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Is a Spousal Lifetime Access Trust Right for Your Family?

A Spousal Lifetime Access Trust (or “SLAT”) is an asset preservation tool that can work well in many estate planning situations. A SLAT can minimize the impact of transfer taxes and maximize the opportunity for long term growth. It may also preserve financial access for a surviving spouse or other beneficiaries.

As with any tool, however, it is not appropriate in every situation. A SLAT must fit within your larger estate plan, which should certainly include a will, life insurance, a power of attorney and perhaps a living will, healthcare proxy, other trusts and even succession planning for a closely held business.

At Wiles Law Firm, LLC, we are ready to guide you through the process of securing your family’s future in ways that are tailored to your needs and their needs, both in the particular details and the larger picture.

What is a SLAT?

A SLAT is an irrevocable trust created by one spouse (usually referred to as the “donor spouse”) for the benefit of the other (the “beneficiary spouse”) as well as additional family members, such as children or grandchildren. The donor spouse irrevocably gives up his or her ownership of the assets transferred to the trust, while the beneficiary spouse irrevocably gains access.

Some SLATS allow only the beneficiary spouse to have access to trust assets during his or her lifetime; some allow other beneficiaries to have access simultaneously. There is some latitude in designing conditions for access.

The estate and gift tax exemption ($11,400,000 per person in 2019) may be used during life or at death. Completed gifts are not subject to further transfer taxes. The donor spouse must pay income taxes on any trust earnings. When the SLAT will continue beyond the lifetime of the donor’s children, there may be additional generation-skipping transfer taxes that should be taken into account.

In sum, a SLAT is one of many tools to preserve assets for long term growth; it allows some flexibility, but it must be carefully designed to reflect the needs of the donor and beneficiaries and to comply with the requirements of the law.

Advantages of a SLAT

  • Potential for tax-advantaged growth. The estate and gift tax exemption is also currently quite generous, although those provisions are scheduled to sunset in 2025. SLATs created before that date can be expected to benefit from current tax provisions. A SLAT is particularly effective for assets with substantial growth potential over the donor’s lifetime
  • Flexibility in funding. A SLAT may be funded with a variety of assets, including cash, securities, real estate, life insurance, and an interest in a closely held business
  • Beneficiary control. The beneficiary spouse may serve as a trustee of the SLAT, although distribution decisions should adhere to an ascertainable standard and some may require the participation of additional trustees
  • Flexibility. The beneficiary-spouse may receive distributions of income and/or principal from the SLAT for his or her health, education, maintenance and support during the donor spouse’s lifetime
  • Leveraged funding. Gifts to the SLAT can be leveraged through the purchase of life insurance, and valuation discounts can be obtained by forming LLCs and partnerships
  • Protection from creditors. If the SLAT is properly structured, the assets held in trust are not are not available to either spouse’s creditors

The tax advantages of a SLAT are often the first factor to catch the attention of someone exploring better estate planning tools. However, estate planning should be built on more than tax minimization. There are also multi-generational gifting and long-term planning advantages to a SLAT.

Disadvantages of a SLAT

  • Irrevocability. The SLAT is an irrevocable trust, so neither the donor spouse, nor anyone else can change its terms. This is true even in the event of divorce or the early death of the beneficiary spouse
  • Funding restriction. Only the donor spouse’s assets may be used to fund the SLAT. Property owned jointly with the beneficiary spouse may not be transferred to the SLAT
  • Reciprocal SLATs not permitted. A husband and wife cannot simultaneously create identical SLATs that are intended to benefit the other
  • Possible scrutiny of beneficiary distributions. All distributions from the SLAT should be made to a separate account in the beneficiary spouse’s name. There should be no implied agreement that the beneficiary will use distributions for the donor’s benefit. The SLAT should provide that no distributions may be made during the donor’s or spouse’s lifetime that would satisfy the donor’s legal obligation to support the spouse or other beneficiaries
  • Potential tax law changes. Future tax law changes, including state tax law changes are unlikely to eliminate the benefits of a SLAT, but they could they could limit them

Careful drafting can minimize some of these concerns. The trust document may, for example, be designed to permit only a current spouse to be a beneficiary, or to create SLATs for both spouses that similar, but not identical. This is among the reasons that it is vital to have a full and frank conversation with an experienced estate attorney about the potential pros and cons of this and other estate planning tools.

How Wiles Law Firm, LLC Can Help

It is very important to us that our clients are able to make estate planning decisions based on a sound understanding of their choices and how those choices fit into their overall plan for wealth preservation. A spousal limited access trust may be an appropriate part of that larger plan. Please contact us today to schedule a consultation to learn how we can help.

Wiles Law Firm, LLC helps clients with their estate planning needs in Charleston, South Carolina and the surrounding areas such as West Ashley, Summerville, North Charleston, Mount Pleasant, and John's Island.

Information on this website is not legal advice. Further, viewing of the enclosed information does not create an attorney-client relationship with Wiles Law Firm, LLC. Matters will be handled by attorneys who primarily practice out of our office in Charleston County located at 852 Lowcountry Blvd., Ste. 101, Mt. Pleasant, SC 29464. M. Emerson Wiles, III is the attorney responsible for this advertisement.

Any result Wiles Law Firm, LLC may achieve on behalf of one client in one particular matter does not necessarily indicate similar results can be obtained for other clients. Please contact a South Carolina estate planning attorney or one of our attorneys with Wiles Law Firm, LLC for a consultation regarding your unique estate plan.

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| Phone: 843-718-0232

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