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Using a Spousal Lifetime Access Trust (SLAT) in Florida

SLAT Trusts in Florida

With the prospect of a reduced federal estate tax exemption looming in the near future, taxpayers are considering tax-mitigation strategies that capitalize on today’s record-high exemption. Asset protection, or protection from potential lawsuits, is also top of mind in today’s litigation prone landscape.  For these reasons, spousal lifetime access trusts—or “SLATS”— in Florida are fast becoming a sought after estate planning option.  Understanding the pros and cons of implementing and using a SLAT Trust in Florida is the focus of this article.

What is a SLAT Trust

Irrevocable trusts in Florida and elsewhere, are named with acronyms that usually hint at the overall design and purpose of the trust.  Various irrevocable trust strategies for tax planning and/or asset protection in Florida carry different acronyms.  A spousal lifetime access trust, identified by the acronym SLAT, is a flexible form of irrevocable trust designed to benefit a grantor’s spouse, protect wealth, and reduce estate taxes. A trustmaker (commonly referred to as the grantor) creates the SLAT as an irrevocable trust that names the grantor’s spouse as beneficiary and irrevocably transfers assets to the trust.  Depending on the goals assigned to the SLAT, the trust can be prepared as making an “incomplete gift” or a “completed gift” for tax planning purposes.  With the former, an incomplete gift trust is a bit more flexible and the goal is primarily asset protection and marital planning.  With the latter, the SLAT is less flexible for the grantor; however,  estate tax planning is added to the set of goals.  These advantages are discussed in more detail in the next subsection below.

With any SLAT, the beneficiary spouse has access to the trust wealth during life in the form of distributions from the trustee. Upon the beneficiary spouse’s death, the trustee distributes residual trust wealth to remainder beneficiaries or trust beneficiaries in Florida or elsewhere who are named in the trust—typically the couple’s children or grandchildren.

A SLAT can be set up so that the trustee distributes residual trust wealth to remainder beneficiaries all at once—effectively terminating the trust. Or, wealth can remain under the trustee’s long-term management—with periodic distributions to successor beneficiaries under terms specified by the grantor spouse. The latter structure allows a SLAT to function like a Florida dynasty trust benefiting multiple generations.

A grantor could also establish a trust with a structure similar to a SLAT for the principal purpose of benefiting later generations—applying the generation-skipping tax (GST) exemption in Florida to wealth transferred to the trust. A trust that does not at least initially name the grantor’s spouse as beneficiary is not technically a SLAT, and would be deemed something like an “irrevocable gift trust” but such a trust can often achieve many of the same objectives.

What Benefits do SLATs Offer in Florida

SLATs that are drafted as completed gift trust may be an effective tool for reducing estate tax—particularly in the current climate where it may be an advantage to capture the spousal estate tax exemption in Florida. Wealth transferred to an irrevocable “completed gift” SLAT is removed from the grantor’s and beneficiary spouse’s future taxable estates. That means the IRS doesn’t count wealth held in a SLAT when determining the amount of estate tax owed by either spouses’ eventual estates. Trust assets continue benefiting the spouse—and end up with the grantor’s children or other beneficiaries—but the trust assets ideally won’t be taxed when the grantor dies.

SLATs also offer the advantage of long-term wealth protection from lawsuits in Florida and elsewhere, and an incompleted gift SLAT is used primarily for this purpose. Wealth transferred to a SLAT is held in an irrevocable trust, for other beneficiaries, that by definition is no longer under the grantor’s effective control. The grantor’s creditors therefore cannot attach trust assets, and—in the event of a grantor’s bankruptcy—trust wealth is in most cases not subject to liquidation by a trustee. Beneficiaries’ creditors also cannot attach wealth held in a SLAT. A trust designed to endure over succeeding generations, for instance, can shield family wealth from successor beneficiaries’ creditors until funds are actually distributed and therefore no longer in the trust.

As mentionted, a SLAT Trust in Florida is versatile, and an individual SLAT can be designed to emphasize different objectives. A grantor can exercise long-term control over trust assets—protecting family wealth over an extended period—through instructions provided to the trustee when creating the trust. While SLATs are irrevocable, an individual trust might also allow for increased distributions to the beneficiary spouse if the couple needs short-term access to assets in the trust.

