Skip to content

Spousal Limited Access Trust: Learn How to Use Florida's Estate Planning Device

With federal tax exemptions projected to remain high in the coming years, many taxpayers are eager to adopt strategies that can allow them to leverage these exemptions and cut down on their tax obligations. Furthermore, the reality of today's litigation-prone landscape also prioritizes asset protection for people looking to protect themselves against lawsuits.

Unsurprisingly, irrevocable trusts are becoming an increasingly popular option for estate planning. In this guide, you'll learn everything you need to know about a particular kind of irrevocable trust known as Spousal Limited Access Trust (SLAT) and how you can use it in your estate planning.

What Is A SLAT?

A SLAT is an irrevocable trust in which one spouse serves as the grantor and the other as a beneficiary. By naming the lifelong beneficiary spouse as trustee, SLATs can provide continuous access to the donated property. When a spouse serves as a trustee, they have the authority to distribute trust assets to themselves. This arrangement allows the grantor to transfer assets out of their estate while continuing to benefit from them indirectly through their spouse.

In addition to their spouse, a grantor can also designate their children as beneficiaries of a SLAT. In that case, the grantor's children will become sole beneficiaries if their spouse dies before them. This is often a source of anxiety for some people since the untimely death of a spouse (lifelong beneficiary) might render the trust property unavailable to the grantor. However, this is not likely to happen if the SLAT is written correctly.

Suppose the grantor's lifelong beneficiary spouse dies before the grantor. In that case, another individual can be designated to stand in for the spouse in terms of allowing the grantor to access trust property. The drafter of the SLAT may incorporate a clause that will enable the grantor to borrow without paying interest or putting up collateral, thus protecting the grantor's access to trust assets.

When setting a trust with multiple beneficiaries, you can draft it such that the trustee distributes the trust's remaining assets to the remaining beneficiaries all at once upon your death, thus dissolving the trust. Alternatively, you can structure it such that money can be managed by the trustee for the long term, with periodic payments to subsequent beneficiaries according to your trustee's wishes. This means the trust will function like a Florida dynasty trust that benefits several generations.

You can also create trust with a structure similar to a SLAT. The primary aim is to assist future generations by transferring money to the trust and taking advantage of Florida's GST exemption. At least at the outset, a trust that does not identify your spouse as a beneficiary is not legally a SLAT and would be considered an 'irrevocable gift trust' but would ultimately serve the same objective as a SLAT.

Why Create a SLAT in Florida?

SLATS are fundamentally estate planning and asset management devices that are particularly useful for assets that are projected to appreciate over the lifetime of the donor spouse. The main reasons why you may want to establish a SLAT are:

1.  Spousal Estate Tax Exemption

A SLAT permits the donor spouse (also known as the grantor) to transfer up to their applicable exemption amount without paying gift tax. The value of the assets in the SLAT is excluded from the grantor's estate and is not liable to the federal estate tax once they pass on.

It bears mentioning that since this grantor will have used the exemption amount to shield assets moved to the SLAT from federal gift tax, the exemption amount will no longer be available to shelter assets in the donor spouse's estate from estate tax. In other words, only the appreciation of the assets in the SLAT will indeed be exempted from federal estate tax.

For a SLAT to achieve this objective, it must be drafted as an irrevocable trust. When establishing a SLAT, the donor spouse must irreversibly transfer assets to the SLAT, relinquishing all income and using those assets for the rest of their lives. However, this does not necessarily mean that the income from those assets or the assets themselves will be lost to the donor spouse and their beneficiary. Depending on the provisions of the SLAT, the beneficiary spouse (and, indirectly, the grantor spouse) might receive income or principal dividends from the SLAT, allowing the beneficiary spouse (and, indirectly, the grantor spouse) to access the transferred assets if they need to.

A SLAT is typically classified as a "grantor trust" for federal income tax purposes. This essentially means that the donor spouse, as the SLAT's grantor, is recognized as the SLAT's owner. Consequently, the income from the trust's assets is included in the donor spouse's gross income, thus necessitating payment of income tax.

