Setting Up A Spousal Limited Access Trust (SLAT) In Massachusetts
As Massachusetts residents, we live in one of the few states that imposes a state estate tax. As you plan the distribution of your estate, you’ll likely be interested in distributing assets to your spouse, children, and grandchildren without losing a portion of those assets to state or national estate taxes. A spousal limited access trust or SLAT may be the answer.
What Is A Spousal Limited Access Trust?
A spousal limited access trust is an irrevocable trust established by one spouse for the benefit of the other. The goal of a SLAT is to transfer assets into a trust that can provide income and or principal distributions to a spouse without including the assets in the spouse’s estate.
Assets transferred through a SLAT are typically life insurance policies, closely held stock or investment accounts. The SLAT typically benefits the spouse during his or her lifetime and the trust is written to allow distributions only to meet the spouse’s needs to create asset protection benefits. Distributions from the trust to the surviving spouse reduce the trust amount left to the next generation of beneficiaries free of estate tax.
A spousal limited access trust is similar in nature to a bypass trust. However, a spousal limited access trust is funded via gifts while the asset owner is still alive. This means that the transfer of assets to the trust will use some or all of the individual’s federal estate & gift tax exemption, currently $11.18M.
What Are The Benefits Of A Spousal Limited Access Trust?
Ultimately, the greatest benefit of a spousal limited access trust is the ability to transfer a signifiicant amount of assets to the next generation exempt from estate tax. The ultimate value of the SLAT is in the appreciation of the gifted assets and that the trust assets will pass estate tax free to the next generation. Additionally, your spouse has access to those trust assets as necessary for their lifetime and since your spouse has access to the trust assets as a beneficiary, those distributions allow you indirect access while maintaining asset protection from future creditors.
SLAT Planning Considerations
While a SLAT has several advantages, there are certain hurdles worth considering before deciding to create a spousal limited access trust. The trust is an irrevocable trust, which means that you can only indirectly benefit from the trust funds through distributions to your spouse. If you divorce or your spouse passes away, you may no longer be able to benefit from the trust funds. Therefore, it’s best to fund a SLAT with assets that you can reasonably live without.
To avoid this issue, some couples prefer to set up trusts for both spouses. If done this way, the trusts must differ in meaningful ways with different provisions, different funding assets, and/or different establishment times. The reciprocal trust doctrine prevents individuals from setting up trusts for each other’s benefit that are essentially the same. Careful planning will be required to make sure the doctrine isn’t violated. Another option is to use life insurance outside the SLAT to offset the value of the assets placed in the SLAT.
Should you decide to set up a spousal limited access trust, you will need to plan on funding the trust with your available gift tax exemption amount or use some of your lifetime exemption to make a “taxable gift”. A qualified estate planning attorney can review your financial situation to help you determine if a spousal limited access trust makes sense for you and your estate planning goals.
Form A Spousal Limited Access Trust With A Local Massachusetts Estate Planning Attorney
If you’re interested in setting up a spousal limited access trust, the estate planning attorneys at Eckert Byrne LLC are available to help. Our distinguished firm has assisted clients across Cambridge and the Greater Boston area in creating comprehensive estate plans that meet or exceed individuals’ legacy planning goals. Contact Eckert Byrne LLC today by filling out our online form or calling (855) 743-3136 to schedule a consultation with an estate planning attorney.