The Spousal Lifetime Access Trust: A Nearly Perfect Tool?

A spousal lifetime access trust (SLAT) is an irrevocable trust where one spouse (the donor spouse) gifts assets to the other spouse (the beneficiary spouse) in a trust.  The trust authorizes the trustee to make distributions to the beneficiary spouse if a need arises. It can be designed to benefit one’s children, grandchildren or future generations. A lifetime gift tax and a generation-skipping tax exemption can be used to shield contributions to the trust and future appreciations from transfer taxes.

A key benefit of a SLAT is that, by naming their spouse as a lifetime beneficiary, the donor spouse retains indirect access to the trust assets. A trust can be set up to make distributions based on an ascertainable standard—the beneficiary spouse’s health, education, maintenance, or support. Another option is to give a trustee full discretion to distribute income or principal to the beneficiary spouse.

There are two types of SLATs: the completed gift SLAT and an incomplete gift SLAT.

The completed gift SLAT is more common. Its primary objective is to move assets out of a donor spouse’s estate while maintaining the ability to access the assets through distributions to his or her spouse.

The donor spouse sets up the trust for the benefit of his or her spouse and their descendants, making gifts to the trust that must come from the donor spouse’s separate property. If drafted properly, trust assets are protected from the creditors and divorcing spouses of the beneficiaries and aren’t subject to estate taxes when the donor spouse and the beneficiary spouse pass away.

But the federal estate tax exemption is so high these days that only the extremely wealthy would pay a federal estate tax were they to pass away now. Therefore, there are fewer completed gift SLATs used now than there were in the past. Today, more folks use the incomplete gift SLAT.

A New Angle

The incomplete gift SLAT is being called one of the smartest trust options available. It protects trust assets from creditors. The donor spouse transfers assets into the trust for the benefit of the transferor’s spouse and descendants. If the donor spouse gets sued or divorced, the assets are protected. If the beneficiaries get sued or divorced, the assets are protected.

The donor spouse retains a lifetime and testamentary power to appoint income and principal to anybody except the donor spouse, the donor spouse’s estate or the creditors of the donor spouse or donor spouse’s estate. The donor spouse retains the power to veto any distributions. The transfers to the trust aren’t completed transfers for gift tax purposes and are included in the donor spouse’s taxable estate for estate tax purposes. 

There’s a significant risk inherent in the SLAT strategy: If the beneficiary spouse predeceases the donor spouse, or if the donor spouse and the beneficiary spouse divorce, there will be a loss of indirect access to the trust assets.

Irrevocable trusts can be uncomfortable because they place assets outside one’s control. What happens if a grantor’s financial fortunes take a turn for the worse after a large portion of wealth has been irrevocably transferred? Still, a SLAT is a viable strategy to obtain the optimal benefits of an irrevocable trust by allowing a marital partner to help create a solid financial backup plan for one’s spouse. Working with a professional, you can decide whether a SLAT is right for your family.

Count on our experienced team at Ericson, Scalise & Mangan, PC to provide you with sound guidance for your Estate Planning, Elder Law, Real Estate, Probate, Trust & Estate Administration, and other legal needs. For assistance, contact us today at (860) 229-0369, or email us at info@esmlaw.com.