Using SLATs in Estate Planning

Transferring assets out of the estate now to reduce estate taxes later is often a good strategy, but individuals may be reluctant to make a large gift to take advantage of the high exemption because they fear losing access to the transferred funds. The spousal lifetime access trust may provide a solution. A SLAT is a type of irrevocable trust that may be used to preserve the transfer tax benefit of the increased exemption amount while also building flexibility into the estate plan.

A SLAT is an irrevocable trust established by one spouse for the benefit of the other spouse and the couple’s children and/or grandchildren. It requires use of the donor spouse’s exemption amount to protect the transfer from gift tax. When funding the SLAT, the grantor-spouse should use his or her separate property, as opposed to jointly owned or community property (this could make the transferred property includible in the estate of the beneficiary-spouse).

Spousal access to the funds in a SLAT is not unlimited. If distributions are made to the beneficiary-spouse, who consistently uses them to benefit the grantor-spouse, this could be considered a retained interest on the part of the grantor-spouse and make the trust assets includible in the grantor-spouse’s estate for estate tax purposes.

If there is a divorce or the beneficiary-spouse dies, the grantor-spouse will lose indirect access to the trust. Accordingly, the grantor-spouse may want to limit the amount transferred to the trust, or provide that if the grantor remarries, the new spouse will be a trust beneficiary or that the trustee may lend trust property to the grantor.

The SLAT is an important tool that may allow a grantor-spouse to take full advantage of the increased exemption amount while permitting indirect access to the trust funds by way of the beneficiary-spouse’s interest. Ideally, however, this access would never be needed, and as long as the grantor-spouse is still responsible for paying the trust’s income tax liability, an even greater amount of assets will pass to the next generation, free of federal estate and gift tax.