal lifetime access trust (SLAT) can go a long way in providing for one’s family. It’s an irrevocable trust into which one spouse puts assets for their partner and beneficiaries. They can draw upon the trust’s income and may even be able to access the principal in some conditions.
A SLAT can also generate some tax advantages as it removes the named assets from the grantor’s estate, reducing their overall taxable assets.
Are the benefits of a SLAT worth the time to draw one up? In this article, we discuss how the trust works, its advantages, and some potential drawbacks.
How a SLAT Works
To set up a SLAT, the grantor gifts their assets—cash, life insurance, commodities, real estate, and so forth—to their beneficiaries. The grantor then reports the gifts on their tax return.
Once the SLAT is launched, the grantor designates someone to manage the trust. Often, the trust manager is the beneficiary spouse, but an independent manager outside the family is also a possibility.
Depending on the terms of the trust agreement, beneficiaries can get distributions from income generated by the trust. They may be able to draw from the principal amount of the trust as well.
Assets in a SLAT are safeguarded from creditors and legal action. That’s because they’re no longer in the grantor’s direct control. For the same reason, trust assets are excluded from the grantor’s estate, which can reduce the estate tax. Donors can also use their lifetime gift tax exemption in a SLAT to lessen their tax burden.
The trust remains in effect until it’s terminated according to the conditions outlined in the trust agreement. This could be a predetermined date or something triggered by a certain event (usually the death of the spousal beneficiary). When that happens, the assets are transferred to other beneficiaries, like the couple’s children.
One of the main things to remember about a SLAT is that it’s irrevocable. Once assets are moved into it, they’re no longer part of the estate and are excluded from tax liability. The irrevocability also safeguards the assets and makes conditions clear.
Advantages of a SLAT
Some of the “pros” of a spousal lifetime access trust include the following:
Tax savings: By removing the assets from the taxable estate, the grantor and beneficiaries can potentially get a smaller tax bill.
Sheltering assets: Assets placed in a SLAT are defended against creditors and potential lawsuits since they’re no longer part of the estate.
Flexibility: The trust can help provide sustained income for the beneficiary spouse and future generations.
Preservation of wealth: A SLAT keeps assets in the family name and out of government hands, making it easier for future family members to preserve wealth.
Potential Disadvantages of a SLAT
Some of the “cons” of a SLAT may include the following:
Irrevocability: Once assets are placed in a SLAT, they can’t be recovered. This could make trust management challenging.
Expenses: The cost of setting up and managing a SLAT can be a financial burden, especially when it’s managed by a party outside the family.
Complexity: The legal and tax implications of a SLAT require the trust manager to be a careful and diligent planner, especially when overseeing investment decisions and distribution.
Loss of control: The grantor signs away all ownership over SLAT assets, so they’re no longer in control of those assets. Of course, this can also be considered an advantage—one less thing to worry about.
Learn More About SLATs From Experienced Financial Advisors
Anderson Financial Strategies works with estate planning attorneys and CPAs to help families map out their futures with trusts, estate planning, and other related services. We strive to differentiate ourselves by practicing regular communication, full disclosure, and due diligence. You can’t put a price on the level of confidence you’ll find.
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About Shon
Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 20 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER® practitioner and holds the Chartered Financial Analyst® (CFA®) certification. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as an adjunct professor teaching personal finance courses at Wright State University, leads CFP® exam review courses for Keir Educational Resources, and is president of the CFA Society Dayton. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dog, Jack. Over the years, Shon has been involved in several volunteer organizations including the Wright State chapter of Delta Tau Delta as an alumni advisor and was a Big Brother in the Big Brothers/Big Sisters program. To learn more about Shon, connect with him on LinkedIn.