Asset Protection Planning: Should Your Estate Plan Include A Spousal Lifetime Access Trust
dan • March 22, 2022
A lot of new clients tell us that they are interested in putting their assets in trust in order to shield those assets from taxes and creditors . Many of those clients are talking about revocable living trusts. We have to break it to those clients that, unfortunately, neither the IRS nor the U.S. court system are going to allow you to avoid your debts and liabilities by placing your assets into a trust that you control and have the right to revoke or amend at any time. Frankly, you wouldn't want to live in a society in which that would be allowed. Imagine being hit by someone's car and being told that the person driving that car can't compensate you for your damages or medical bills because everything they have is in a trust -- one that they control. You might think that is unfair.
But what if you could get your assets out of your name, minimize taxes, and protect yourself from lawsuits by putting your assets under the control of someone who has the same priorities, goals, and interests as you? Your spouse, for example. Enter the Spousal Lifetime Access Trust (also known as a SLAT).
How does a sLAT work?
To set up a SLAT, one spouse sets up a trust for the benefit of the other spouse and usually their kids too. As explained above, unlike your typical living trust, this kind of trust does have to irrevocable, and ideally, you appoint a non-family third-party to the trustee position. Doing this gets those assets out of your and your spouse's names for asset protection purposes and also allows all future growth in value to occur outside your estate.
Although it may seem undesirable to irrevocably hand your money over to someone outside your family, keep in mind that:
While it is technically possible to appoint the spouse for whom the trust is being created or another beneficiary as the trustee, the benefit of having an unrelated trustee is that an unrelated trustee does not need to be limited to making distributions by any particular standard. They can be given full discretion to make distributions for any reason they see fit.
If, on the other hand, a beneficiary, or someone closely related to a beneficiary, is serving as trustee, their discretion to make distributions has to be limited to an "ascertainable standard." Similar to its policies around revocable trusts, the IRS does not view handing over your assets to a spouse and then giving that spouse the right to withdraw the assets for any reason as a sacrifice that is sufficient to justify the substantial tax breaks for which these trusts can qualify. While the ascertainable standard can be quite broad (the most common example of an ascertainable standard is limiting distributions to those for the beneficiary's "health, education, maintenance, or support"), having a beneficiary in charge of the trust invites much closer scrutiny of the trust and how it has been managed by the IRS and courts. Any deviation from the ascertainable standard, or any lack of supporting documentation, can completely undo the purpose of the trust. It can be difficult for people who are not professional trustees to consistently abide by these standards and maintain documentation for years.
Although it may seem undesirable to irrevocably hand your money over to someone outside your family, keep in mind that:
- you are choosing this person and it can be someone to whom you have a close relationship (just not someone to whom the beneficiaries of the trust are closely related, like their siblings, parents, spouses, or kids);
- you can reserve the right to replace the trustee;
- you are the one creating the instructions for the trustee as to how and when he or she distributes money from the trust; and
- the trustee has a fiduciary obligation to protect and use the assets for the beneficiaries' interests.
While it is technically possible to appoint the spouse for whom the trust is being created or another beneficiary as the trustee, the benefit of having an unrelated trustee is that an unrelated trustee does not need to be limited to making distributions by any particular standard. They can be given full discretion to make distributions for any reason they see fit.
If, on the other hand, a beneficiary, or someone closely related to a beneficiary, is serving as trustee, their discretion to make distributions has to be limited to an "ascertainable standard." Similar to its policies around revocable trusts, the IRS does not view handing over your assets to a spouse and then giving that spouse the right to withdraw the assets for any reason as a sacrifice that is sufficient to justify the substantial tax breaks for which these trusts can qualify. While the ascertainable standard can be quite broad (the most common example of an ascertainable standard is limiting distributions to those for the beneficiary's "health, education, maintenance, or support"), having a beneficiary in charge of the trust invites much closer scrutiny of the trust and how it has been managed by the IRS and courts. Any deviation from the ascertainable standard, or any lack of supporting documentation, can completely undo the purpose of the trust. It can be difficult for people who are not professional trustees to consistently abide by these standards and maintain documentation for years.
Common questions about SLATs
- Why not just retitle my assets to my spouse instead of setting up this complicated trust structure that I can't undo?
Giving assets to your spouse does not necessarily avoid the estate tax problem if you have one. Unlike direct transfers to a spouse, SLATs are specifically set up so that when you transfer assets into them, the transfer counts as a gift and uses up some of your gifting exemption. Transferring your assets to a trust for your spouse's benefit instead of to your spouse gets the assets out of your estate and allows future growth to occur without increasing the size of your estate and your estate tax problem. It also creates asset protection because the assets are no longer in the name of a person who can get sued.
- What if my spouse and I get divorced?
It's certainly not ideal! But you can define the "spouse" to be the person to whom you are currently married so that if the identity of that person changes, the recipient of the trust's distributions does as well. You can also draft it so that your children can continue to access the funds. Of course, your children may not be as willing to share funds they receive from the trust as your spouse would have been. Even if they are, there could be gift tax considerations for transfers from kids back to a parent.
- What if my spouse dies before I do? Can I get the trust assets back?
Sorry, but no. As explained above, to get the tax and asset protection benefits from this kind of trust, it has to be irrevocable. But again, you can specify who becomes the beneficiary of the trust at your spouse's death, and can set up the trust so that it could be used to cover expenses for your kids that you might have covered, such as helping them with their educations, weddings, or housing.
- Can my spouse and I create SLATs for each other?