Federal Gift and Estate Tax on Transfers to SLATs

A grantor’s transfer of assets to a SLAT Trust in Florida potentially triggers federal gift tax for the year of transfer. The tax code’s $15,000 annual gift exclusion can be used for transfers to the trust—but only if the trust is correctly formed to allow beneficiaries a present interest in the gift.

Federal Estate Tax ReturnIn some cases, IRS gift-splitting rules allow allocation of a gift between both spouses—treated as though each spouse made half the gift—increasing the non-taxed amount. Gift-splitting can be tricky, though, and must be carefully planned.  Also, gift splitting is NOT advisable for SLATs in most cases since the cases are split with the exception being if there is a good chance that the spouse will not be needing the SLAT income (as in the case of a larger estate with smaller percentage being held in the SLAT).

When a transfer to a SLAT triggers gift tax, the grantor either pays the gift tax due or applies the transfer toward the combined gift and estate tax lifetime exemption. The exemption sits at a record high of over $12 million for 2021 but is scheduled to drop significantly in 2026 (or possibly earlier). A SLAT funded before the exemption decreases can therefore result in sizable tax savings.

Under IRS rules, if a taxpayer applies the gift-tax exemption toward a current transfer, the taxpayer locks in the current exemption amount for the transferred wealth. Wealth removed from a grantor’s estate to a SLAT now therefore remains exempt from future estate tax—even if the transferred amount ends up exceeding the estate tax exemption in place when the grantor dies.  A gift tax return is needed and must be properly prepared in order to lock in gift tax, estate tax and GST exemptions.

Designing a SLAT in Florida

As noted above, a SLAT Trust in Florida is highly flexible. They can own most types of assets—anything from cash and securities to real estate and business interests. A grantor can tailor distributions to specific objectives. A SLAT focused on tax-efficient transfer of wealth to children—for instance—might provide for minimal distributions during the grantor and spouse’s lives. Instead, the trustee focuses on growing assets for eventual distribution to successor beneficiaries. On the other hand, a SLAT’s distributions could be more front-loaded if the trust’s primary objective is to provide for the beneficiary spouse, and transferring wealth to children is secondary.

Spousal distributions can be earmarked for one or more specific purposes—such as healthcare—or more generalized. Likewise, distributions may be on a regular schedule, or timing can be left to the trustee’s discretion. A trustee can be empowered to distribute trust principal—or just growth. Remember, though, distributions from the trust to the beneficiary spouse are potentially in the spouse’s future taxable estate after distribution. So—if a SLAT’s primary purpose is tax-efficiency—distributions may be detrimental to the trust’s ultimate objective.

Similarly, a grantor has multiple options for distributions to remainder beneficiaries after the beneficiary spouse’s death. A trust instrument might instruct the trustee to distribute all remaining assets in full and terminate the trust.  Or the trust could stay in place—with the trustee instructed to manage assets for the long-term benefit of the remainder beneficiaries. A SLAT structured along these lines can essentially serve as a dynasty trust.

A SLAT can also double as an ILIT (irrevocable life insurance trust) in Florida and elsewhere if the trust owns a permanent life insurance policy for estate planning. Applying this strategy, the grantor typically gifts wealth to the trust, and the trustee uses the funds to pay policy premiums. When the policy pays out due to the grantor’s death, proceeds are paid into the trust for distribution to beneficiaries under the terms of the trust instrument. A life insurance policy owned by a SLAT needs to be set up so that the grantor has no “incidents of ownership” in the policy—which can lead to inclusion of policy proceeds in the grantor’s taxable estate. Incidents of ownership include the right to access or borrow against the policy’s cash value.

SLATs often name the beneficiary spouse as trustee, and an independent third party can also serve as trustee—but not the grantor spouse. A caveat is that—if a beneficiary spouse is trustee—distributions need to be based on an “ascertainable standard”—reasonably objective criteria relating to the spouse’s support, education, or health. That standard still allows for some latitude in how trust wealth is used—it just can’t be completely discretionary. On the other hand, a trustee with no personal interest in the trust can be given much broader discretion over distributions (subject to the trustee’s fiduciary duties and any limitations built into the trust).

