Some of the most effective estate-planning strategies involve setting up irrevocable trusts. For a trust to be deemed irrevocable, you’re effectively removing those assets from your taxable estate. This may be an especially pertinent question in light of the current economic downturn resulting from the novel coronavirus (COVID-19) pandemic.
If you’re married and feel as though your marriage is strong, a Spousal Lifetime Access Trust (SLAT) allows you to obtain the benefits of an irrevocable trust while creating a financial backup plan.
SLAT in action
A SLAT is simply an irrevocable trust that authorizes the trustee to make distributions to your spouse if needs arise. Like other irrevocable trusts, a SLAT can be designed to benefit your children, grandchildren, or future generations.
The key benefit of a SLAT is that by naming your spouse as a lifetime beneficiary, you retain indirect access to the trust assets. To keep the trust assets out of your taxable estate, you must not act as trustee. You can appoint your spouse as trustee if distributions are limited to an ascertainable standard.
Another critical requirement is to fund the trust with your separate property. If you use marital or community property, there’s a risk that the trust assets will end up in your spouse’s estate.
Understand the pitfalls
There’s a significant risk inherent in the SLAT strategy: If your spouse predeceases you, or if you and your spouse divorce, you’ll lose your indirect access to the trust assets. One way to mitigate this risk is to use dual SLATs. In other words, you and your spouse each establish an irrevocable trust using your separate property and naming each other as lifetime beneficiaries.
If you’re considering using a SLAT or would like to learn about other estate-planning strategies contact Capell & Howard at (334)241-8000 to speak to one of our experts.