The Benefits of California SLATs

Understanding SLATs

A SLAT is a trust that acts as a life-long gift. It’s established when one partner creates an irrevocable trust for the benefit of the other spouse. When assets are deposited into the trust, they are treated as gifts. Since married couples are entitled to high lifetime gift exemptions, people often establish SLATs to minimize their federal taxes and eventual estate dues.

When the spouse who creates the trust—called the grantor or trustor—transfers an asset into the trust, the receiving spouse, or beneficiary, has limited access to the trust’s holdings. Estate planning attorneys often emphasize the “limited access” aspect of SLATs. If spouses are allowed unfettered access to the trust, their assets could be claimed by creditors before or after their death.

The Benefits of a SLAT

The grantor can use their estate and gift tax exemptions to transfer independent, non-community property into the SLAT.

While the grantor spouse retains limited access to the assets deposited into the SLAT, they will still be able to resolve any income tax liabilities generated by stocks, bonds, or any other appreciating items.

If the SLAT is properly configured, its holdings will not be subject to future estate taxes, even if the SLAT grows in value and is passed on to multiple generations of beneficiaries.

Joint SLATs

Married couples can maximize their federal and gift exemptions by establishing two SLATs at the same time. Each spouse’s SLAT can name the other partner as a beneficiary. While the formation of two SLATs can provide significant advantages, you should consult an experienced California estate planning attorney before finalizing your arrangement. California, like other estates, has what is sometimes referred to as a “reciprocal trust doctrine.” When two SLATs are too similar, the court could order that any SLAT assets be considered part of an estate and, therefore, subject to estate taxes.

The Risks of SLATs

SLATs, like other trusts, have certain risks. If a SLAT is not properly established, it could be contested by creditors and would-be heirs.

How SLATs Are Challenged

Undue Influence

A SLAT could be contested if an interested party believes the grantor spouse was coerced or otherwise pressured into establishing the trust.

Incapacity

California law presumes that most adults have the mental capacity to write a will or establish a trust. However, persons of advanced age or with certain mental conditions may be presumed of “unsound mind” and, therefore, incapable of making informed estate-related decisions.

Fraud

A SLAT may be found fraudulent if the court is provided compelling evidence to suggest that any of the SLAT’s documents were forged or amended without the grantor or trustee’s authorization.

Deciding If a SLAT Is Right for You

A SLAT is an inexpensive and flexible estate planning tool for married couples who want to want to work as a team and shelter certain assets.

Who Should Create a SLAT

High-net-worth individuals seeking to shield real properties and other valuables from estate taxes
Married couples seeking to establish an intergenerational legacy
Individuals with comprehensive estate plans who want to use their estate and federal gift tax exemptions to benefit their spouse and provide an inheritance for their children or other loved ones

However, a SLAT should only be one part of a comprehensive estate plan. While a SLAT has definite tax benefits and risk management advantages, it may not be sufficient to keep an estate out of probate.

Even if you already have a will, a trust, and other estate planning documents, you should still consult an attorney to ensure that your legacy is guaranteed.

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