A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust designed as an estate planning tool for married couples. It provides financial benefits to the beneficiary spouse while removing assets from the grantor spouse's taxable estate, offering tax and asset protection advantages.

Why use it: It allows your spouse access to assets in the trust while removing them from your taxable estate. It combines the benefits of asset protection, tax efficiency and flexibility in wealth transfer strategies.

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Key Features of a SLAT

1. Irrevocability: Once established, a SLAT cannot be revoked. The assets transferred are permanently removed from the grantor's estate.

2. Spousal Access: Unlike some irrevocable trusts, a SLAT allows your spouse ongoing access to trust assets. The beneficiary spouse can receive health, education, maintenance, and support (HEMS) distributions and income from the trust, ensuring financial security and flexibility.

3. Beneficiaries: Typically, upon the death of your spouse, any remaining assets in the SLAT pass to designated beneficiaries, such as family members or designated trusts.

4. Estate Tax Savings: By transferring assets to the SLAT, the grantor reduces their taxable estate, potentially saving on estate taxes. Additionally, any appreciation of the trust's assets is excluded from the taxable estate.

5. Gift Tax Exemption: The transfer of assets to the SLAT can utilize the grantor's lifetime gift tax exemption.

6. Creditor Protection: Assets in the SLAT are protected from creditors of both spouses, adding an extra layer of security.

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Considerations

1. Complexity and Costs: SLATs can be expensive to establish and maintain. Legal and financial professionals are needed to ensure proper set-up and compliance with tax laws.

2. Cost Basis: Assets in a SLAT do not receive a step-up in basis at death, potentially leading to higher capital gains taxes if sold later by the beneficiaries. Although, SLATs often include a power of substitution, allowing the grantor to exchange assets in the trust with other assets of equivalent value – potentially optimizing tax planning techniques.  

3. Reciprocal Trust Doctrine: If both spouses create SLATs for each other, they must be careful to avoid the reciprocal trust doctrine. Trusts found to be substantially similar may be ignored for federal tax purposes. This requires careful planning and drafting to ensure sufficient differences between the trusts.

4. Loss of Control: The grantor spouse irrevocably gives up control over the assets transferred to the SLAT. This means they no longer have direct access to or control over these assets even in the event of a divorce.

The considerations noted above highlight the importance of careful consideration and professional guidance when deciding whether a SLAT is appropriate for your specific financial and family situation. If deemed appropriate, a SLAT can create a powerful strategy for wealth preservation, family financial security, and efficient estate planning.

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The Bottom Line

In an era where estate taxes are uncertain, effective estate planning is crucial to long-term financial success, Spousal Lifetime Access Trusts can provide a compelling option. They allow you to strategically manage your wealth, preserve your legacy, and protect your family's future – all while still enjoying access to the benefits of your hard-earned assets. At GatePass Capital, we’re dedicated to helping our clients navigate these complex strategies with confidence and clarity. If you’re interested in exploring whether a SLAT is right for your estate plan, please contact us here.

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