Although the donor spouse pays income taxes on the trust's income (rather than the beneficiary spouse, this provides the extra benefit of allowing the trust's assets to grow without being depleted by income taxes, this tax payment is not a gift since the donor spouse is liable to pay the income tax related to the trust's revenue, which means it is not subject to the gift tax.

2.  Asset Protection Against Lawsuits

Committing assets to a SLAT also confers some protection from creditor claims on both the grantor and beneficiary spouses. Because the grantor spouse relinquishes control over the transferred assets and does not maintain any interest in or become a trustee of the SLAT, the transferred assets are considered to be free from the claims of the donor spouse's creditors, provided the transfer to the SLAT is not deemed to be a form of fraudulent conveyance.

Moreover, if the SLAT's terms include a spendthrift clause prohibiting beneficiaries from assigning the SLAT's assets, then the assets are exempted from lawsuits against the beneficiary spouse's creditors. The spendthrift clause essentially deems the beneficiary spouse as having only a discretionary interest in the SLAT, which means they can only receive principal or income from the trust strictly at the discretion of an independent trustee. Their creditors cannot claim the wealth held in the trust. However, this provision does not prevent them from claiming any property paid to the beneficiary spouse.

Happy young couple reading document on tablet together sitting on couch in living room

Setting Up A SLAT in Florida

In Florida, SLAT Trusts are incredibly versatile and can possess many assets, including cash, real estate, securities, and business interests. As a grantor, you can customize distributions to meet specific goals. For example, a SLAT focusing on tax-efficient asset transfer to children may allow for modest distributions throughout the lives of the grantor and their beneficiary spouse. This means the beneficiary spouse concentrates on increasing assets to be distributed to succeeding beneficiaries in the future. Conversely, if the primary goal of the trust is to support the beneficiary spouse and passing money to children is secondary, the trust's payouts may be more front-loaded.

Spousal distributions might be oriented towards one or more particular objectives, such as the beneficiary spouse's medical care, or they can be broader. Additionally, distributions may be issued on a given timeline or at the trustee's pleasure. A trustee can also be given the authority to disburse the trust's principal and its growth.

However, keep in mind that distributions from the trust to the beneficiary spouse may end up in the spouse's eventual taxable estate. Therefore, if the main objective of the SLAT is to provide tax efficiency, then spousal distributions may end up being counterproductive to the ultimate goal of establishing the trust.

Likewise, a grantor is at liberty to decide how their trust assets will be distributed to surviving beneficiaries after the beneficiary spouse's death. The trustee may be instructed to distribute all remaining assets, thus effectively ending the trust. Alternatively, the trust might be maintained, with the trustee tasked with managing assets for the long-term benefit of the remaining beneficiaries. The SLAT would essentially act as a dynasty trust in such a scenario.

In general, the beneficiary spouse of the grantor is usually named as trustee of a SLAT. However, an impartial third party can act as a trustee in some cases, but the grantor spouse cannot serve as a trustee in a SLAT under any circumstances. Suppose a beneficiary spouse is named as the trustee of a SLAT. In that case, the distributions issued to them must be predicated on an "ascertainable standard" such as the spouse's support, health, or education.

This requirement nevertheless allows for some discretion in using trust assets, but it cannot be entirely arbitrary. An impartial trustee with no personal stake in the trust, on the other hand, can be allowed far more latitude over distributions which are nonetheless subject to the trustee's fiduciary obligations and any trust constraints agreed upon with the grantor.

Can Each Spouse Have A SLAT?

No law in Florida stops married couples from establishing individual SLATs. However, couples considering doing so need to be aware of the Reciprocal Trust Doctrine. According to this law, if a husband and wife set up individual SLATs that are identical or deemed substantially similar, both of the SLATs may be ignored by the IRS for federal tax purposes.

In other words, SLATs that are identical or very similar are considered reciprocal. This means that all assets in a SLAT made by a wife for her husband are recognized and treated as a part of the wife's estate, and all assets in a SLAT produced by a husband for his wife are considered and treated as a part of the husband's estate.

