What is a Spousal Limited Access Trust in Florida?

In Florida, a spousal limited access trust, or SLAT, is an estate planning device that provides asset protection without the loss of protection of tenancy by entireties assets upon the non-debtor spouse’s death.

Florida law exempts assets owned by married couples as tenants by entireties from execution of judgments against either spouse individually. Entireties protection is lost when the spouses are no longer married. This creates a problem if there is a judgment against one spouse, and the non-debtor spouse dies first. Upon the non-debtor spouse’s death, the surviving debtor spouse owns in his own name all assets previously owned and protected as TE assets. These assets are then exposed to a civil judgment.

Using SLATs in Florida is an advanced asset protection technique to mitigate this issue.

How to Form a SLAT

Using a SLAT to mitigate the loss of protection when one spouse dies involves each spouse creating an irrevocable trust for the benefit of the other spouse and their children. A husband forms an irrevocable trust for the lifetime benefit of his wife, and the wife forms her own irrevocable trust for the benefit of her husband.

Both trust agreements typically state that income and principal may be distributed or applied for the beneficiary spouse’s health, education, maintenance, and support. The beneficiary spouse may serve as trustee with discretion to distribute to herself income and principal, or there can be an independent co-trustee for enhanced protection.

SLAT design is flexible regarding the disposition of trust assets after the death of the beneficiary spouse. The trust could provide that trust assets are distributed or held in trust for children and future generations.  Or, the trust can provide that upon the death of the beneficiary spouse, the trust assets remain in trust for the benefit of the donor spouse, as discussed below. Upon the death of both spouses, the assets typically are distributed or held for the benefit of the spouse’s children or other designated heirs. The SLATs may not give the trustmaker spouse any rights to income or principal during the lifetime of their beneficiary spouse, and the trustmaker should not serve as trustee of a SLAT.

The SLAT includes asset protection features of typical irrevocable trusts. The SLAT has a standard “spendthrift clause” that prevents the beneficiary spouse from assigning or pledging their trust benefits to a third-party including creditors. The amount and timing of any trust distributions are within the trustee’s sole discretion.

Each beneficiary spouse may serve as trustee of the trust created by the other, grantor spouse. For example, a husband can establish an irrevocable trust for the benefit of his wife and name his wife as the trustee of her trust. Enhanced asset protection is afforded by having the trust agreement provide for an independent co-trustee. Each spouse can reserve the right to remove and replace trustees in order to retain some control over his assets conveyed to the trust.

Each beneficiary spouse can open a checking account in trust name to receive distributions. If the beneficiary spouse is named as trustee, he or she may use money in her SLAT account to pay for family expenses. In this example, the husband would be trustee and have access to distributions from the SLAT created by his wife and vice versa. There is no change in available family income from assets transferred to two spousal SLATs.

Asset Protection Benefits

Assets conveyed to a SLAT are protected from creditors of either spouse.

For illustration purposes, assume a husband who is concerned about future claims and lawsuits is married to his wife who anticipates no significant future civil liability. The spouses considered holding their family assets as entireties assets, but they are concerned that the wife may predecease leaving these same assets exposed to the husband’s creditors. If the wife creates a SLAT and transfers her assets for the benefit of her husband. The SLAT’s spendthrift clause and discretionary trustee distributions protect these assets from the husband’s creditors.

Florida statutes protect a beneficiary’s interest in any “spendthrift trust,” and Florida statutes protect from creditors a beneficiary’s interest in discretionary trust distributions even if the beneficiary is serving as trustee of their own trust and controls distributions.

In the above example, the deceased wife is considered the settlor of the SLAT that the surviving husband initially created, and the husband’s asset protection will not be lost by the same SLAT being considered a self-settled trust.

After the debtor husband conveys his assets irrevocably to a SLAT for his wife’s benefit, the assets are titled in the SLAT and are not exposed to a judgment against the grantor husband because he no longer owns the assets. If the wife dies, unlike with entireties ownership, there is no loss of protection. This is because the husband’s trust names himself as successor trustee and the trust is designed to make discretionary payments of income and principal to the grantor husband upon his wife’s death.

The SLAT assets that supported the wife during her life revert to the benefit of the grantor husband if his wife predeceases. SLAT distributions are protected from the husband’s creditor by the SLAT’s spendthrift clause and discretionary nature of distributions.

