SLATs: Not Something You Buy at Home Depot

Estate planning is rich with acronyms and can make you feel as though you are searching for an item within the vastness of a Home Depot store. Uncertainty looms as you roam the many aisles looking for the item. Even after you locate what you need, it can be challenging and frustrating to finish your project. Spousal Lifetime Access Trusts (SLATs) are an estate planning technique that sounds like it might be found in the lumber section of your favorite home improvement store. This article will discuss some of the benefits of SLATs for families with more complex estate planning needs.

Why Create a SLAT?

SLATs are designed to help complete gifts by one spouse (the donor of the assets and the grantor or “creator” of the trust) to children, grandchildren or others, while still providing access to the trust for the other spouse, if necessary, for health, education, and support and maintenance needs during their lifetime. SLATs are established to have future appreciation of assets occur in the SLAT rather than be included in the estate of the donor. Currently, individuals are allowed to exclude up to $11.7 million per person from estate taxes. However, concerns exist that this exclusion may be reduced to $5 million by a “sunsetting” of the current laws on December 31, 2025 (or earlier) to $3.5 million by Congress.

How Does a SLAT Work?

A SLAT is often established as an irrevocable grantor trust. The grantor selects assets to gift or transfer to the trust. These assets most often include cash, securities, real estate, and closely-held business interests. The grantor usually elects to pay the tax on income generated by the trust so that the portfolio can grow as much as possible outside of their estate. The non-grantor spouse can be selected as a trustee, but many times an independent trustee is used. The trust provisions can be broad or narrow with regard to distributions from the trust to the non-grantor spouse and other family members such as children or grandchildren. One of the key aspects of SLATs is that you want as much appreciation as possible to be outside of the estate of the grantor to avoid future estate taxes. So, non-grantor spouses will often only take withdrawals as needed. Some clients find comfort in this structure in cases where they are concerned about whether they transferred too many assets to other family members in their efforts to minimize estate taxes. This point is a key advantage of SLATs over direct gifts to family members when dealing with large dollar amounts.

Can Both Spouses Establish SLATs?

Each spouse can establish a SLAT for the benefit of the other spouse. However, great care must be taken to make sure that the SLATS are not identical or substantially similar regarding trust provisions, especially as relates to distributions/beneficiaries, types of assets held, and the timing of the creation of the trusts. Otherwise, the trusts could still be included in the estates of the grantors under the Reciprocal Trust Doctrine. This doctrine may cause the IRS to disregard the trusts for estate tax purposes as they could be deemed to have been created for the benefit of the donors.

What Happens Upon the Death or Divorce of the Non-Grantor Spouse?

Since the grantor has relinquished control of the assets in creating the SLAT, he or she will lose the indirect access to the trust assets through their spouse upon divorce or death of that person. The risk of divorce could be mitigated by terminating the non-grantor spouse’s interest in the trust in the event of divorce. With regard to a premature death of the grantor, life insurance can provide additional funds to support the surviving spouse. Such insurance proceeds would also be excluded from estate taxes.

Cash Flow/Spending Analysis

Before funding a SLAT, a cash flow projection analysis should be performed to estimate if the amount of assets retained by the grantor and his/her spouse outside of the SLAT are sufficient to support their lifestyles.

Summary

A SLAT can be a great estate planning tool for certain individuals and families with larger estates that want to minimize the amount of estate taxes and maximize the level of growth of assets outside of their estates available for future generations. The use of a SLAT should be considered within a holistic review of key factors affecting the overall comprehensive wealth plan. But you can’t get a SLAT at Home Depot no matter how hard you search!