The reciprocal trust doctrine was created to prevent harsh circumstances like when two spouses construct identical SLATs for each other to avoid paying estate taxes on the trusts' worth. The IRS can cross out the trusts under the reciprocal trust principle, deeming each spouse to have formed a trust for their benefit. Consequently, when the spouse who started the trust dies, the value of the trust will be included in their gross estate and liable to estate tax.

The reciprocal trust doctrine does not require proof of a quid-pro-quo SLAT arrangement between a married couple, nor does it need evidence of a tax-evasion motive. Instead, the doctrine can be applied if two individual SLATS established by a married couple are found to be interrelated and that the arrangement (in terms of mutual value) leaves both grantors in the same economic situation as they would have been if they created a SLAT and named themselves as the beneficiaries.

With that in mind, there are several things that a married couple may do when drafting their SLATS to avoid being subject to the reciprocal trust doctrine. These include:

  • Naming different trustees in their trusts

  • It is establishing trusts under different plans. This can be supported by a separate memorandum or sections of a memorandum dealing with each trust individually.

  • Not naming their spouses as trustees in their trusts

  • Granting different rights to the assets in their trusts. One trust, for instance, may enable the beneficiary to receive income while the other only permits the beneficiary to collect principal. Alternatively, one trust may make unrestricted distributions while the other restricts payouts to healthcare, education, spousal assistance, or upkeep.

  • Having different beneficiaries in the individual trusts. For instance, one trust may benefit the spouse, while the other may benefit both the spouse and the children.

  • Establishing individual trusts at different times. For example, if the husband sets up a trust today, the wife might consider waiting a few years before creating the other trust.

  • Providing different dissolution dates

  • Funding the individual trusts with different asset types and values

All those above are designed to make the individual SLATs substantially different from each other so that the IRS cannot invoke the reciprocal trust doctrine for tax collection on the respective estates of each spouse.

Downsides Of SLATS

While SLATs are an effective estate protection tool that can help you manage your wealth and pass it on to your beneficiaries effectively, they are limited in several ways. For instance, if your spouse suddenly dies, you lose your indirect access to income from their SLAT. With that being said, you can reserve the power of appointment (as the grantor) in an incomplete (grantor) gift trust. This allows you to take back the trust or pass on its trusteeship to other beneficiaries following the death of your spouse.

A marital disagreement might also preclude you from receiving indirect support from trust assets through payments to your spouse unless you specifically include a clause that expressly stipulates that the SLAT is for your current and future spouses. So, the SLAT may be considered dissolved in divorce, and the beneficiary spouse's interest would be terminated. In Florida, the "floating spouse" provision typically offers the perfect solution for this eventuality as it defines the grantor's spouse as anyone he or she is legally married to at any given time.

How Much Do I Need To Fund A SLAT?

Your estate planner will consider your current planning and other planning approaches to help you fund the SLAT adequately. As highlighted earlier, SLATs can be funded with a variety of assets, just like other irrevocable trusts.

Utilizing highly significant assets with a low-cost base to fund the SLAT might be advantageous since any increase will not be included in your estate tax calculations. It would be best if you also were careful not to transfer any assets that you jointly own with your spouse, as this would negate the essence and benefits of establishing a SLAT.

In Closing

Tax laws are constantly changing, making it difficult to forecast what will happen in the future. Nevertheless, establishing a SLAT is one of the best wealth-transfer strategies you can employ today. It allows you to take advantage of the record high estate exemptions we are enjoying presently.

If you are considering pursuing this option, be sure to undertake the process with the assistance of a professional estate planning attorney. They will help you determine whether this is the right strategy for you and guide you through the legal nuances of this device.

Interested in learning about becoming a resident in Florida or moving there? Read more.

Find The Right Mortgage

For more than 20 years, Phil have been helping customers achieve their home purchase and refinance goals by providing them with invaluable resources and support.

Schedule a FREE Consultation
Phil Ganz

Subscribe to Get Your First Time Homebuyer Checklist

Sign up for the weekly newsletter to stay up to date on the latest real estate market trends, loan news, and so much more!