Change of Florida Law

In the past, there had been an issue regarding the protection of the husband’s interest in his own trust after his wife’s death in this example. The issue related to Florida law regarding self-settled trusts. Florida law does not permit a trustmaker from protecting from his creditors the assets the trustmaker conveys to a trust established for his own benefit. In the above example where the grantor spouse acquired a beneficial interest in the trust after the death of the beneficiary spouse, a creditor could argue that the SLAT is an unprotected self-settled trust when the grantor spouse becomes a beneficiary of a trust he created.

The Florida legislature resolved this issue through a change to the Florida trust code in 2022. The new statute provides that the grantor of a SLAT is not considered to be the settlor of an irrevocable trust if the trust benefits only the grantor spouse after the beneficiary’s death, does not benefit the grantor during the beneficiary’s life, and the initial trust funding was a completed gift for tax purposes. The new statute enables a debtor to retain a future interest in the property he conveys to a SLAT for his non-debtor spouse.  

A properly drafted SLAT should deal with the possibility of divorce. Neither spouse wants to create an irrevocable trust that could continue to benefit their spouse following a divorce. The solution is a “floating spouse” provision that defines the trustmaker’s spouse as the person he or she is married to at any time. A trust agreement might state that upon divorce, or filing for a divorce, the beneficiary spouse’s interest in a SLAT would terminate. The definition of a “spouse” could include a future spouse subject to prenuptial agreements with the new spouse.

Estate Planning Benefits

A SLAT may provide estate tax savings in addition to asset protection. Transfers to SLATs must be completed gifts for tax purposes, meaning that the trust may not have language reserving powers to the trustmaker to create a “grantor trust” for taxation. Trust income is assigned to either the trust beneficiaries or to the trust itself, but not to the trustmaker. The SLAT must also obtain its own tax identification number.

Gifts to a SLAT may be subject to gift tax in the year of transfer. Transfers within the annual gift exclusion (currently about $17,000 per person/recipient in 2023) are excluded if the trust agreement gives the beneficiary a present interest in the gift through “withdrawal rights.” Transfers in excess of the gift exclusion apply to the trustmaker’s lifetime inheritance credit which is currently about $13 million as of 2023. Assets transferred to a SLAT are removed from the trustmaker’s taxable estate when the trustmaker and his spouse die. This means that the trust assets and their appreciation after transfer to the SLAT are not counted when determining family estate tax liability.

Avoiding Reciprocal Trust IRS Rule

The asset protection and estate planning SLAT benefits will be lost if the spousal SLATs violate what the IRS refers to as the “reciprocal trust doctrine.” The doctrine holds that when spouses are beneficiaries of each other’s trust, and the two trust agreements are the same or very similar,  then the two trusts will be “merged” or “uncrossed” so that each spouse will be considered to have made a self-settled trust for their own benefit.

The gifts each spouse makes to their irrevocable trust for the beneficiary spouse will be essentially voided,  and the transfers will be deemed made to each spouse’s own trust for their own benefit.

Reciprocal trusts can be avoided by planning and precise drafting of the trust agreements. There are many trust designs that result in meaningful variation between spousal SLATs and accomplish SLAT objectives without triggering reciprocal trust consequences. For instance, spousal SLATs may name different trustees or co-trustees, include different types of assets, and somewhat different dispositive provisions. The more differentiation between the trust agreements the better protection against reciprocal trust treatment.

Key Points

The most important things to know about a SLAT include:

• A SLAT plan involves spouses that establish irrevocable trusts for one another that provide income during the beneficiary spouse’s lifetime and reverts to the donor spouse after the beneficiaries’ death.
• The SLAT cannot be amended or revoked; it is irrevocable.
• SLAT assets are protected from the beneficiary spouse’s creditors during his or her lifetime.
• SLAT assets remain in trust after the beneficiary spouse’s death where they are protected from the donor spouse’s creditors.
• Florida statutes state that a SLAT is not considered a “self-settled trust” by the donor spouse after the beneficiary’s death even though the donor created the trust from which he may ultimately benefit.
• A SLAT may reduce estate tax liability because appreciation in trust assets is not counted toward the value of the spouse’s taxable estates after their deaths.
• Transfers of assets to a SLAT should be made as competed gifts for tax purposes.
• To be effective for asset protection, a SLAT may not be structured as a “grantor trust” for tax purposes.
• Transfers to a SLAT may be attacked as “fraudulent conveyances” if the trusts appear intended to avoid or hinder creditors.