The present global circumstances of economic and political uncertainty, a high federal estate tax exemption, and a low-interest rate environment merit a focused examination of the trust entity which we call a 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?
Here is an example of how to use this type of trust. 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 with limitation rules that help to shelter the property from the Beneficiary Spouse’s future creditors, spouses and from being included in the Beneficiary Spouse’s taxable estate.
What should I Transfer to the SLAT?
It is important to have a financial advisor run scenarios to identify the type and extent of assets to be transferred to a SLAT. Neither the Grantor Spouse nor the Grantor Beneficiary should transfer all of their asset to the SLAT, and each should leave sufficient assets outside the slat in their own control, and in their estates to fund their daily living expenses.
SLAT Pros and Cons
- Provide asset protection. The amount of protection will depend on many things, including the trust’s terms.
- Provide an excellent savings vehicle for couples who regularly put aside assets for retirement over and above their 401k.
- Can provide a shelter for investments in a start-up company.
- Can be a Grantor Trust, allowing the Grantor Spouse to pay the trust’s income taxes, Gift Tax-free.
- Could have some federal death tax protection.
- Can avoid a state’s Inheritance Taxes for the Beneficiary Spouse.
- May reduce 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.
- 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.
- 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.
- Can be arranged to avoid state income taxes.
- Can be drafted to keep assets within the family.
- Can serve as a Dynasty Trust, sheltering assets from children and grandchildren’s divorces, creditors and legal complications.