Tax laws can change quickly, so you need an effective estate plan in place to help you protect your assets and secure your future. One such estate planning tool is the Spousal Lifetime Access Trust, or SLAT. How can you use a SLAT to guarantee your spouse access to assets while keeping them out of your taxable estate?
A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust that provides payouts to the beneficiary spouse while excluding the trust’s assets from the grantor spouse’s gross taxable estate. The trust can also eventually benefit a secondary recipient, usually your children.
“The benefit is that those assets are out of the individual’s estate, allowing them to take advantage of the increased estate tax exemption… while still retaining a degree of control over those assets via their spouse during their lifetime.”
SLATs can be a wise estate planning strategy to shield assets while transferring wealth to your spouse and children. However, because tax laws are fluid and are impacted by politics, you should consider this tool while the lifetime gift and estate tax exemption remains high. Under current federal tax laws, the Unified Tax Credit is currently $12.06 million per person, or $24.12 million for married couples, but is set to expire in 2025. If it does, the credit would revert to the pre-2018 level of approximately $6.6 million in 2026.
How could SLATs work in your California estate planning? Here is a basic explanation of how SLATS function.
The donor spouse funds the SLAT trust. Possible sources of funding can include cash, life insurance, securities, real estate, or other similar assets. Because California is a community property state, any jointly held assets would need to be converted into separate property assets through a partition agreement. Assets transferred to the SLAT can avoid taxation when the donor spouse uses the Unified Tax Credit, up to the maximum credit amount currently at $24.12 million for married couples.
After the donor spouse funds the SLAT, the beneficiary spouse, as the primary SLAT beneficiary, can request distributions from the trust during their lifetime. This can be used to maintain their standard of living and other expenses. This also indirectly benefits the donor spouse, as long as they remain married to and living with the beneficiary spouse.
Upon the death of the beneficiary spouse, the SLAT is terminated and the remaining assets transfer to the named remainder beneficiaries, usually the children of the donor and beneficiary spouse.
Wealthy married couples may wish to each create a SLAT for the benefit of the other spouse, and thereby use both Unified Tax Credit exclusions. A California Estate Planning Attorney from The Law Offices of Alice A. Salvo can help you do this legally and avoid violating the IRS’ Reciprocal Trust Doctrine. This doctrine comes into effect if the IRS interprets your SLATs as being similar or related. This can happen if they are too similar in nature and in the source of assets used for funding. If your dual SLATs are judged to violate the Reciprocal Trust Doctrine, they can be voided and the assets counted in your taxable estate.
An experienced Estate Planning Attorney from Salvo Law can make sure the respective trusts are created and worded differently to avoid this possible complication. They can guide you to create and fund the trusts at different times, even different years, and include different terms for beneficiary distributions. Due to the complexities involved, you should consult with one of our Estate Planning Attorneys at length before creating dual Spousal Lifetime Access Trusts.
Our Estate Planning Attorneys at The Law Offices of Alice A. Salvo can clarify the estate planning process and explain more about Spousal Lifetime Access Trusts in a private consultation. Contact us in Woodland Hills, CA and let us help you make sure your future is secure.