At Brady Cobin Law Group, PLLC, we understand the value of preserving your hard-earned assets while ensuring your loved ones are taken care of. Estate planning is a journey, and having the right tools in place can make all the difference for your family’s future.
One such tool that can offer significant benefits is the Spousal Lifetime Access Trust (SLAT). In this post, we’re going to explore what a SLAT is, how it works, and the ways it can protect your legacy here in North Carolina.
What is a SLAT?
A Spousal Lifetime Access Trust, or SLAT, is an irrevocable trust created by one spouse for the benefit of the other. Essentially, the grantor spouse places assets into the trust, and the beneficiary spouse can access these assets throughout their lifetime. Once assets are placed into a SLAT, they are removed from the grantor’s estate, providing benefits like asset protection and potential tax savings.
There are three main roles in setting up a SLAT. The first is the grantor, the spouse creating the trust. The second is the trustee, the individual or entity who manages the trust. And, lastly, the beneficiary, which is the spouse who benefits from the trust. The grantor spouse funds the trust during their lifetime and it can be used to provide financial security for the beneficiary spouse.
Benefits of a SLAT in North Carolina
A Spousal Lifetime Access Trust offers several key benefits that make it an appealing option for estate planning.
Estate Tax Advantages
One of the primary advantages of a SLAT is that it helps minimize potential federal estate tax liability by removing assets from the both the grantor and the grantor spouse’s estate. This can be especially important for high-net-worth families. While North Carolina does not impose a state estate tax, federal estate taxes can be a concern if your estate exceeds the exemption amount.
Asset Protection
A SLAT also provides asset protection by placing the assets in an irrevocable trust. This helps shield them from creditors, lawsuits, or other claims against either spouse. For instance, if you’re a business owner or in a profession with a high risk of liability, a SLAT can help ensure that your family’s financial future remains secure, even in the face of unexpected challenges.
Flexibility and Access
While a SLAT is irrevocable, it still provides some level of flexibility. The beneficiary spouse can access the trust’s funds, which can be distributed as income or principal, depending on how the trust is drafted. This means that, although the assets are no longer directly controlled by the grantor, they can still be used to support the family. Distribution options can be customized based on your unique needs, providing financial security while maintaining flexibility.
Continued Control
Although the grantor gives up direct control of the assets, they still retain some influence through careful trust drafting. By choosing a trustee they trust and setting specific parameters for distributions, the grantor can ensure the trust serves their family’s needs.
Structuring a SLAT in North Carolina
Creating a SLAT involves careful planning and specific steps to ensure its effectiveness. The first crucial step is funding the trust.
Funding the Trust
A critical step in setting up a SLAT is properly funding it. The trust should be funded with the grantor’s separate property to ensure asset protection benefits and estate tax exclusion. This means that, before placing assets into the trust, it’s important to title them correctly to maintain their status as separate property.
Trustee Selection
The choice of trustee is another essential consideration. The best option for a trustee is an independent party. It is crucial to select someone who is financially responsible, impartial, and capable of understanding the grantor’s wishes. Some families choose a corporate trustee to ensure professional and unbiased administration.
Trust Design
SLATs can be customized to meet the unique needs of each couple. You can choose how the trust distributes assets—whether it provides income only, income and principal, or includes additional beneficiaries like children or grandchildren. Specific instructions can also be included, such as setting spending limits or guidelines for how the assets should be used. Clearly defining these terms is vital to prevent misunderstandings and potential disputes.
Tax Considerations
While a SLAT offers significant estate planning advantages, it’s important to understand the tax implications. One key area to consider is income tax. How a SLAT is treated for income tax purposes can affect your overall tax liability and the growth of the trust assets.
Income Tax
SLATs are generally structured as grantor trusts for income tax purposes. This means that the grantor is responsible for reporting the trust’s income on their individual tax return. While this may seem like a disadvantage, it can actually provide some tax benefits, such as allowing the trust’s assets to grow without being subject to trust income tax rates.
Potential Risks and Considerations
While SLATs offer numerous benefits, it’s crucial to acknowledge potential challenges. Life events, such as divorce, can significantly impact a SLAT and its intended purpose.
Divorce
One potential challenge with a SLAT is divorce. Since the trust is created for the benefit of your spouse, divorce could mean losing indirect access to the trust’s assets. To address this risk, some couples include provisions in a prenuptial or postnuptial agreement that outline what will happen to the assets in the event of a divorce.
Reciprocal Trust Doctrine
Another consideration is the reciprocal trust doctrine, which can negate the intended tax benefits if two spouses create SLATs for each other in a way that is deemed too similar. To avoid violating this doctrine, it is important to speak with an experienced estate planning attorney.
Changes in Tax Laws
Finally, tax laws are always subject to change, which could affect the effectiveness of your SLAT. This is why it’s essential to work with a knowledgeable estate planning attorney to review and update your trust as needed, ensuring it continues to meet your estate planning goals.
Need Advice on Trust Planning? Contact Us Today.
A Spousal Lifetime Access Trust can be a powerful tool to protect your assets and provide for your family. At Brady Cobin Law Group, PLLC, we’re here to help you make informed decisions about your estate plan. If you’re interested in learning more about how a SLAT could benefit you, contact us today at 919-782-3500 to schedule a consultation.
