Looking to celebrate Valentine's Day by gifting each other an estate tax planning strategy? Ok, maybe stick with chocolates and flowers for Valentines Day, but it is worth learning about a SLAT and how it can provide for you and your spouse, while protecting your assets from estate taxes and creditors.
A Spousal Lifetime Access Trust (SLAT) is a type of irrevocable trust that can provide significant benefits for a married couple. A SLAT is created by one spouse (the grantor) for the benefit of the other spouse (the beneficiary). This trust allows the grantor spouse to transfer assets out of their estate, while also providing the beneficiary spouse with access to those assets during their lifetime.
One of the key benefits of a SLAT is that it can be used to minimize estate tax liability. When assets are placed in the trust, they are no longer considered part of the grantor's estate, which can help to reduce the amount of estate tax that would be due upon the grantor's death. The beneficiary spouse can still access the assets during their lifetime, which makes the SLAT a useful tool for couples who want to reduce their tax liability while also providing for each other. The grantor spouse gets an indirect benefit from the SLAT, since SLAT income can be used to pay for expenses normally paid directly by the couple.
Another benefit of a SLAT is that it can provide protection from creditors and lawsuits. Because the assets are no longer considered part of the grantor's estate, they are not subject to the same legal liabilities as other assets. This can be particularly important for couples who are at risk of being sued (think: physicians) or who have significant debts.
To ensure that the beneficiary spouse is properly provided for while maintaining the estate-tax integrity of the Trust, SLATs typically include a standard known as the HEMS standard. HEMS stands for Health, Education, Maintenance, and Support, which are considered the basic needs of an individual. The HEMS standard outlines the circumstances under which the trustee can make distributions to the beneficiary spouse. For example, if the beneficiary spouse needs funds for healthcare expenses or to pay for educational expenses, the trustee may be able to make a distribution. The HEMS standard is important because it ensures that the beneficiary spouse is provided for without allowing them to abuse the trust by receiving unnecessary distributions.
SLATs can also be structured in a way that allows for additional beneficiaries. For example, the grantor spouse can designate that any remaining assets in the trust be distributed to their children upon the death of the beneficiary spouse. This can be a useful way to ensure that the grantor's wealth is passed on to the next generation in a tax-efficient manner.
A Spousal Lifetime Access Trust can be a valuable estate planning tool for married couples. The trust allows the grantor spouse to transfer assets out of their estate while also providing the beneficiary spouse with access to those assets during their lifetime. The HEMS standard ensures that the beneficiary spouse is properly provided for, while additional beneficiaries can be named to receive any remaining assets in the trust. There are certain traps to be wary of when creating your SLAT such as naming appropriate trustees and avoiding the reciprocal trust doctrine issue.
Call Hogan Law Office at 516-274-3250 if you would like to discuss how a SLAT may be appropriate for your family.