Many wealthy professionals are looking for ways to protect assets from potential lawsuits or other unknown creditors without giving up substantial control. Estate tax considerations are also still important as the current large estate tax exemption ($11.4 million for individuals, or $22.8 million for married couples) is set to drop at the end of 2025, and Illinois estate tax hits individuals with over $4 million.

A Spousal Lifetime Access Trust (SLAT) can be used to provide some creditor protection and mitigate estate taxes.

How a SLAT Works

A SLAT is an irrevocable trust created by one spouse (the “grantor”) for the benefit of the other spouse and their children or other heirs. It must be irrevocable, and the grantor cannot retain any beneficial interest in the trust. By creating the trust before any creditor problems arise and removing the assets from the grantor’s name, the assets are generally protected from claims against the grantor. While the grantor is not a direct beneficiary of the trust, distributions can be made to the grantor’s spouse or descendants that can indirectly benefit the grantor.  It may also be possible to loan money from the trust to the grantor.

To strengthen the creditor protections, the trustee should have “sole and absolute” control over distributions.

Worried about the strength of your marriage? The SLAT can be written to provide protections against a potential divorce as well.  For instance:

• The SLAT can incorporate a “floating spouse” provision. This provision removes the spouse as a beneficiary in the case of divorce or death, while a remarriage would add the new spouse as a beneficiary.
• Also, the gift to the SLAT removes the assets from your estate, and they are arguably no longer marital property subject to a property settlement in a divorce.

While this provides protection for the SLAT assets, a divorce will impact the indirect ability to reach the SLAT assets through distributions to the spouse.

Many estate planning techniques require that you give up control and use of the assets.  This creates a balancing act between the desire to minimize estate taxes and the perceived need to retain control over assets. Using a SLAT can provide the estate tax savings, while still retaining the indirect use of the assets if needed through distributions to your spouse.

Estate tax savings can be realized in a few ways:

• Use the current gift tax exclusion amount to fund a SLAT now before the law sunsets in 2025 and the exemption amount drops. Keep in mind the political climate may change as soon as next year’s elections, and the large estate and gift tax exemption may not even last through 2025;
• Use annual exclusion gifts for your spouse and descendants to fund the trust. If you are currently not taking advantage of the $15,000 per person annual exclusion gifts, this is an easy and inexpensive way to fund this type of trust each year; and
• Of course, any growth in the trust assets will also be outside of your taxable estate.

If you are not interested in estate tax savings, you can still get the creditor protection and maintain more control over the trust. This is called an “incomplete gift SLAT” and would allow you to retain the right to veto distributions and maintain the limited ability to appoint the assets out of the trust.

For income tax purposes, the SLAT is often written as a grantor trust so you would continue to pay the income taxes on the earnings of the trust. If desirable, the trust could be its own taxpayer; because of the high trust tax rates and additional administrative complexity, this may not be desirable.

Interested in learning more about SLATs? Please join us for an ORBA Wealth Management Group’s seminar covering this and related topics on December 11, 2019.  For more information or to register, visit www.orba.com.

For more information contact Frank L. Washelesky at [email protected] or 312.670.6235. Visit orba.com to learn more about our Wealth Management Services.