Irrevocable trusts are well-known tools in estate planning, offering ways to reduce estate tax liabilities, shield assets from lawsuits, and control the distribution of wealth to heirs. However, one notable drawback is that once assets are placed in such a trust, they are out of the grantor’s control and cannot be accessed or withdrawn. Spousal Lifetime Access Trusts (SLATs) address this issue, offering a solution with more flexibility.

Why SLATs Are Gaining Popularity

SLATs are a specialized form of irrevocable trust that allow the grantor to retain some degree of access to trust assets, unlike traditional irrevocable trusts. The key feature of a SLAT is that it provides indirect access to the assets through the grantor’s spouse. These trusts offer a combination of tax advantages and the ability to continue receiving income from the trust, making them increasingly popular for those looking to manage their wealth efficiently while maintaining some control.

How SLATs Work

In a SLAT, the grantor uses part or all of their estate tax exemption to fund the trust, naming their spouse as the beneficiary during their lifetime. Typically, children are named as remainder beneficiaries, meaning they will inherit any remaining trust assets after the spouse’s death. The trust helps shelter assets from lawsuits and creditors, and it removes the assets, along with any future appreciation, from both spouses’ taxable estates, making them exempt from estate taxes when the beneficiary spouse passes away.

Adding Life Insurance to the SLAT Strategy

Some SLAT strategies incorporate life insurance, where the trust purchases a life insurance policy on the grantor’s life. The beneficiary spouse can access the policy’s cash value, and the death benefit can be used to cover estate taxes. This adds a layer of financial protection, especially when large estate taxes are involved.

Risks and Drawbacks of SLATs

While SLATs offer significant benefits, they also come with certain risks. First, funding the trust reduces the grantor’s estate tax exemption, and overfunding the trust can trigger gift tax liabilities. Another potential risk is divorce. If a couple with a SLAT divorces, the beneficiary spouse will continue to have access to the trust, but the grantor spouse will lose their indirect access to the assets. To protect against this, a provision can be added to the trust, specifying that it is for the benefit of the grantor’s current and future spouses, which would restore indirect access if the grantor remarries.

Additionally, if the beneficiary spouse passes away prematurely, the grantor spouse loses access to the trust assets. Another consideration is that SLAT assets do not receive a step-up in basis upon the grantor’s death, meaning that heirs could face capital gains tax if they sell any transferred assets.

Is a SLAT the Right Choice?

Spousal Lifetime Access Trusts offer a powerful combination of tax benefits, asset protection, and flexibility, making them an attractive option for many. However, they are complex and may not be suitable for everyone. SLATs are especially beneficial for couples with significant estate tax exposure, but for those with smaller estates, other strategies might be more appropriate.

Consulting with a wealth advisor is essential to determine whether a SLAT is the best strategy for your estate planning needs and financial goals.