Making a SLAT trust can lead to lower taxes for a donor’s taxable estate, but be sure to understand the possible downsides as well.
A Spousal Lifetime Access Trust (better known as a SLAT trust) is a type of irrevocable trust. The SLAT trust is a valuable tool for one spouse to help another during their lifetime or after their passing.
It’s essential to understand the way a SLAT operates in order to know how to use one, or even whether or not you should use one at all. There are some important distinctions from other types of trusts, and those differences play an important role in implementing the SLAT.
The first thing to know about the SLAT is that as an irrevocable trust, it cannot be changed by the creator of the trust. Once created, it is in place and cannot be altered. For this reason, under no circumstances should you form a SLAT before understanding precisely what you are doing. Be sure that the terms of the SLAT are just as you want them for your specific situation. Think of it as a tattoo – only without the option to one day remove it.
Understanding if a SLAT trust is right for you
Unlike a marital trusts, you can form a SLAT trust while the person contributing assets to the trust (the donor) is still living. While many trusts operate to ensure the donor’s control over their assets after their passing, a SLAT can be thought of as a way for the donor to protect the assets from improper use, even by themselves.
The only person who can access these funds will be the beneficiary spouse and potentially children or grandchildren involved. As its defining feature, the fact that you can create a SLAT while the donor is still living also lends it the most significant advantages and disadvantages.
Recognizing the benefits and liabilities of a SLAT trust
The primary benefit of a SLAT trust is in forming the trust immediately and allowing yourself to avoid estate taxes in the passing of your assets and funds. The exemption for current estate taxes is near $12 million, higher than ever before. This limit will expire in 2026 and could even change sooner.
A SLAT allows you to pass along large assets and take advantage of the current exemption amount. The trust terms are also very flexible, allowing a SLAT to combine with other trusts, including an irrevocable life insurance trust, a dynasty trust, or a credit shelter trust.
While a SLAT gives you security over how estate taxes will treat the funds, the irrevocable nature of the trust takes control out of your hands. Thus, in the event of the death of the beneficiary spouse, or divorce from the beneficiary spouse, complications can arise.
Deciding on a trustee is the most critical part of forming a SLAT trust since the donor cannot be the trustee. Also, if the beneficiary spouse is the trustee, they will only have access to the funds for “ascertainable standards.” An independent trustee will have much more leverage over dispersing the funds.
What are the goals you have in mind for forming a Spousal Lifetime Access Trust? What are your biggest concerns moving forward?
Nancy Zambell, Chief Analyst of the Financial Freedom Federation, has spent more than 30 years helping investors navigate the minefields of the financial industry. Nancy's book, Make Money Buying & Selling Stocks is an introduction for new investors and a reminder for experienced investors on how to profit in the stock market.Learn More