There are numerous mechanisms that can be used by large estates to reduce the impact of estate tax. Of the many different types of trust, the spousal lifetime access trust (SLAT) is gaining in popularity because it provides partners with a way to put their assets into a trust while still providing for their spouse. A SLAT is a way to lock in lower asset values by making distributions to a spouse while still giving you the tax benefits of an irrevocable trust.
Distributions to a Spouse
What makes a SLAT unique is that the trustee is authorized to make distributions to your spouse. You can also name other beneficiaries, such as children and grandchildren. You can apply lifetime gift tax exemptions to the contributions you make to the trust and, because it is a form of irrevocable trust, appreciation on assets held in the SLAT does not result in transfer taxes.
SLAT distributions to your spouse can be made based on education, health, maintenance and support, and other such ascertainable reasons. This gives the trustee the discretion to make distributions as needed. The trustee, generally, is an independent individual. Even when you are still alive and setting up the SLAT, you should still name an individual trustee. Otherwise, the assets in the SLAT will become part of your taxable estate. You can choose to name your spouse as the trustee of the SLAT, but must make sure the standards on which distributions are made are clear.
However, if your spouse dies before you die, or if you divorce, then your access to the assets in the trust are lost. If your spouse dies, then the successor trustee and beneficiaries have access to the assets in the trust as directed by the trust document. Similarly, if you divorce, the trustee will continue to use the assets to provide distributions to your spouse as guided by the trust documents.
In addition to using a SLAT to take care of your spouse during their lifetime and pass assets in a tax-favored manner, a SLAT could also be a mechanism for pre-marital agreements or to set up for your spouse in exchange for their willingness to release the spousal share claim on your future estate.
The team at Dunn Law Firm will work with you to ensure your estate plan is comprehensive and covers a variety of possible scenarios, including care for your spouse and other family members. For large estates, we use SLATs and other trusts and tools to try and help you pass assets in the most tax-favorable manner possible. To learn more, reach out to the Dunn Law Firm by calling (435) 628-5405 to set up a free consultation today.