A central goal of much estate planning is ensuring that assets pass to and are available for a person’s loved ones. One such method is the spousal lifetime access trust (SLAT), an irrevocable trust created by a lifetime gift to the trust which provides for the grantor’s spouse and children as beneficiaries. Using a portion of the lifetime exemption of the grantor for the transfer to the SLAT allows this trust to avoid gift tax when created and estate taxation in both the grantor’s and spouse’s estates at death. The trust also avoids the potential costs and complexity of probate.
This trust allows the beneficiaries access to funds during the grantor’s lifetime and after his or her death. The distributions may be made on a preset schedule, under specified circumstances or at the sole discretion of the trustee. The trust provides a level of protection against creditors since assets in the trust are not reachable by most creditors. It is important to understand the typical SLAT is designed as a grantor trust meaning that the income tax obligations of the trust are borne directly by the grantor during his or her lifetime. Planning for this income tax burden will be necessary.
Many states do not have a state estate or inheritance tax and in such case other techniques may be equally or more favorable for transfer tax planning purposes. An alternative to this approach is the typical revocable trust which funds irrevocable trusts for surviving spouse and children at the grantor’s death instead of currently as a SLAT would provide. Consulting with your tax professional should help you determine if the SLAT will work in your estate plan.