The SLAT: A Love Letter to Your Spouse (and Your Tax Bill)
One of the key tenets of estate planning is that practically everything you own is part of your taxable estate which means you could potentially owe estate taxes on these assets. And the tricky part is, thanks to the IRS, the only way to remove assets from your estate & lower your estate tax bill is to give up access to those assets, to give them away.
But therein lies the rub. If you’re under age say 70 or 75 years old, what if you feel you may need access to those assets down the road? Then the thought of giving away assets today is a daunting one. Until now.
Enter the Spousal Lifetime Access Trust or SLAT. A SLAT solves this dilemma. It is designed to remove the asset from one’s estate yet still provides access to that asset via your spouse. A husband, for example, could gift assets to a SLAT of which his wife is the beneficiary—thereby still giving the husband indirect access via his spouse.
If one’s spouse uses that money to pay for a vacation, a new car, or a particularly expensive dinner, you are likely sitting right across the table from them and enjoying these benefits too. You’ve effectively removed the money from the IRS’s reach while keeping a “key” to the funds through your marriage. It’s the closest thing to having your cake and eating it too, provided you stay on good terms with the person eating the cake.
The Benefits
- The Great Estate Freeze: Much like the Sale to a Defective Trust, any growth on the assets inside the SLAT happens outside your estate. If that tech stock triples, the IRS doesn't get a dime of the appreciation.
- Asset Protection: Because the assets are in a trust, they are generally shielded from creditors. And if you get sued, the SLAT acts as a legal moat.
- Income Tax Perks: Usually, SLATs are "Grantor Trusts," meaning you pay the income tax on the trust’s earnings. While paying taxes sounds like a chore, it’s actually a gift: it lets the trust grow unburdened from taxes while further reducing your taxable estate.
The Catch
The “wry” part of the SLAT is that it relies entirely on the “S” (Spousal) part. If you get a divorce or your spouse passes away, that back door access is closed. You can’t be a beneficiary of a trust you created for yourself, or the IRS will gleefully drag those assets back into your estate.
Because of all these powerful benefits, SLAT’s have become quite popular in the estate planning world. And the beauty is it can be funded over time. It doesn’t have to be funded all at once. This gives you flexibility, control and that key access to the assets all while removing it from your taxable estate potentially saving you in estate taxes.
Because of all these powerful benefits, SLAT’s have become quite popular in the estate planning world. And the beauty is it can be funded over time. It doesn’t have to be funded all at once. This gives you flexibility, control and that key access to the assets all while removing it from your taxable estate potentially saving you in estate taxes.
Navon Wealth does not give tax/legal advice and encourages clients to seek such counsel.