SLATs as Grantor Trusts and Non-Grantor Trusts

Wealth within a SLAT Trust in Florida should ideally be earning consistent growth during the grantor’s lifetime. As mentioned above, SLATs may structured as grantor trusts, which means there was an incompleted gift and the grantor pays the income taxes on trust income. Depending on the situation, this can result in tax savings, as individuals are often taxed at lower rates than trusts. Grantor trusts also have the advantage of allowing grantors to retain limited powers in the trust—such as the power to veto distributions or to purchase assets from the trust by exchanging equivalent value (which can have tax advantages).  This is the same tax strategy used for GRATs and GRUTS which is the subject of another article.

When a SLAT is structured as a non-grantor trust, the trust files its own tax return and is responsible for paying its own income tax. Non-grantor SLATs typically emphasize estate-tax planning, and a grantor exercises no control over the trust after its creation. As noted above, SLAT created as a non-grantor trust is sometimes called a SLANT—or spousal lifetime access non-grantor trust.

For grantors in some states, the non-grantor trust model can save money on income tax. A grantor who lives in New York might create a SLAT that is considered a “resident” of Florida for tax purposes. In that scenario, trust growth wouldn’t be subject to state income tax because Florida has none. Of course, for Florida residents, this particular benefit becomes less valuable.  Also notable is the fact that Florida has no estate or inheritance tax.

Potential Pitfalls with SLATs

Divorce or a beneficiary spouse’s untimely death could potentially frustrate a SLAT’s purposes. If a grantor is counting on indirect support from trust assets via distributions to the spouse, a spousal dispute could prevent that from occurring. Likewise—in the event of the beneficiary’s early death—the wealth has already been irrevocably gifted to the trust and cannot be taken back.  However, depending upon whether the trust was an incomplete (grantor) or completed (non-grantor) gift trust, a power of appointment may be reserved, for the grantor with the former and the spouse with the latter, in order to assign the trust back to the grantor or to future generations.

On the flip side, a SLAT can be drafted with a “floating” spouse and in event of divorce, the beneficiary spouse’s rights can terminate.   This can be an effective marital planning tool for the grantor in conjuction with other protections such as a prenuptial or postnuptial agreement in Florida.

A potential pitfall for SLAT planning involves the “reciprocal trust doctrine”—a risk when each spouse creates a SLAT in favor of the other—can defeat a SLAT’s purpose by causing inclusion of trust wealth in the spouses’ estates.  If each spouse creates a SLAT, the two trusts trigger the reciprocal trust doctrine if they are too similar. Basically, if the SLATs mirror one another—each grantor spouse benefiting the other spouse under similar terms—the IRS views them as being essentially self-settled (i.e., by the grantor for the grantor’s benefit). In that scenario, trust wealth is not removed from the grantor’s taxable estate—preventing the SLATs from providing tax savings.

To avoid the reciprocal trust doctrine, there must be meaningful variation between the two SLATs. That could mean naming different trustees, funding the trusts with different asset categories and values, adopting different distribution standards, and forming the trusts in different states. The more variation, the better.

It should go without saying that all of the above requires careful professional drafting by an expert advanced estate planning attorney.

Steve Gibbs, Esq.

2 comments… add one
  • Brooke McCauley October 6, 2021, 11:20 am

    I have a revocable trust holding all my assets (approx 6-8 million). My spouse and I also have a basic prenup. The trust provides that if I predecease her, she may live in the homestead for the rest of her life, but there is no provision to pay the taxes, HOA fees, or maintenance on it other than from her 20% share of my estate (80% of the estate goes to my children from a former marriage). Can a SALT trust be used in addition, to give her enough income the pay real estate taxes and HOA fees (she can pay the maintenance herself)? What is your cost to draft such a SALT trust?

  • gibbslawfl October 6, 2021, 2:49 pm

    Hello, thanks for connecting. Yes, I believe you’re referring to a SLAT Trust and this can be used to provide additional income for your spouse and these are commonly used for this purpose as well as asset protection and even marital planning because the assets a earmarked to stay with the grantor and can float to a new spouse. We offer a 1 hour zoom consultation (which is $395 and a credit toward any planning costs) to help you decide whether this approach is appropriate at which time we can review costs with you. To schedule, you can go to our home page and schedule on line or call our office at 239-415-7495.

    Best, Steve Gibbs, Esq.