Using a Spousal Lifetime Access Trust (SLAT) in Florida

With the possibility of a reduction in the federal estate tax exemption looming in the near future, taxpayers are considering tax-mitigation strategies that take advantage of 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,” are quickly becoming a popular estate planning tool in Florida. The purpose of this article is to help you understand the benefits and drawbacks of implementing and using a SLAT Trust in Florida.

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 (SLAT) is a flexible type of irrevocable trust created to benefit a grantor’s spouse, protect wealth, and reduce estate taxes. A trust maker (also known as the grantor) establishes the SLAT as an irrevocable trust, naming the grantor’s spouse as beneficiary and irrevocably transferring assets to the trust. Depending on the goals of the SLAT, the trust can be set up as an “incomplete gift” or a “completed gift” for tax purposes. With the former, an incomplete gift trust is a bit more flexible and the goal is primarily asset protection and marital planning. The SLAT is less flexible for the grantor with the latter; however, estate tax planning is added to the set of goals. These benefits are discussed in greater detail in the following subsection.

Any SLAT allows the beneficiary spouse to receive distributions from the trust’s assets during their marriage. The trustee distributes any remaining trust assets following the death of the beneficiary spouse to any remainder beneficiaries or trust beneficiaries in Florida or elsewhere who are named in the trust; typically, these are the couple’s children or grandchildren.

A SLAT can be set up so that the trustee distributes residual trust wealth to the remainder beneficiaries all at once—effectively terminating the trust. Alternatively, wealth can be managed long-term by the trustee, with periodic distributions to successor beneficiaries under terms specified by the grantor spouse. The latter structure enables a SLAT to operate similarly to a Florida dynasty trust, benefiting multiple generations.

A grantor could also create a trust with a structure similar to a SLAT for the primary purpose of benefiting future generations by applying the GST exemption in Florida to wealth transferred to the trust. A trust that does not initially name the grantor’s spouse as a beneficiary is not technically a SLAT and is more akin to an “irrevocable gift trust,” but it can often achieve many of the same goals.

What Benefits do SLATs Offer in Florida?

SLATs drafted as completed gift trusts may be an effective tool for reducing the estate tax, particularly in the current climate where capturing the spousal estate tax exemption in Florida may be advantageous. Wealth transferred to an irrevocable “completed gift” SLAT is excluded from the grantor’s and beneficiary spouse’s taxable estates in the future. That is, the IRS does not consider wealth held in a SLAT when calculating the estate tax owed by either spouse’s eventual estate. 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 provide long-term wealth protection from lawsuits in Florida and elsewhere, and an unfinished gift SLAT is primarily used for this purpose. Wealth transferred to a SLAT is held in an irrevocable trust for the benefit of other beneficiaries, and is therefore 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. Creditors of beneficiaries 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 previously mentioned, a SLAT Trust in Florida is adaptable, and a specific SLAT can be created to emphasize various goals. By giving the trustee instructions when establishing the trust, the grantor can exercise long-term control over trust assets, safeguarding family wealth for a long time. Although SLATs are irrevocable, a personal trust may permit increased distributions to the beneficiary spouse if the couple requires temporary access to the trust’s assets.

Federal Gift and Estate Tax on Transfers to SLATs

Federal gift tax may apply for the year of the transfer if a grantor transfers assets to a SLAT Trust in Florida. Transfers to the trust are eligible for the $15,000 annual gift exclusion allowed by the tax code, but only if the trust is set up properly to give the beneficiaries a present interest in the gift.

IRS gift-splitting rules occasionally permit splitting a gift between spouses, increasing the amount that isn’t subject to tax (it’s treated as though each spouse made half the gift). However, gift splitting can be tricky and needs to be carefully thought out. Additionally, since the cases are split, gift splitting is generally not advised for SLATs. The only exception is if there is a strong likelihood that the spouse won’t require the SLAT income (as in the case of a larger estate with a smaller percentage being held in the SLAT).

When a transfer to a SLAT results in gift tax, the grantor has two options: pay the gift tax owed or use the transfer to increase their lifetime exemption for both gift and estate taxes. The exemption is set to drop significantly in 2026 from its current record high of over $12 million for 2021. (Or possibly earlier). Therefore, a SLAT funded before the exemption is reduced could result in significant tax savings.

The current exemption amount for the transferred wealth is locked in if a taxpayer uses the gift-tax exemption toward a current transfer, per IRS regulations. Therefore, property transferred from a grantor’s estate to a SLAT is no longer subject to estate tax in the future, even if the transferred sum ultimately exceeds the grantor’s available estate tax exemption. To secure gift, estate, and GST exemptions, a gift tax return is required and must be properly prepared.

Designing a SLAT in Florida

A SLAT Trust in Florida is very flexible, as was already mentioned. They are permitted to own the majority of asset classes, including cash, securities, real estate, and business interests. Distributions may be tailored by the grantor to meet particular goals. For instance, a SLAT that prioritizes the tax-efficient transfer of wealth to children may call for very little distribution during the grantor and spouse’s lifetimes. The trustee instead concentrates on increasing assets for eventual distribution to succeeding beneficiaries. On the other hand, if providing for the beneficiary spouse is the trust’s primary goal and passing wealth to children is its secondary goal, a SLAT’s distributions may be more front-loaded.

Spousal distributions can be designated for one or more specific purposes, such as healthcare, or they can be more general. Similarly, distributions can be made on a regular basis or at the trustee’s discretion. A trustee can be given the authority 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 may direct the trustee to distribute all remaining assets and end the trust. Alternatively, the trust could be maintained, with the trustee directed 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 SLAT-owned life insurance policy must be structured so that the grantor has no “incidents of ownership” in the policy, which could result in the policy proceeds being included in the grantor’s taxable estate. Incidents of ownership include the right to access or borrow against the policy’s cash value.

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

Call us today 305-962-5929 to schedule a consultation to find out more about how to plan for your future legacy.