A Spousal Limited Access Trust (SLAT) is an estate planning tool that allows one spouse to transfer assets to a trust for the benefit of the other spouse. It can provide asset protection and potential tax benefits while still allowing limited access to the funds, helping couples preserve wealth for future generations.
How Does a SLAT Work?
A SLAT is an irrevocable trust established by one spouse (the grantor) for the benefit of the other spouse (the beneficiary). The trust can also benefit other family members, such as children or grandchildren, after the beneficiary spouse’s death.
With a SLAT, the grantor spouse transfers assets into the trust, removing them from the grantor’s taxable estate, potentially reducing estate tax liability upon their death.
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Asset Protection Benefits
A SLAT has asset protection advantages over the more common asset protection tool of tenancy by entireties ownership.
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 because of the death or divorce of the non-debtor spouse.
The former tenants by entireties assets could then be exposed to a civil judgment against a surviving debtor spouse. Using SLATs in Florida is an advanced asset protection technique to mitigate this risk with entireties protection.
Estate Planning Benefits
A SLAT may provide estate tax savings in addition to asset protection.
Transfers to SLATs may be completed gifts for tax purposes or incomplete gifts. The nature of the gift is determined by the powers retained by the trustmaker in the SLAT agreement.
With an incomplete gift, the SLAT assets remain the trustmaker’s property for purposes of gift and inheritance taxation. With a completed gift, the current value and future appreciation of property are permanently removed from the trustmaker’s taxable estate.
Completed gifts to a SLAT may be subject to gift tax in the year of transfer. Transfers within the annual gift exclusion 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.
How to Create a SLAT
- Consult with an attorney to draft the SLAT document, ensuring it meets legal requirements.
- Specify the terms and conditions of the trust, including the beneficiary (your spouse) and the trustee who will manage the trust.
- Transfer assets into the SLAT, such as cash, securities, or property, officially funding the trust.
- The trustee manages the assets in the trust, making distributions to the spouse as outlined in the trust agreement.
Designing the Trust
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 then distributed or held in trust for children. Or, the trust can provide that upon the death of the beneficiary spouse, the trust assets remain in trust for the benefit of the trustmaker husband in this hypothetical, to be discussed below.
Upon the death of both spouses, the assets typically are distributed or held for the benefit of the couple’s children or other designated heirs. The SLATs may not initially give the trustmaker spouse any rights to income or principal during the lifetime of the beneficiary spouse, and the trustmaker should not serve as the sole trustee of a SLAT. The trustmaker husband may reserve the right to remove and replace trustees.
The SLAT includes asset protection features of typical irrevocable trusts, and accordingly, SLAT assets cannot be reached by the beneficiary wife’s creditors. The SLAT typically includes a standard “spendthrift clause” that prevents the beneficiary spouse from assigning or pledging their trust benefits to a third-party, including a creditor.
A SLAT Can Be an Asset Protection Trust
Some people consider a so-called domestic asset protection trust (DAPT) to protect an individual’s assets from creditors. A DAPT is a trust designed to protect the assets of a prospective debtor who creates the trust for his own benefit. A trust for the benefit of the trustmaker is referred to as a “self-settled trust.” Some states have laws that protect the trustmaker’s beneficial interest in a self-settled trust. Florida law, however, does not protect assets of self-settled trusts, even if the trust includes asset protection provisions such as spendthrift clauses.
A SLAT can be drafted to act as a self-settled trust where the protection of the trustmaker’s assets does not depend on a favorable state statute. The trust can be designed to include a trust protector (an independent third-party), who has the power to add trust beneficiaries.
Even without a customized SLAT with trust protectors, a SLAT offers the trustmaker asset protection after the death of their non-debtor spouse. A standard SLAT provides that after the non-debtor spouse’s death, the trustmaker becomes the primary trust beneficiary and the trustee.
Florida statutes protect a beneficiary’s interest in any “spendthrift trust,” even if the beneficiary is serving as trustee of their own trust and controls distributions. If the SLAT is drafted to be a discretionary spendthrift trust for the initial spouse and other beneficiaries, a surviving trustmaker will have a similarly protected right to income and principal.
New Florida Law Regarding SLATs
In the past, there had been an issue regarding the protection of a surviving trustmaker’s interest in a SLAT they created following the death of the trustmaker’s spouse. In the above example, where the grantor husband acquired a beneficial interest in the trust after the death of his non-debtor beneficiary spouse, a creditor could argue that the SLAT is an unprotected self-settled trust when the husband becomes a beneficiary of a trust he had 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 (1) the trust benefits the trustmaker only after the death of the trustmaker’s spouse, (2) the trust does not benefit the trustmaker during the spouse’s lifetime, and (3) the initial trust funding was a completed gift for tax purposes.
The new SLAT law allows a debtor to retain a future protected interest in the property they convey to a SLAT for their non-debtor spouse.
According to the Florida statute, the deceased spouse is considered the settlor of the SLAT that the trustmaker initially created, and the trustmaker’s asset protection will not be lost by the same SLAT being considered a self-settled trust.
