The Spousal Lifetime Access Trust (SLAT) offers a unique planning opportunity for married couples to pass wealth to future generations while potentially reducing their taxable estate.
This powerful planning tool is particularly advantageous under South Dakota’s progressive modern trust law and is important for high and ultra-high-net-worth individuals and families to consider in the planning process.
Understanding SLATs
A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse. It allows the funding spouse to transfer assets into the trust, which are then managed by a trustee for the benefit of the beneficiary spouse and potentially other family members.
SLATs offer several advantages:
- Tax Efficiency: By transferring assets into the trust, the funding spouse removes those assets from their taxable estate, reducing estate tax liability upon the funding spouse’s death.
- Asset Protection: Assets held within the trust are typically shielded from creditors, lawsuits, and divorce settlements, providing a layer of protection for the beneficiary spouse.
- Flexibility: SLATs can be structured to allow the beneficiary spouse access to income and principal distributions, providing financial support while maintaining the integrity of the trust.
By leveraging South Dakota’s unique and industry leading trust laws, married couples can harness the full potential of SLATs to preserve wealth, protect assets, and provide for future generations.
Completed v. Incomplete Gift SLAT
When it comes to understanding SLATs, there are two types: Completed Gift SLAT and Incomplete Gift SLAT. The Completed Gift SLAT tends to be the most common; however, it is important to understand the similarities and differences between the two as they share many characteristics but with key differences in how the gifts are treated for tax purposes.
Similarities:
- Irrevocable Nature: Once established, both the Completed Gift SLAT and Incomplete Gift SLAT cannot be altered or revoked.
- Beneficiary Access: In both types of SLATs, the non-donor spouse can access the trust’s income and, under certain conditions, the principal.
Differences:
- Gift Tax Treatment:
- Completed Gift SLAT: Transfers to the SLAT are considered completed gifts, utilizing the donor’s lifetime gift tax exemption.
- Incomplete Gift SLAT: Transfers to the SLAT are considered incomplete gifts for tax purposes, meaning they do not utilize the donor’s lifetime gift tax exemption.
- Estate Tax Benefits:
- Completed Gift SLAT: Assets transferred to the SLAT are removed from the donor’s estate, reducing potential estate taxes.
- Incomplete Gift SLAT: While the assets may still be included in the donor’s estate, they are protected from creditors and provide other non-tax benefits.
SLATs are considered a powerful planning tool for married couples looking to transfer wealth, reduce estate taxes, and protect assets. South Dakota’s favorable trust laws enhance the benefits of both Completed Gift and Incomplete Gift SLATs and understanding the differences between these two types of SLATs can help in choosing the right strategy for your client’s estate planning needs.
For more information on Spousal Lifetime Access Trusts (SLATs) and how they combine with South Dakota’s modern trust laws to create powerful planning opportunities for advisors and their clients, please contact us via our contact page or by calling (605) 224-9189.
