What you need to know about SLATsShare this post
Being happily married, healthy and wealthy is one of life’s great trifectas. It is hard to imagine improving on that but there’s a tax perk that can make it even sweeter. Known as a Spousal Lifetime Access Trust, or SLAT, this trust has a major benefit for high-net-worth couples: Offering the ability to take assets out of their taxable estates while still benefiting from them during retirement.
Keep in mind a SLAT is not a simple 1-2-3 set up. It is easy to get the requirements wrong, void your arrangement and end up owing the IRS millions of dollars. Yet when done correctly, some estate planners call it the perfect tax break. SLATs are categorized as grantor trusts, in which a donor, or grantor, transfers assets but retains a degree of control.
So how does it work? A spouse sets up a SLAT for the benefit of his or her partner by transferring assets held in their name only. Most married couples own property and investment accounts jointly, so those need to be placed into separate accounts with separate ownership before being transferred. The idea is to transfer assets, including life insurance, into the trust so that your estate dips below the historically high federal exemption levels, in 2021, $11.7 million for single person and $23.4 million per couple, and moving to $12.06 million and $24.12 million respectively. After that, the 40% gift and estate tax kicks in.
The donor pays tax on the trust’s taxable income when filing her personal return. Children or grandchildren can be named as later beneficiaries. A SLAT must have a trustee. That person can’t be the donor and can be the beneficiary only if their power to move money out of the trust is limited.
The donor spouse has effectively given the beneficiary spouse the assets. The bonus is the spouse who’s the beneficiary can request withdrawals from the SLAT to fund basic lifestyle needs and pursuits, like vacations, mortgages, or home remodeling. Because both spouses typically live in the same home and vacation together the donor spouse benefits as well.
There are risks to be mindful of when considering a SLAT. If you get divorced, the donor spouse loses access to the trust. Because a transfer of assets into a SLAT is irrevocable, that means your ex continues post-marriage as the beneficiary. Additionally, a donor spouse whose partner dies can no longer access the trust.
In summary, SLATs have become an incredibly popular estate planning tool. Many professionals believe that SLATs are a good idea for couples with a net worth under $50 million. They can use up their full exclusion and still have access to the money. Common usage doesn’t mean simplicity though. A key take home message is that it is easy for you to ruin your SLAT plan by improperly administering the trust. The trustee should be deliberate and seek advice in advance of taking certain actions. The best way to do that is for the trustee to consult with professionals before a transaction, and in all events once a year with a planning team of all your advisers.