What Is a SLAT Trust? An Experienced Orlando Trust Attorney Explains

For many people, estate planning can be a complex and overwhelming process. One often-overlooked yet powerful tool that can provide substantial benefits is a Spousal Lifetime Access Trust (SLAT). 

In this blog, an Orlando trust attorney from Family First Firm explains what is a SLAT trust, how it can be an effective tool in your estate planning arsenal, and its role in managing your wealth now and for future generations.

If you have questions or are ready to include a SLAT as part of your estate planning strategy, call (407) 574-8125 to schedule a consultation with a member of our team. At Family First Firm, we’re always by your side to provide simple yet creative legal solutions to protect your family’s legacy.

What is a SLAT?

A Spousal Lifetime Access Trust, more commonly referred to as a SLAT, is an irrevocable trust created by one spouse (the grantor spouse) to benefit the other (the beneficiary spouse). As the name suggests, it's a trust designed to ensure access to assets throughout the beneficiary spouse's lifetime.

The assets transferred into the SLAT are generally considered separate property of the beneficiary spouse and are managed by a trustee. This trustee can be the spouse who created the trust, another individual, or even a trusted institution.

Though the grantor spouse cannot directly access the trust's assets once transferred, the beneficiary spouse can. As a result, this arrangement indirectly allows the grantor to still benefit from the assets. The trust also caters to the needs of any children or designated beneficiaries, making it an efficient tool for wealth transfer.

Florida Legislation Enhances SLAT Benefits

Recent Florida legislative changes have bolstered the advantages of a SLAT, mitigating some previous disadvantages. Previously, upon the beneficiary spouse's death, the grantor spouse would lose indirect access to the SLAT's assets. 

Now, after the passing of the beneficiary spouse, the grantor spouse may be added as a beneficiary, granting them access to the trust's assets while likely maintaining separation from their personal estate and creditors. 

However, this provision applies only to trusts established and funded after June 30, 2022, and it doesn't allow the grantor spouse to be added in the event of a divorce. Additionally, the beneficiary spouse must remain a beneficiary throughout their lifetime, even post-divorce.

While some experts suggest the Internal Revenue Service (IRS) might include the SLAT's assets in the grantor spouse’s estate once they're made a beneficiary, parallels drawn with self-settled asset protection trust laws in other states suggest otherwise. 

However, these implications aren't definitive and emphasize the importance of consulting with a Florida trust attorney for guidance.

Advantages of a SLAT

The advantages of a SLAT are numerous and can make it a powerful estate planning tool. Here are some key benefits:

Estate Tax Reduction

By moving assets into a SLAT, you're effectively reducing the size of your taxable estate. This can result in significant estate tax savings, particularly for high-net-worth individuals.

Lifetime Access

Even though a SLAT is irrevocable, the grantor can still indirectly access the assets. If financial circumstances change, the beneficiary spouse can receive distributions from the SLAT, benefiting both spouses.

Asset Protection

Since assets in a SLAT are generally shielded from creditors, it's an effective tool for asset protection. However, the level of protection can vary based on your specific circumstances.

Benefit for Descendants

A SLAT can provide for children or other descendants after the beneficiary spouse's death. This ability to pass wealth to future generations can be an essential part of legacy planning.

Tax Advantages for Income and Appreciation

The SLAT is treated as a grantor trust for income tax purposes, meaning the income generated is taxed to the grantor, not the trust. Also, any appreciation of assets in the SLAT is removed from the grantor's estate, escaping future estate taxation.

Flexibility

A SLAT can be structured to address various needs and goals, making it a flexible tool in estate planning.

Establishing a SLAT 

Establishing a SLAT involves a structured process that should be carried out with the assistance of an experienced Orlando estate planning attorney to ensure all legal requirements are met, and the trust aligns with your unique financial goals. Here's an outline of the process:

Identify Your Objectives

The first step is understanding why you need a SLAT. Are you aiming to minimize estate taxes, provide financial security for a spouse, or transfer wealth to the next generation? Your specific goals will dictate the terms of the trust.

Choose the Trust Assets

Decide on the assets that will be placed into the trust. These could be cash, real estate, stocks, or other valuables. The choice of assets is crucial, as once transferred, they are removed from the grantor's taxable estate.

Select a Trustee

This person or institution will manage the trust's assets and oversee distributions to the beneficiary. The trustee could be the grantor, an independent third party, or a professional entity like a bank.

Draft the Trust Agreement

Your attorney will draft the trust agreement, specifying the terms and conditions, including how and when the beneficiary spouse can access the trust assets. This step is crucial, as the trust is irrevocable. Once it is established, the terms cannot be changed.

Transfer Assets to the Trust

After the trust agreement is signed and finalized, transfer the chosen assets to the trust.

File Necessary Tax Forms

Since a SLAT is a type of irrevocable trust, it's necessary to file certain tax forms with the IRS, including a gift tax return, if the transferred assets exceed the annual gift tax exclusion.

Regular Trust Administration

The trustee administers the trust, manages the assets, makes distributions per the trust terms, and handles any necessary tax filings.

Remember, each family's situation is unique, and establishing a SLAT should be tailored to your family's specific needs and circumstances. Therefore, it's always best to engage a trust attorney to guide you through this process.

Potential Risks Associated with a SLAT 

While a SLAT can provide significant tax advantages and financial security, like all estate planning strategies, it also comes with certain risks. Let's outline some potential challenges:

Irrevocability

Once established, a SLAT is irrevocable, meaning you can't easily alter or dissolve it. If your circumstances change or you regret your decision, it's not simple to undo. This makes the initial planning process crucial to ensure a SLAT aligns with your long-term objectives.

Dependence on Marital Relationship

The benefits of a SLAT are largely contingent on the marital relationship remaining intact. In the event of divorce, the grantor spouse may lose indirect access to the trust assets.

Gift Tax Considerations

When you fund a SLAT, you're making a gift that reduces your lifetime gift and estate tax exemption. If you later need those funds or if the tax laws change, this could lead to unintended consequences.

Creditor Claims and Legal Judgements

Although a SLAT can offer some level of protection against creditors, it's not foolproof. In some cases, creditors may still reach the trust assets.

Uncertain Legal and Tax Environment

Laws governing trusts and estate taxes can change. Future legislative changes could impact the efficacy and benefits of a SLAT.

Given these potential risks, consulting with a knowledgeable estate planning attorney before establishing a SLAT is essential. This will help ensure that your estate planning strategy is robust, flexible, and tailored to your specific needs and circumstances. 

Notwithstanding the potential risks, through careful planning with an experienced estate planning attorney, you can establish a SLAT that aligns with your financial goals, secures your family's future, and ensures your wealth is preserved for the next generation. 

Married and Looking to Protect Your Financial Future? Reach Out to Family First Firm in Orlando, Florida

Estate planning is not something you can afford to delay or get wrong. Whether you're looking to establish a SLAT or explore other estate planning tools, Family First Firm in Orlando, Florida, is here to guide you every step of the way. 

With the right planning, you can minimize your estate's tax liability, protect your assets from potential creditors, and provide for your spouse and descendants. 

Don't leave your estate to chance. Contact Family First Firm today at (407) 574-8125 or online to schedule a consultation for comprehensive and tailored estate planning solutions with an experienced Orlando trust attorney. 

At Family First Firm, we’re always by your side to provide simple yet creative legal solutions to protect your family’s legacy.