The Spousal Lifetime Access Trust: A Near-Perfect Tool?

The Spousal Lifetime Access Trust is not one of the better-known trusts but has become a popular estate planning strategy for families.

A spousal lifetime access trust (SLAT) is an irrevocable trust that authorizes the trustee to make distributions to a spouse if a need arises. It can be designed to benefit one’s children, grandchildren, or future generations. A lifetime gift tax and a generation-skipping tax exemption can be used to shield contributions to the trust and future appreciations from transfer taxes.

A key benefit of a SLAT is that, by naming a spouse as a lifetime beneficiary, the grantor retains indirect access to the trust assets. A trust can be set up to make distributions based on an ascertainable standard—the spouse’s health, education, maintenance, or support. Another option is to give a trustee full discretion to distribute income or principal to a spouse.

There are two types of SLATs: the completed gift SLAT and an incomplete gift SLAT.

The completed gift SLAT is more common. Its primary objective is to move assets out of a settlor’s estate while maintaining the ability to access the assets through distributions to his or her spouse.

The settlor sets up the trust for the benefit of his or her spouse and their descendants, making gifts to the trust that must come from the settlor’s separate property. If drafted properly, trust assets are protected from the creditors and divorcing spouses of the beneficiaries and aren’t subject to estate taxes when the settlor and his or her spouse pass away.

But the federal estate tax exemption is so high these days that only the extremely wealthy would pay a federal estate tax were they to pass away now. Therefore, there are fewer completed gift SLATs used now than there were in the past. Today, more individuals use the incomplete gift SLAT.

A New Angle

The incomplete gift SLAT could be a smart trust option for you and your family. It protects trust assets from creditors. The settlor transfers assets into the trust for the benefit of the transferor’s spouse and descendants. If the settlor gets sued or divorced, the assets are protected. If the beneficiaries get sued or divorced, the assets are protected.

The settlor retains a lifetime and testamentary power to appoint income and principal to anybody except the settlor, the settlor’s estate or the creditors of the settlor or settlor’s estate. The settlor retains the power to veto any distributions. The transfers to the trust aren’t completed transfers for gift tax purposes and are included in the settlor’s taxable estate for estate tax purposes.  

There’s a significant risk inherent in the SLAT strategy: If the trustee spouse predeceases the other, or if there’s a divorce, there will be a loss of indirect access to the trust assets.

Irrevocable trusts can be challenging because they place assets outside one’s control. What happens if a grantor needs access to the funds due to unforeseen circumstances after a large portion of wealth has been irrevocably transferred? Still, a SLAT is a viable strategy to obtain the optimal benefits of an irrevocable trust by allowing a marital partner to help create a solid financial backup plan for one’s spouse.

Contact us at (805) 963-7811 to learn more and decide whether a SLAT is right for your family.