Spousal Lifetime Asset Trust
A spousal lifetime asset trust, or SLAT, is a type of irrevocable trust that is set up to reduce estate taxes. In this article, we will go over how a spousal lifetime asset trust works, the benefits one provides, and information you should consider before you create one.
A spousal lifetime asset trust serves a very specific purpose. It allows married couples to take advantage of the currently high federal lifetime gift and estate tax exemptions. In 2021, the exemption amount for a couple is $23.4 million. When you fund assets into a spousal lifetime asset trust during your lifetime, the assets will be excluded from the estate tax exclusion for both spouses.
Implementing a spousal lifetime asset trust is complex and must be done correctly to receive the full benefits. The donor spouse is the spouse who creates and funds the irrevocable trust. They cannot use the assets they place into the trust for their benefit. However, the non-donor spouse can receive trust assets as gifts. Though they cannot take direct distributions; the donor spouse can directly benefit from distributions to the non-donor spouse as long as they are married and living together.
Besides the benefits previously mentioned, SLATs also provide additional benefits. These benefits include:
- Any assets you transfer into the trust are excluded from both spouses’ taxable estates.
- The current high exclusions amounts will sunset in 2026. If congress does not renew the exclusions, creating a SLAT now will allow you to take advantage of the $23.4 million exclusion now and separate assets from your taxable estate before the exclusion lowers.
- A SLAT also enables you to pass your wealth on to multiple generations without being subject to generation-skipping transfer tax.
Since a SLAT is an irrevocable trust, there are some important facts you should consider before you create one. First, you need to take into consideration what will happen upon the death of the non-donor spouse. This is important because when the non-donor spouse passes, the donor spouse will no longer have access to funds. Second, you need to address the potential for divorce. You will want to ensure your trust has a special provision that terminates the non-donor spouses’ beneficial interest upon divorce. This will prevent the non-donor spouse from continuing to have access to fund despite a divorce.
Third, you will want to ensure your trust is not subject to the reciprocal trust doctrine. The reciprocal trust doctrine is a test the IRS will administer to two trusts to determine if they are too similar or interrelated. If this is determined to be the case, the IRS will undo the trusts, causing all assets to rejoin the donor’s taxable estates. To avoid this, if both you and your spouse are creating an irrevocable trust, you will want to create and fund your trusts at different times. You may also want to consider including different classes of beneficiaries and terms of distribution to further differentiate your trusts.
Creating a Spousal Lifetime Asset Trust
If you decide that a spousal lifetime asset trust is right for your circumstances, you will want to meet with a qualified estate planner who can draft the documents for you.
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