SLAT

SLATs are a flexible and inexpensive lifetime estate planning tool for married couples wishing to shelter assets who see the family as a team. As part of an Estate Plan, SLATs are principally an Asset Protection Tool.

How Do I Form a SLAT?

Let’s call the spouse who creates the trust the “Grantor Spouse” and the spouse who benefits from the trust the “Beneficiary Spouse.” The Grantor Spouse creates a Spousal Limited Access Trust by executing an Irrevocable Trust for the Beneficiary Spouse’s benefit, giving the Beneficiary Spouse limited access to the trust assets. Access is “limited” to provide shelter from creditors and death taxes.

What is the Purpose of a SLAT?

Simply put, the goal is to move assets into the SLAT and out of the Grantor Spouse’s name and estate so they can provide care for the Beneficiary Spouse limited enough to shelter the property from the Beneficiary Spouse’s future creditors, spouses and from being included in the Beneficiary Spouse’s taxable estate.

SLAT Pros and Cons 

Pros:

• Asset protection. The amount of protection will depend on many things, including the trust’s terms.
• A SLAT provides an excellent savings vehicle for couples who regularly put aside assets for retirement over and above their 401k.
• A SLAT can provide a shelter for investments in a start-up company.
• A SLAT can be a Grantor Trust, allowing the Grantor Spouse to pay the trust’s income taxes, Gift Tax-free.
• Partial federal death tax protection.
• Avoiding the Pennsylvania and New Jersey Inheritance Taxes.
• Reducing conflict in case of divorce. If each spouse forms a SLAT for the other and divides up assets while the marriage is healthy, then potentially there are fewer disputes during the divorce.
• The SLAT can provide income or principal not only to the Beneficiary Spouse but also descendants.
• At the Beneficiary Spouse’s death, the trust assets can immediately be available to provide care for descendants, despite the Beneficiary Spouse’s estate being mired down by lawsuits, or other tax or legal complications.
• If the Grantor Spouse dies, the SLAT assets are kept separate from the Beneficiary Spouse’s subsequent spouse.
• A SLAT is essentially a Credit Shelter Trust or Bypass Trust set up during life rather than at death. The SLAT’S shelters the gifted assets plus growth from the date of the gift onwards rather than starting at death.
• The SLAT can be arranged to avoid state income taxes.
• A SLAT can be drafted to keep assets within the family.
• A SLAT can serve as a Dynasty Trust, sheltering assets from children and grandchildren’s divorces, creditors and legal complications.

Cons:

• Once transferred, the SLAT assets cannot return to the Grantor Spouse. But, of course, the Beneficiary Spouse can always voluntarily share distributions with the Grantor Spouse.
• If they divorce, the SLAT assets are for the Beneficiary Spouse. If divorce is a concern, there are drafting options such as defining “spouse” as the person to whom the Grantor Spouse happens to be married to at any time or the trust can shift at divorce from Beneficiary Spouse to children.
• If both spouses wish to form trusts for one another, care must be given to avoid the IRS’s Reciprocal Trust Doctrine. This doctrine allows the IRS to treat each trust as if the spouse formed the trust alone, under the theory that they created identical trusts for each other, which is the same as if they formed a trust for themselves. Careful drafting can help avoid this pitfall.
• If the Beneficiary Spouse dies, the Grantor Spouse might lose any indirect benefit to the trust. Life insurance and other tools can minimize this loss.
• The law is always changing, and nothing is guaranteed. Techniques that work today may not work tomorrow. Over the years the spouse will have to keep up with changes to make sure the SLAT is still providing the advantages they hoped.

Example

If a Pennsylvania resident couple dies and leaves their $2M estate to their children, the Pennsylvania Inheritance tax due is $90,000.00 ($2M x 4.5% Tax). If instead, the Grantor Spouse forms a SLAT for the Beneficiary Spouse, puts into that trust $1M, and both spouses die several years later, then the $1M and all the growth it may have had passes to the children, free of the Pennsylvania Inheritance Tax. At the second spouse’s death, the tax is on the remaining $1M x 4.5% = $45,000.00, a savings of $45,000 for the family.

Typical Estate Questions About SLATs:

Here are some common questions clients, beneficiaries, and Trustees ask:

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If you have any questions about Spousal Lifetime Access Trusts or any other estate planning topics, please contact us to schedule a free consultation. For more than two decades Klenk Law has focused only on Estate Law. We’ve seen it all, and this experience allows us to explain complex estate law and planning techniques clearly and concisely. We make it easy for you to understand SLATs so you can make the best decisions for yourself and your family.