Opening a trust fund is a common tool used to preserve and transfer your wealth in estate planning. Trusts can help mitigate estate taxes and help beneficiaries avoid probate court after you pass away, all while ensuring your assets are managed according to your wishes. For married couples, typically those who have a high net worth, a Spousal Limited Access Trust (SLAT) could be an efficient wealth-preserving strategy. These irrevocable trusts allow one spouse to transfer assets such as cash, marketable securities, real estate, and life insurance, to a trust that benefits the other spouse.

One of the biggest concerns in estate planning is navigating the tax burden your heirs may be responsible for after you pass. In 2024, the maximum amount you can leave for your heirs without being subject to gift or estate taxes is $13.61 million, or $27.22 million per couple. Assets transferred from a deceased spouse to a surviving spouse do not involve an estate tax. However, there could be an estate tax due once the surviving spouse passes – specifically if the estate is worth more than the above exclusions.

Let’s say a married couple has a combined net worth of $60 million. One spouse could transfer as much as $13.61 million into a SLAT tax-free. The surviving spouse, listed as a beneficiary of the SLAT, can receive distributions from the trust as a form of income. Once the surviving spouse dies, the remainder of the trust can be passed on to children – or other beneficiaries – tax-free.

Although SLATS are treated as separate legal entities when it comes to ownership, they’re not treated that way when it comes to income taxes. Typically, these trusts are structured as grantor trusts, meaning the donating spouse must pay income taxes generated by the trust’s assets each year. However, paying taxes on the trust’s income each year allows the assets in the trust to grow tax-free over time.

In addition to the tax benefits, SLATS can also protect assets from creditor claims made against you and your spouse. By relinquishing control over the transferred assets, you technically no longer own them, meaning there’s no one for creditors to go after. If the trust is structured so that your spouse can only receive income or principal at the discretion of an independent trustee, the assets should also be protected from the non-donating spouse’s creditors.

There are some downsides to utilizing a SLAT. The donor, or gifting spouse, must give up direct control and access of the assets being transferred to the fund. Additionally, the gifting spouse cannot be a trustee of the trust and therefore will not have any say in how distributions are made to beneficiaries. The gifting spouse cannot be a beneficiary of the trust either. However, the donating spouse can remove and replace the trustee if needed.

If the non-donor spouse dies before the donating spouse, the donating spouse loses indirect access to the assets in the trust. The assets can still be passed to the donor’s children or other beneficiaries by remaining in the trust or being distributed outright.

Divorce can also cause issues for irrevocable SLATs. If the couple divorces, the donating spouse will likely lose indirect access to the assets and may have to pay taxes on those assets. It may be possible to renegotiate the terms of the trust during the divorce settlement, but that’s dependent on your individual situation. The stability of the marriage should be taken into consideration before setting up the trust.

SLATs can be a great tool for preserving wealth for high-net-worth families, but there is a lot to consider before setting one up. To see if a SLAT is right for your financial situation, consult with your financial adviser, or an estate planning attorney. They can help you go over the benefits and any potential concerns, ensuring you make the best decision for preserving and transferring your wealth.

Source:  https://www.advisorperspectives.com/articles/2024/07/01/managing-wealth-spousal-lifetime-access-trust

by Derek Miser, 7/1/24