Learn About Spousal Limited Access Trusts (SLATs)
The third week in October is designated as “National Estate Planning Awareness Week” to raise awareness about the importance of estate planning and creating wills and trusts. One common estate planning strategy for married couples is a Spousal Limited Access Trust (SLAT).
A SLAT allows individuals to freeze the value of and transfer assets out of their estate while providing lifetime benefits to their spouse. It is an irrevocable trust designed to reduce federal estate taxes while maintaining for the donor indirect access to the trust assets through their spouse. The trust allows the donor to remove assets from their taxable estate while ensuring their spouse can benefit from those assets by receiving income or principal distributions from the trust.
Upon creation, the donor contributes assets to the trust and names their spouse as the primary beneficiary. The spouse may then receive distributions during their lifetime, often for health, education, maintenance, and support. The donor cannot directly access the assets themselves.
By transferring assets into the trust, the donor removes the assets from their taxable estate, thereby lowering the amount subject to estate tax upon their death. This can be particularly beneficial for married couples with large estates, as it allows them to use both spouses’ estate tax exemption amounts to shield more wealth from taxes. Additionally, the structure of a SLAT provides a level of protection from creditors and helps ensure that assets will pass to future generations.
Now that the Federal gift, estate tax, and generation-skipping transfer tax (GSTT) exemptions are permanent with the passing of the One Big Beautiful Bill, estate tax planning will not be an issue for most Americans. However, for spouses without estate tax concerns, SLATs can still be used for creditor protection and for income tax planning.
SLATs do come with certain limitations and risks. Once assets are placed into the trust, they cannot be reclaimed by the donor, as the trust is irrevocable and the assets will not get a step-up in basis at the donor’s death. Furthermore, as the donor cannot directly access the assets, the trust must be structured carefully to ensure that the spouse is comfortable with the terms. Moreover, in the event of divorce or death of the donee spouse, the purpose of the trust could be disrupted, potentially affecting the intended beneficiaries. Spouses can create SLATs for each other; however, care must be taken to ensure the trusts do not violate the reciprocal trust doctrine, which if applied, may cause estate tax issues. Therefore, while SLATs can be a powerful estate planning tool, they must be carefully crafted to align with the donor’s long-term goals and financial situation.
Ready to learn more about using a SLAT as part of your estate plan? Contact us at (888) 727-9191 to speak to a Members Trust Company (MTC) Senior Fiduciary Officer.
Trust services provided by Members Trust Company, a federal thrift regulated by the Office of the Comptroller of the Currency. Trust and Investment products are not NCUA/NCUSIF/FDIC insured. May lose value including the possible loss of principal. No financial institution guarantee. Not a deposit of any financial institution. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant.
