Before I get into SLATs, let me take a second and tell you why someone would initiate their Estate Planning.

Your estate is everything in your name. When you die, if the value of your estate is above the federal or state limit, you will have to pay the estate taxes. Fortunately, the 2017 Act (Tax Cuts and Jobs Act) raised those levels for single individuals and married couples filing jointly. However, with the Act set to sunset on January 1, 2026, those levels will likely revert to pre-2017 levels—far lower than they are today. The key point here is that anything above those limits will be taxed.

At this point, the main issue arises. If an individual's total wealth is tied up in real estate, the stock market, or some other financial vehicle, their heirs may find themselves in a bind when faced with tax bills that must be paid. This brings into play the importance of estate planning.

For high-net-worth individuals who wish to leave a financial legacy, the question of estate planning comes into play, often at the suggestion of their Certified Public Accountant. Numerous strategies are available to achieve this goal; however, the current discussion focuses on a particular technique designed for married couples: the Spousal Lifetime Access Trust, known as SLAT. A SLAT is effective in minimizing potential estate taxes while at the same time providing flexibility and economic security for the family unit. This article will examine the inner workings of a SLAT, its benefits, and the critical considerations that must be considered.

What is a Spousal Lifetime Access Trust (SLAT)?

A SLAT is an irrevocable trust. One spouse, the grantor, gifts assets into it for the other spouse, the beneficiary. Now those assets are out of the taxable estate, thereby reducing the potential amount of estate taxes paid yet still maintaining indirect access to the assets held in the trust through the beneficiary spouse.

How Does a SLAT Work?

Here’s how a SLAT is created and utilized:

1.    The Creation of the Trust

·         An estate planning attorney drafts the SLAT with provisions for discretionary distributions to the beneficiary spouse and other family members. These distributions typically cover health, education, maintenance, and support (HEMS).

2.    Gift Transfer

·         The grantor transfers assets to the trust, using gift tax exemptions to fund it.

3.    Life Insurance Purchase

·         The trust often purchases a life insurance policy on the grantor’s life, funded through annual gifts from the grantor. 

4.    Asset Growth and Distributions

·         As the trust assets grow, the trustee can make distributions to the beneficiary spouse, ensuring financial flexibility while keeping the assets outside the taxable estate.

5.    Asset Management After Death

·         Upon the grantor’s death, the trust assets are either distributed to beneficiaries or held in trust to provide creditor protection and ongoing financial management.

Benefits of a SLAT

1.    Tax Efficiency

·         A SLAT minimizes estate and gift taxes by keeping assets outside the taxable estate, allowing them to grow tax-free.

2.    Wealth Preservation

·         Trust assets are protected from creditors and lawsuits, ensuring they are preserved for future generations.

3.    Flexibility and Access

·         Beneficiary spouses can access distributions when needed, while the trust assets remain protected.

4.    Retirement Income

·         The policy’s cash value can serve as a supplemental retirement income source through tax-advantaged loans or withdrawals.

5.    Multigenerational Planning

·         SLATs enable tax-efficient wealth transfer to future generations, supporting your family legacy. 

Important Considerations

While SLATs offer significant advantages, they also come with key considerations:

1.    Irrevocability

·         Once established, the SLAT cannot be amended or revoked, so careful planning is essential.

2.    Spousal Access

·         Divorce or the death of the beneficiary spouse can complicate access to trust assets.

3.    Proper Funding

·         Improper funding of the SLAT may trigger tax consequences, underscoring the need for expert guidance.

Ideal Candidates for a SLAT

SLATs are particularly suitable for:

·         High-net-worth individuals seeking tax-efficient wealth transfer.

·         Married couples aged 45 or older with strong marital relationships.

·         Individuals purchasing life insurance with concerns about estate inclusion.

How to Establish a SLAT

1.    Consult with an Estate Planning Attorney

·         Work with a professional to draft and finalize the trust documents.

2.    Decide on Funding Sources

·         Identify assets to transfer while adhering to gift tax regulations.

3.    Purchase a Life Insurance Policy

·         Place the policy within the trust and manage premiums accordingly.

4.    Review and Monitor the Trust

·         Ensure the trust continues to align with family and financial goals.

The spousal lifetime access trust forms an essential tool of flexibility in estate planning and tax benefits for wealth preservation. By incorporating the SLAT in your estate planning, you could protect your legacy while making sure of strong financial security for forthcoming generations.

Material discussed is meant for general informational purposes only and is not to be construed as a recommendation or advice. Please note that individual situations can vary therefore, the information should be relied upon only when coordinated with individual professional advice.  Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Tracking Number 7494185.1