Spousal Lifetime Access Trusts & Closely Held Businesses by Travis Neal Business owners often face a unique estate planning challenge: how to minimize the estate tax implications when the business is worth more than the gift and estate tax exclusion. The Spousal Lifetime Access Trust (SLAT) is one estate planning tool that may address the issue. SLATs do not work for every high net-worth client seeking to remove assets from their estate. This article provides an overview of SLATs and presents some of the tax implications and drawbacks. A SLAT is an irrevocable trust created during a married settlor’s lifetime. The SLAT allows a married settlor to remove assets from her estate, such as a closely held business or entity, while still benefiting from trust income indirectly through her spouse. Transfers of appreciating assets to SLATs allows the settlor to lock-in gifts of amounts up to the current gift and estate tax exclusion ($11.7 million in 2021) and avoid estate tax at death on the gifted assets as well as their appreciation, while enjoying the lifetime benefits from the trust payable to the beneficiary spouse. The settlor can still maintain managerial control of the business. The SLAT’s beneficiaries’ ability to exercise control over the interest held in the SLAT will be subject to the settlor’s limitations provided in the trust.
Discussion
With a SLAT, the “settlor-spouse” establishes an irrevocable trust for the “beneficiary-spouse” and if desired, the spouses’ children or grandchildren. The settlor-spouse must fund the SLAT with her separate property assets. This transfer reduces the settlor-spouse’s estate. At the beneficiary-spouse’s death, the SLAT’s assets may be distributed to the spouses’ children or grandchildren outright or in trust. The beneficiary-spouse may be the SLAT’s sole or co-trustee. The SLAT directs the trustee to distribute income and/or principal to the beneficiary-spouse for his health, education, maintenance, or support (HEMS). If the settlor-spouse wants the trustee to distribute trust assets above what is needed for the beneficiary-spouse’s HEMS, she must appoint someone other than the beneficiary-spouse to be trustee or co-trustee. Otherwise, the trust assets may become subject to the beneficiary-spouse’s creditors and make the SLAT’s assets includable in the beneficiary-spouse’s estate.
SLAT Tax Implications
A SLAT can provide tax benefits to the settlor-spouse. The transfer
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