The utilization of sophisticated strategies in estate planning for ultra-high-net worth families is not just advisable but often critical in preserving wealth across multiple generations. A Spousal Lifetime Access Trust (SLAT) is one of these strategies that may enable a taxpayer to transfer wealth to future generations while also protecting assets from creditors and ensuring a spouse’s financial security.
What Exactly is a SLAT and How Does It Work?
A Spousal Lifetime Access Trust, or SLAT, is an irrevocable trust created and funded by one spouse (the donor spouse) for the benefit of the other spouse (the beneficiary spouse). The key feature that sets SLATs apart from other trusts is that the beneficiary spouse has access to the trust assets during their lifetime, which can include income and/or principal distributions, depending on how the trust is structured. This enables a spouse to use funds from the trust (if necessary) to maintain their standard of living even though the trust assets have been removed from the donor spouse’s estate. While the donor spouse does not have any rights to the trust assets, they may still indirectly benefit from the beneficiary spouse’s ability to access them.
Potential Benefits of SLATs
- Asset Protection
One of the primary reasons ultra-high net worth families opt for SLATs is asset protection. By transferring assets into an irrevocable trust, assets are generally shielded from creditors, lawsuits, and other potential threats. - Estate Tax Efficiency
Estate taxes can significantly erode wealth as it passes from one generation to the next. SLATs can help mitigate these taxes by removing assets and all future appreciation on those assets from the donor spouse’s taxable estate. - Flexibility and Control
Despite being irrevocable, SLATs offer a degree of flexibility and control. Although the donor spouse must give up all direct control and access to the trust assets and should not serve as trustee, he or she may still retain the ability to remove and replace the trustee with an independent trustee to ensure their original wishes are effectuated.
Additional Considerations
While SLATs may provide many benefits, there are also other things that should be considered before setting one up:
- While a donor spouse may indirectly benefit from distributions made to the beneficiary spouse, it is important to note that any indirect benefit to the donor spouse would be eliminated upon divorce or the beneficiary spouse’s death.
- SLATs are generally considered “grantor” trusts, meaning the donor spouse is responsible for paying the income tax generated by the trust assets each year even though he or she is neither a beneficiary or trustee of the trust. However, paying taxes on behalf of the trust is not considered an additional gift to the SLAT, which means the trust assets can grow unencumbered by income tax liability.
- In order to maximize the amount of assets that are able to grow and be passed on to the trust’s ultimate beneficiaries, distributions from the SLAT should not be taken unless they are truly needed.
- Ultimate beneficiaries of the trust inherit assets at the donor spouse’s original tax basis. As a result, it is important to carefully weigh which assets are used to fund the trust and consider the use of a swap power that could allow the donor spouse to remove a low basis asset from the trust and replace it with a higher basis asset of the same value.
Conclusion
For ultra-high net worth families, the complexity of estate planning requires the consideration of more advanced strategies like SLATs. These trusts may offer a unique blend of asset protection, tax efficiency, flexibility, and wealth transfer capabilities that support the long-term goals of preserving and growing family wealth.
Consulting with experienced advisors is crucial when considering SLATs, as each family’s circumstances and objectives are unique. By integrating SLATs into a comprehensive estate plan, ultra-high net worth families can help secure a stable financial future for generations to come.
