Planning for estate taxes can get challenging when there are several parties. For instance, you might worry about supporting your first marriage’s children while still paying for the surviving spouse of a second marriage. Of course, you should also use the law’s advantageous estate tax provisions. Fortunately, there is a reasonably easy approach to accomplish your goals with few serious tax repercussions. It is often known as a spousal lifetime access trust (SLAT).

A SLAT in action

A SLAT is essentially an irrevocable trust created by one spouse (referred to as the grantor spouse) for the benefit of the other spouse (referred to as the beneficiary spouse) and additional family members, such as children and grandchildren. The trust’s assets are only partially accessible to the beneficiary spouse. Therefore, the assets are typically shielded from the recipient spouse’s creditors. This makes sure that the grandkids and children who will receive the remainder of the estate will have a nest egg to fall back on.

The beneficiary spouse receives lifetime distributions following the SLAT terms to take care of their requirements. Preferably, before making regular distributions to the spouse, the recommendation is to use the other funds available to the beneficiary spouse outside of the trust. Otherwise, payments from the SLAT to the beneficiary spouse will make the trust less effective.

Favorable tax provisions 

1. One of their main draws is that SLATs reduce federal tax obligations. The transfer of assets is generally a taxable gift. But by combining the yearly gift tax exclusion ($16,000 for 2022) with the gift and estate tax exemption ($12.06 million for 2022), protection from gift tax is possible. Be mindful, though, that using the exemption while the grantor spouse is still alive limits the amount of potential estate tax shelter when they pass away.
2. The grantor spouse’s assets that transfer to a SLAT pull from their taxable estate. Because there are no inheritance taxes to worry about, the leftover estate tax exemption allows the use for other assets.
3. For taxation reasons, a SLAT would be a “grantor trust.” In other words, suppose a grantor spouse creates a SLAT for the benefit of the beneficiary spouse. In that case, the trust entity pays no tax. Still, the trust’s taxable income appears on the grantor’s personal tax return. Due to the assets’ ability to grow inside the trust without the erosion of income taxes, this may be favorable. The trust must then pay income tax upon the passing of the grantor spouse.

Other planning considerations

Since the transfer of assets to a SLAT constitutes a gift, the grantor must submit a federal gift tax return. Lastly, keep in mind that a SLAT is an irrevocable trust. As a result, the grantor spouse cannot retrieve assets once there is a transfer to the trust. Contact our RRBB accountants and advisors if you’re thinking about using a SLAT for more information.

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