What Is a Spousal Lifetime Access Trust and Should You Add One to Your Estate Plan?

You want to spend the rest of your life with your spouse and ensure they are cared for after you’re gone. That’s a noble and romantic goal and an excellent reason to draft a comprehensive estate plan. You can use many tools to protect your partner’s financial future, even if something happens to you. One tool that has become particularly popular in recent years is the spousal lifetime access trust (SLAT).

While SLATs can be effective in the right circumstances, they are not always the best solution. Below, we discuss how these trusts work, their benefits and drawbacks, and when they are best used or avoided.

What Is a SLAT?

A spousal lifetime access trust is an irrevocable trust set up by one spouse to benefit the other and potentially additional family members. The spouse who sets up the SLAT, also known as the grantor, places assets in the trust to provide for its beneficiaries. These assets are permanently removed from the grantor’s estate and become the property of the SLAT. It cannot be dissolved and deposited assets may not be returned to the grantor without the approval of all beneficiaries and a judge’s order.

Benefits of SLAT Trusts

There are three primary financial benefits to SLATs. First, the assets placed within the trust are removed from the couple’s estate. This means they are not subject to estate, gift, and inheritance taxes. 

Second, these trusts are structured so the grantor remains responsible for paying its income and capital gains tax burden. Since the grantor pays these taxes, the SLAT’s assets grow significantly faster than other trusts. 

Third, the grantor retains indirect access to the assets through their beneficiary spouse. When the beneficiary receives disbursements from the trust, the grantor can also access them. 

Drawbacks of SLATS

Despite these benefits, SLATs are not perfect. The primary concerns arise if a couple chooses to end their marriage. As an irrevocable trust, a SLAT cannot be dissolved without the beneficiary’s permission. After ending the marriage, the beneficiary spouse is unlikely to agree to dissolve the trust. This can put the assets placed within it out of the grantor’s reach forever. 

This can be mitigated through a postnuptial agreement or careful writing of the terms of the SLAT. However, a standard SLAT can quickly cause financial complications if a couple ends their marriage after it is formed. 

When Are SLATs Beneficial for Estate Plans? 

A SLAT can be an excellent addition to your estate plan, but you must consider your circumstances before committing to one. While irrevocable trusts often provide more financial protections, they also put you at risk of control of the assets permanently should you divorce.

For this reason, SLATs are rarely recommended early in a couple’s marriage. It is usually a better idea to set up a revocable trust initially. After a couple has been together a decade or more, they can decant that trust into a SLAT if they remain confident in their relationship. This strategy reduces the risk that the grantor will lose access to the assets due to a divorce.

A SLAT becomes a much better prospect if you have already been married for a decade or more. Still, there are measures you can take as a grantor to protect yourself alongside your spouse. Strategies to make your spousal lifetime access trust safer for both of you include adding clauses such as the following:

  • Terminating the trust in the event of divorce or death of the beneficiary spouse
  • Specifying the trust only extends to current and future spouses
  • Ending the beneficial interest of the non-grantor spouse upon divorce

Additionally, it may be wise to name someone other than your spouse as the trustee. This expands the potential options for disbursements and reduces the risk that your spouse takes overly broad distributions and takes on taxable assets, counteracting the benefits of the strategy. 

Discuss How to Structure Your Estate Plan to Protect Your Spouse

If you want to protect your spouse’s financial future, you can’t go wrong with a well-designed estate plan. A SLAT may or may not be the right choice, though. You can discuss your needs and explore your options by scheduling a consultation with the expert estate planning attorneys at The Dayton Law Firm, P.C. We have decades of experience drafting detailed, personalized estate plans for California couples. We are dedicated to ensuring every client has a plan tailored to their needs, whether that includes a SLAT or other spousal protection strategies.