This is a part in a series of articles I have written on various types of irrevocable trusts.
What is a SLAT?
A SLAT stands for a Spousal Lifetime Access Trust. It is an irrevocable trust created by one spouse for the benefit of the other spouse during their lifetime. The grantor (person creating the trust) may choose to also name other individuals as a beneficiary of a SLAT, including descendants.
Like many irrevocable trusts, the assets in a SLAT appreciate outside of the taxable estate of the grantor. The noteworthy part of a SLAT is that because the spouse is a named beneficiary, the grantor then has indirect access to the assets through the beneficiary spouse.
A SLAT is taxed as a grantor trust, which means that the trust is a pass-through entity when it comes to income taxes. Instead, the grantor of the trust is responsible for paying any income taxes attributed to the trust, regardless of whether that income stays within the trust or is distributed to any of the beneficiaries. In this regard, a SLAT is a type of intentionally defective grantor trust.
What is a SLANT?
A SLANT is a Spousal Lifetime Access Non-Grantor Trust. It is exactly the same as a SLAT with two main differences.
First, the trust is not a grantor trust but, instead, is taxed as a non-grantor trust. This means that the trust is its own taxpayer for income tax purposes and is taxed at a different (more compressed) income tax rate. For example, in 2020, if trust income was above $12,950, the trust paid $3,129 in taxes plus an additional 37% tax on any income above that threshold! As a result, many times, income will be distributed out to beneficiaries of the trust in a lower tax bracket.
Second, because the spouse is a beneficiary in a SLANT, any distributions to the spouse must be approved by an adverse party. This usually means that another trust beneficiary must approve any distributions made to the spouse. Some practitioners recommend that this adverse party approval apply to any distributions made to any beneficiary of the trust – not just the beneficiary spouse. One thing to keep in mind is that the beneficiary spouse cannot serve as an adverse party for purposes of approving a distribution.
Drafting SLANTs is certainly more challenging than a SLAT. One reason to use a SLANT instead is when the grantor wants the trust to qualify as a separate taxpayer for purposes of obtaining an additional $10 million deduction for qualified small business stock, pursuant to IRC Section 1202.
Same Advantages of an Irrevocable Trust
The SLAT/SLANT offer the same benefits typical of an irrevocable trust, except that the spouse still has access to the assets and is named as a beneficiary.
These advantages include:
- Reduced estate taxes – A SLAT/SLANT allows you to use all or part of your current lifetime gift tax exemption to transfer assets outside of your estate to reduce potential estate taxes. With incredibly high exemption amounts, many people feel it is better to use them now – and use them to gift assets into a SLAT/SLANT – before the exemptions are reduced in future tax bills.
- Asset Protection – Generally, an irrevocable trust provides asset protection to the grantor since the assets no longer belong to the grantor and the grantor is not a named beneficiary of the trust. In a SLAT/SLANT, there is asset protection afforded to your spouse (and other named beneficiaries) while also allowing your spouse to benefit from the trust assets. Furthermore, the grantor has indirect access to the assets through their spouse.
There are some unique issues that pertain to drafting SLAT/SLANTs. I discuss some of these below:
- Reciprocal Trust Doctrine – When drafting two SLATs (one for each spouse), you must be careful to make sure the SLATs are not identical, otherwise you will afoul of the “reciprocal trust doctrine,” which holds that if both trusts are substantially the same, the IRS may claim that each spouse simply made a gift to one another and pull back the assets into both spouse’s estates. Thus, attorneys will generally look for ways to differentiate between the SLATs. Perhaps one will be a SLAT and other a SLANT, perhaps one will only include the spouse as a beneficiary while the other includes descendants as a beneficiary. Perhaps the investment trustees and distribution trustees of the trust will be different, and perhaps they will be sitused in different states.
- Premature Death or Divorce – What happens if the beneficiary spouse dies before the grantor spouse? At that point, the grantor spouse loses indirect access to the trust assets. In the case of a divorce, if no care is made to draft the trust appropriately, then the ex-spouse can still benefit from the trust assets (since they are a named beneficiary) and the donor spouse again may lose indirect access. There are ways to draft around these issues, but care must be taken to make certain that these issues are contemplated and solved for.
- Governing Law – It might be recommended to build your SLAT/SLANT in a state like Nevada, which has one of the best Domestic Asset Protection Trust Statutes in the nation. Moreover, if established as a dynasty trust, Nevada law would allow the SLAT/SLANT to last for 365 years, without paying estate taxes!
- Community Property – Generally a SLAT/SLANT is funded with separate property assets of the donor spouse. If the married couple establishing the SLAT/SLANT however wants to gift community property assets to fund the trust, careful attention must then be given to avoid estate tax inclusion in the estate of the beneficiary spouse. Again, attorneys can draft around this issue but identifying this potential pitfall is crucial.
Management of SLATs
In building a SLAT/SLANT in a state like Nevada (read here to understand the advantages), the trustee of a SLAT/SLANT can be divided into three roles:
First, the investment trustee is the person who determines what the trust buys, sells, holds, and invests. The investment trustee in a SLAT/SLANT can be the grantor, or even the beneficiary spouse, which is a tremendous power that can be retained legally by the trust creator.
Second, the distribution trustee is the person or company in charge of distributing assets to the trust beneficiaries or on behalf of the beneficiaries. The distribution trustee also determines when distributions should be made. The grantor cannot retain this power and thus, it is very common that a corporate trustee be named as the distribution trustee.
Third is the administrative trustee. This person or company maintains the records and administrative affairs of the trust, including undertaking all administrative responsibilities of the trust, such as filing annual tax returns. Again, it is common for the trust company to not only serve as the distribution trustee but also the administrative trustee.
A state like Nevada requires that at least one of the trustees is a Nevada resident.
Work with the Right Attorney
A SLAT/SLANT can be a very flexible type of irrevocable trust that puts a great amount of control back in the hands of the family setting it up, while still maintaining all the protections and advantages of an irrevocable trust. It is important to consult with a trusted advisor who is familiar with the potential tax issues that a poorly-drafted SLAT/SLANT can present.