September 21, 2012
Spousal Limited Access Trusts
Spousal Limited Access Trusts (SLATs) can be set-up for the benefit of you and your spouse. You can set the trust up to benefit your spouse upon your death and then when your spouse dies, the remainder of the assets in the trust pass to the rest of the family tax-free. The best part is, you and your spouse can benefit from the set-aside funds while you're both living.
In order to benefit while living, you would make a gift of cash or assets to an irrevocable trust, instructing that the trustee distributes income and principal to your spouse while he or she lives. This income and principal distribution can benefit you as well, and these assets that you put in the irrevocable trust are not part of your estate for estate tax purposes.
There are some pitfalls in creating SLATs, so to keep the IRS from questioning the gift, you should be sure that you carefully draft the trust to prevent the gifted assets from being included in your taxable estate after death, creating an unexpected tax consequence for your heirs. To achieve this, it must be clear that you relinquish control over the trust assets and that you receive no direct benefit from the trust.
Additionally, it is important to consider how you will fund your SLAT. You should fund it with assets that belong to you alone--not assets jointly owned by you and your spouse. You should also avoid signs of collaboration. If you and your spouse create SLATs for eachother, write the trusts differently.
Divorce and death can complicate the concept of SLATs because the gift trust is irrevocable. Even upon a divorce, your spouse would get the trust and all distributions. One way to get around this is to write in the spousal definition in the trust as the person you are currently married to as opposed to naming a specific person.
If one spouse dies before the other, benefits pass to the next generation. This could be problematic if the surviving spouse still needs access to the trust assets to maintain the survivor's lifestyle.
See Richard C. Morais, SLATS: A Spousal Shelter With Benefits, Barron's, Sept. 20, 2012.
Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this blog to my attention.
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