What You Need to Know About Spousal Lifetime Access Trusts (SLATs)

In this video, Matt discusses the Spousal Lifetime Access Trust (SLAT), a beneficial tool for high-income and high-net-worth married individuals. He outlines the ideal candidates for a SLAT, emphasizing its advantages in estate planning. Matt explores the tax implications of estate planning scenarios, introducing the concept of gifting within specified limits. The video details the structure of a SLAT, with both spouses as trustees and beneficiaries. Matt underscores the benefits, such as asset protection, tax efficiency, and flexibility in fund access. The video concludes with insights into suitable assets for SLATs and an invitation for viewer questions. Overall, it offers a concise yet comprehensive overview of this advanced estate planning strategy.

Video Transcript

Today we’re going to talk about spousal life access trust, a type of trust if you’re married, that can be very beneficial not only for estate planning in the future, but also you get the best of both worlds, where you have some asset protection as the money grows, and then also access through your spouse. So we’re going to break this down. But first, I want to go into detail as far as who should potentially be considering a slat spousal life access trust, which is a type of irrevocable trust. So right off the bat, in general, we recommend these for families that either have a top 1% net worth or a top 1% income. Right now, the limits, if you pass each spouse has a limit of $13.61 million in 2024 that can be passed on tax free.

 

You can gift that while you’re living, or you can gift that when you die, or you can do a mix. You could do half and half. If you report gifts along the way while you’re living, that’s going to lower the amount in the end. When you die. However, these limits are getting cut in half. In January 1 of 2026, they’ll get cut in half back. These were raised under the Trump tax code era, but then also the negotiations where they would immediately revert back in 2026. So let’s define a top 1%. So I’m going to go to the screen here.

 

So if you’re in your late thirty s, thirty five to thirty nine, some basic research shows that if you’re the net worth of 5 million plus, so usually this would mean that you maybe were part of an IPO, you work for a tech company, had a bunch of stock options that hit. Or maybe you’re just an incredible saver. Or potentially, if you’re a physician with not that net worth yet, but you’re a specialized surgeon or something to that nature, then your income of being as a family over $800,000 would also put you in the top 1%. So maybe your net worth not that high, but you have the potential as a top 1% income earner to reach a net worth where you can have estate tax planning problems in the future.

 

Then also, just as an example, if you’re 40 to 44 to be in the top 1%, you would need to have a net worth of 7.8 million. So we’ll just call it 8 million to keep it simple. And then also that income stays pretty consistent regardless of age. It’s right around 800,000 in some states. It’s close to a million. And some states it’s closer to 600,000 to be in the top 1%. But again, this is just for America. Overall, it’s around 800,000, based upon several studies that I’ve researched. And these are, again, approximate amounts. We’re talking high level for simplicity in today’s video.

 

So if you are under one of these circumstances, either a high net worth or a high income, which will lead to a high net worth, vice versa, then one of the potential issues, as we forecast, is, let’s say, hypothetically, you go to retire and your net worth is $10 million and your assets are growing by 6%. So 600 grand a year, but you’re only spending half of that and you’re reinvesting half of that back in. And then, hypothetically, the market does pretty good and you’re 90. And now we have a net worth of $20 million. And let’s say these are present value numbers, and let’s say the estate planning is around where it’s at as a family. So the total you could pass on in today’s dollars would be 13.61 million. We’re just going to keep it simple and say it’s 14 million.

 

So what would happen is 14 million would go to your kids tax free, but the other 7 million, regardless of what state this is, a federal tax, would get taxed at 40%. And so $2.8 million would go right to the government in taxes. And that’s just when you pass. So some ways around that are we can, instead of having all that money, let’s say, hypothetically, by 65, we use the example of 20 million. Instead of having that all in your name, we could have, hypothetically, 10 million in your name. And this isn’t a recommendation, this is just to keep the math simple. And then $10 million in an irrevocable trust. So as long as it’s an irrevocable trust, it has the three year look back achieves. I mean, the money has been gifted three years ahead of time before you die.

 

And there’s some five year considerations if we’re looking at Medicaid, et cetera. But the $10 million, if it’s already in the irrevocable trust, we have 10 million here, a total of 20 million. All of this money, upon passing, will be totally tax free because it’s already pre gifted. It has to be a present value gift when you get it in. And there’s limits, actually, let’s say you have three kids you can gift, each spouse can gift 18,000 a year per kid. So we could do 18 times three and 18 times three. So 18 times six. So that’d be 108,000 per year. Let’s say if you’re 35 over 30 years, you can start gifting that money in. And those aren’t reportable gifts because it’s under the gifting limit.

 

Everyone has that amounts they can gift each year as long as the irrevocable trust has three kids attached to it. As the beneficiaries of the trust, you could start moving money slowly, well in advance, before you accumulate this net worth. So then ultimately, when you die, this money goes without taxes because it gets stress tested against the limits again, which is currently the, we’ll say round up and say it’s 14 million combined after 2026. And then this over here, because it’s already pre gifted in the irvocable trust also has zero taxes. So the same example as above where let’s say you die at the end, this is what you die with at age 90, there are absolutely no taxes.