It's possible, but it has to be done with extreme care. The IRS looks with suspicion on people creating identical trusts for each other (Google " the reciprocal trust doctrine "). Allowing married couples to create the same trust for each other would create a massive loophole to the various rules requiring you to give up control as both spouses would continue to have control over all their combined assets. But there are some tweaks you can make to one trust or the other to make them different enough to avoid this problem while still accomplishing the same general purpose.
- What is the ongoing maintenance and cost of having a SLAT?
You will have to file a gift tax return when transferring assets into the trust, and then going forward, the trust will have its own income tax return for any income earned by assets inside the trust.
In addition to those expenses, your trustee might expect to get paid, Professional trustees likely will charge several thousand dollars a year for this service. That may sound like a lot, but compared to the potential tax savings, which can, in many cases, get into six figures, it is often worth it. And don't underestimate the liability associated with being a trustee.
Finally, given the constantly changing tax and asset protection laws, it would be advisable with your attorney on a regular basis to review the trust and ensure that it is continuing to be in compliance with the various regulations and rules.
Who are sLATs best for?
Ideal clients for a SLAT strategy are happily married couples who own property that is expected to significantly appreciate and who can transfer such property irrevocably without jeopardizing their current standard of living. We start to suggest clients consider creating SLATs when they have at least a couple million dollars that they could potentially set aside without impacting their day-to-day lives. For clients who are only worried about asset protection, and not estate taxes, more flexibility can be built into the SLAT to potentially have the person setting it up included as a direct beneficiary.
what next?
If you think it might be time to think through your estate plan, you can:
- Give us a call at 720-821-7604 to schedule a "Discovery Session" at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
- Visit our estate planning page to learn more about how proactively thinking through your estate plan can protect you and your family, minimize hassle, lower the chance of family discord, and minimize or eliminate taxes.
- Get a copy of our estate planning checklist to see where you currently stand.
- Learn more by areading our blog or watching our videos .
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Dealing with the death of a loved one is never easy, and navigating the legal process that follows can add stress during an already difficult time. In Colorado, probate is the legal process by which a deceased person’s estate is administered, their debts are paid, and their assets are distributed to beneficiaries. Whether you’re an executor, beneficiary, or family member, understanding how probate works in Colorado can help you anticipate the steps involved and your potential responsibilities. This blog post will provide an overview of the probate process in Colorado, outline when probate is necessary, and offer guidance on how to navigate the system effectively.  What is Probate? Probate is the legal process that occurs after someone dies to ensure their assets are distributed according to their will or, if there is no will, according to state law. The probate process includes validating the will, inventorying the deceased’s assets, paying off debts and taxes, and distributing the remaining assets to the rightful heirs. While probate is often associated with lengthy court proceedings, not all estates require formal probate. Colorado offers several options depending on the size and complexity of the estate, which can help simplify the process in many cases. When is Probate Necessary in Colorado? Probate is not always required in Colorado. Whether an estate must go through probate depends on the types and value of the deceased’s assets. Generally, probate is necessary if: The deceased owned real estate solely in their name. The deceased’s assets, such as bank accounts or investments, were not held in joint tenancy or designated to transfer on death. The deceased had personal property valued at over $74,000 (as of 2023). If an estate falls below this threshold and does not include real estate, the beneficiaries can often use a Small Estate Affidavit to claim the assets without going through probate. Types of Probate in Colorado Colorado has three main types of probate procedures: small estate procedures, informal probate, and formal probate. The type of probate required depends on the estate’s value and whether there are disputes among heirs or creditors. Small Estate Procedure (Collection by Affidavit) The small estate procedure can be used if the value of the deceased’s assets is less than $74,000 and does not include real estate. This process involves filling out a Small Estate Affidavit, which allows the heirs to collect and distribute the assets without opening a probate case in court. It is the simplest and fastest way to handle a small estate. Informal Probate Informal probate is used when there is a valid will and no disputes among heirs or creditors. The process is overseen by a court-appointed Personal Representative (executor), but there is minimal court supervision. Most of the process, such as distributing assets and paying debts, is handled by the Personal Representative, with only basic filings required with the court. Informal probate is less time-consuming and costly than formal probate. Formal Probate Formal probate is required when there are disputes regarding the will’s validity, disagreements among heirs, or if the estate is complex and needs court intervention. The process is supervised by the court, and all major decisions, such as approving the distribution of assets, must be approved by a judge. Formal probate can take much longer and involve more legal fees than informal probate. 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Closing the Estate After all assets have been distributed and all required filings have been made with the court, the Personal Representative can file a Petition for Final Settlement to close the estate. Once approved, the Personal Representative’s responsibilities are complete. Challenges and Disputes in Colorado Probate Unfortunately, probate can sometimes become contentious, especially in cases involving high-value estates or when family members disagree on how assets should be distributed. Some common challenges in Colorado probate include: Will Contests Heirs or beneficiaries may challenge the validity of a will, claiming it was signed under duress, there was undue influence, or the deceased lacked the capacity to create the will. Will contests can significantly delay the probate process and require formal probate to resolve. Executor Misconduct If an executor is not fulfilling their duties or is mishandling estate assets, beneficiaries can file a complaint with the court and request the executor’s removal. Disputes Among Beneficiaries Disputes can arise over specific bequests, how assets are divided, or even the valuation of estate property. Mediation or formal court intervention may be necessary to resolve these disputes. How a Colorado Probate Attorney Can Help Navigating the probate process can be overwhelming, particularly when dealing with the emotional aftermath of losing a loved one. An experienced probate attorney can help in several ways: Guiding You Through the Process An attorney can explain the probate process, help you understand your rights and responsibilities, and ensure all legal requirements are met. Managing Court Filings and Deadlines Probate involves numerous legal documents and deadlines. An attorney can handle these tasks, ensuring that everything is filed correctly and on time. 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