What Are the Advantages of a Spousal Lifetime Access Trust (SLAT) in Estate Planning?

How Does the Spousal Lifetime Access Trust Work?

When looking for the most suitable estate planning tool, you want one that will prevent your loved ones from paying more taxes than they have to. The spousal Lifetime Access Trust (SLAT) is one such tool created by one spouse to benefit the beneficiary spouse. The beneficiary spouse can use it to transfer money and property out of the donor spouse’s estate.

Donor spouses leverage their federal estate and gift exemption to gift assets to the trust to benefit the non-donor spouse. The donor can also name children and grandchildren as future beneficiaries. Before using a SLAT as your estate planning tool, ensure you understand everything explained to you by your estate planning attorneys in Pennsylvania.

What Are the Benefits of Using a Spousal Lifetime Access Trust?

A SLAT is an irrevocable trust, but the donor spouse can benefit directly from the property they gift the trust as long as the non-donor remains alive and the two remain married. This indirect benefit is achieved because the non-donor spouse is the primary beneficiary. They can request distributions from the trustee during their lifetime.

The income or principal is distributed to the non-donor spouse if the trustee approves the request. In most cases, this happens to maintain the accustomed living standard. However, probate and trust administration attorneys in Pennsylvania recommend that the non-donor spouse not request distributions from the SLAT unless necessary after exhausting other resources.

Non-Donor Spouse Can Serve as Trustee

SLAT gives the non-donor spouse authority to serve as a trustee under certain conditions. However, their power to make distributions to themselves is limited. If you’re considering using a SLAT as your estate planning tool, consider including an independent co-trustee to serve with your non-donor spouse.

A non-donor beneficiary spouse serving as a trustee with an unlimited power of asset distribution to themselves could trigger the inclusion of the trust assets in their taxable assets. That would water down the intent of the SLAT. Unlimited distribution rights may also erode creditor protection. Consult experienced West Chester, PA, estate planning lawyers before drafting the document.

Estate and Gift Tax Exemptions

SLATs are structured as grantor trusts that can effectively help couples reduce their tax burden while planning their estates. The trust’s taxable income is taxed to the donor spouse, reducing the estate value. As long as the donor spouse is alive, the couple need not submit a separate tax return for the SLAT. The exception is if the SLAT is not structured as a grantor trust.

The gift and generation-skipping transfer tax (GST) exemption is valued at over $21 million per person. If you have an estate larger than that or much lower, consider taking advantage of the exception before the exemptions are changed or removed in 2025.

Reduce Estate Value

The value of the property the donor spouse gifts the non-donor spouse through the SLAT is removed from the estate. All future appreciation of the property is also excluded. This can result in significant PA tax savings because Pennsylvania does not have a gift tax but it does tax assets passing via inheritance tax from a donor’s estate.

When the beneficiary spouse receives distributions from the SLAT, the trust property is excluded from their estate. Skilled probate and trust administration lawyers in Pennsylvania can guide you through the process to help you capture the correct details to avoid costly mistakes.

Reduce or Avoid Capital Gains Tax

SLATs may help reduce capital gains tax upon the donor spouse’s death. If the trust comprises appreciated assets, either spouse could swap or buy the appreciated assets out of the trust into the grantor’s name before death. This is possible by transferring assets of equal monetary value to the trust.

The transaction is estate-tax neutral, as the same value remains in the grantor’s estate and the trust. However, the appreciated assets qualify for a step-up at death, eliminating the unrealized appreciation or gain.

Gifs of appreciated assets may have a capital gains tax implemented against them. However, transferring the assets to a SLAT before such a change may exempt them from any capital gains tax by gift.

Creditor Protection

Irrevocable trusts can provide significant asset protection from potential creditor claims. For example, a SLAT can exempt assets from malpractice claims and other beneficiaries of divorcing spouses. The protection applies to property transferred to the trust as long as it is not characterized as fraudulently transferred property.

A SLAT may also serve as an Irrevocable Life Insurance Trust (ILIT). In that case, protecting policy cash values during the insured’s life and the death benefit proceeds may be another benefit the grantor enjoys.

A SLAT May Comprise Various Assets

You can fund a SLAT with multiple assets, including life insurance. However, only transfer assets you own in your name, not jointly with your spouse. That prevents the gift from being treated as made by both you and your spouse, which would eliminate the other benefits of using a SLAT.

This may require additional documentation and transfers. Skilled estate planning lawyers in West Chester can guide you through the process and review your documents to minimize mistakes.

Seek Legal Counsel About SLATs From an Experienced Professional

A SLAT may be an effective estate planning and wealth transfer strategy for grantors who want to protect their beneficiaries from high estate taxes and Pennsylvania inheritance taxes. It also provides several other benefits to the grantor and beneficiaries. Working with skilled Pennsylvania probate and trust administration lawyers is advisable to help you maximize the benefits of your SLAT.

Peak Legal Group, LTD is an estate planning and trust administration law firm. Our lawyers can help you plan your estate to protect your wealth, family, and future. We can answer all your questions about SLATs and other estate planning tools to help you make an informed estate planning decision. Call us at 610-989-7064 to schedule a FREE consultation.