 

So just comparing the above where we paid $2.8 million, if all the money was in the name and taxes versus the 20 million being split between your name and a trust, then we have no federal estate taxes, hypothetically, at the end. So that’s just a quick high level of review. So now let’s look at what a slat is. So a slat is a spousal life access trust. Hypothetically, if we had a Mr. And Mrs. And you have three kids, so we can have Mr. Have a slat, and Mr. Would then name Mrs. As a trustee, and we would name. So the trustee has access to the money while living or when you pass. And then we’d have the three kids as the beneficiary. And then Mrs. Also has a slat. Now, we have to be careful of what’s called a reciprocal trust doctrine.

 

So typically, when I have these trusts set up in different calendar years, when I have different aspects of when the kids could access the money, they have to be different for these to work as irrevocable trusts. So in this example, we’d also use Mr. As the trustee and then we’d have the three kids. So the idea is we would be gifting. Mr. Would be gifting 18,000 per kid times three. Plus you can put 5000 for the spouse. We’re going to keep this simple in this video. So that would be 54,000 per year that we could gift in tax free without reporting it, and then 54,000 to this one. So a total of 108 between the two. And then along the way, as this money is growing, you do have access to it through each other. So on Mr’s trustee, Mrs.

 

Could use the money for a hem standard if it’s for health, education, maintenance, and support, which is so broad, and then vice versa. And Mrs. Slat, Mr. Could take the money out while living again for health, education, maintenance, and support. And so Mr. And Mrs. Are not only the trustees, but also a beneficiary of these trusts, so they can use the money back out for themselves. So obviously, one of the thing is these are completed gifts. So if you end up getting divorced and you’ve only set up one slat, let’s say Mr. Sets one up for Mrs. Then Mrs. Would have control of those assets, and typically, court would not look at that as part of an asset division. So Mrs. Would walk away with whatever in the slat plus a 50% division of the assets and vice versa.

 

So, usually, to be eligible for slat, you need to be married. So we do recommend having two. The trust themselves can’t be identical, but we recommend funding be identical, just God forbid if something happens in the future. So with that being said, so this is the best of both worlds, because typically, as an access, you would need the permission from a trustee. But since your spouse is the trustee, obviously if you’re handling finances well together, you still have the access through each other while you’re living. There’s asset protection, very strong and irrevocable trust. So if you get sued, typically irrevocable trust would have much stronger protection than money in your name. And that’s a state by state, obviously something you want to consult with an attorney.

 

And then the third thing is we avoid the inheritance tax, both from a state in Pennsylvania, if you’re passing money to your kids, it’d be a four and a half percent. And then from a federal, if you’re above those exemption limits, you’d avoid that 40% limit as well. So slats are something we recommend if you’re in the top 1% net worth now, regardless of age, or if you’re in the top 1% income and we have the cash flow to fund into these great. Some other considerations on what do we want to hold in the slat. So, typically, because it’s an irrevocable trust, there’s a tax code that climbs pretty quickly with income. But the way around that is, if you can hold life insurance, which grows tax free, you could hold whole life insurance, would be the most tax efficient.

 

If you want more of a growth oriented vehicle. We would recommend stocks. If you direct index the stocks and you’re not tax loss harvesting and erasing a lot of the tax along the way, especially growth stocks where you’re not getting dividends that get reported. So those would be the two biggest things. We want to hold some unique ways to fund this. If you have a private investment, let’s say that you’ve made that you put 50,000 into and the company is still valued at those share basis, you can put 50,000, you put the 50,000 in, you don’t even have to report it as a gift because if you have three kids, again, the limit would be 54,000. And then let’s say suddenly that 20 x is and it sells for a million dollars.

 

Well, you haven’t used any of your lifetime exemption and now you have a million dollars that turns into cash. The cash then gets invested in stocks. And now if you’re in your 40 years old and then that turns into 5 million when you retire, all of that money, it’s beautifully out of your estate. It’s not going to be subject to those federal taxes at the end. So sometimes private investments, if they’re under the gifting limit, it’s not going to cost you any gift taxes to get it in or even using of your gift exemption.

 

And then obviously, if it hits big, it can be really beneficial for you and your kids to get that money protected and out of your estate from a tax perspective, but then also available through your spouse as the trustee if you need the money while you’re living as well. So those would be some unique things to put in the trust. And then what we would not want to put in the trust typically is anything that’s going to generate short term gains, which would be classified as income. So if you’re in the top tax bracket, would get hit at that 37%. If the trust itself shows income over, I think it’s around 20,000, then it’s going to immediately be subject to that.

 

And then obviously any kind of bonds, like corporate bonds, treasuries, et cetera, would also be subject to the income tax bracket of a trust, which again climbs to the top bracket of 37% very quickly. So in general, we recommend life insurance, stocks or private investment. Once the private investments hit, reinvest it into tax efficient stocks through direct indexing or through low cost etfs. That was a quick overview of how the spousal life access trust works. And then also who would be a good candidate for a spousal life access trust if your high income, high net worth. Obviously, welcome any questions on this subject and thanks for joining us.

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