High-asset divorces are known for being particularly complex. This is not just due to the overall value of assets but also to the variety and complexity of the couple’s estate. One such complex asset class is Spousal Lifetime Access Trusts (SLATs). In recent years, many high-asset couples have turned to SLATs to protect their assets from income taxes without ceding control of them entirely.
While SLATs are beneficial as long as the couple remains married, they can complicate the asset division process if the couple divorces. To understand why, one must understand how these trusts work and what sets them apart from other trusts in California.
Defining Spousal Lifetime Access Trusts
A Spousal Lifetime Access Trust is an irrevocable grantor trust funded by the “grantor” spouse to support the “beneficiary” spouse.
Grantor trusts are those that fully remove assets from the grantor’s estate. The grantor cedes control and ownership of the assets used to fund the trust entirely. It then assumes the full rights and obligations of ownership, including paying income and capital gains taxes. In return for losing the right to access and benefit from these assets, the grantor no longer needs to pay taxes on them.
Additionally, as an irrevocable trust, a SLAT usually cannot be modified after it is established. As such, the assets the trust contains, the beneficiaries and trustees it names, and its terms for distributing assets are fixed. The grantor cannot alter these considerations without either the trustees’ and beneficiaries’ consent or filing a petition for a conversion, modification, or reformation, which can be time-consuming and an uncertain path, as the Court may not approve such a request to convert or modify an existing SLAT once it has been in existence.
What Sets SLATs Apart From Other Trusts?
Spousal Lifetime Access Trusts differ from other asset protection trusts that couples may establish in a few key ways. The first is the unparalleled combination of control and tax protection they offer. SLATs provide all the tax protections that other grantor trusts offer. The grantor only needs to pay the gift tax on assets initially placed in the trust and never needs to pay income or capital gains taxes on them again since the trust handles that. Additionally, the assets in the trust will not be subject to the federal inheritance tax after the grantor passes away.
However, unlike other grantor trusts, a SLAT does not fully prevent grantors from benefiting from the assets. While the grantor cannot receive the funds, their beneficiary spouse can. The disbursements return to the couple’s possession, so the grantor may continue benefiting from them indirectly.
SLATs do come with potentially serious drawbacks should a couple divorce, though. Grantors only benefit from SLAT disbursements if they remain married to the beneficiary spouse. If they divorce, there is no simple solution to alter the terms of the irrevocable trust to regain control of the assets. The beneficiary spouse will continue to benefit from them and is not obliged to modify the terms of the trust for the sake of the grantor. This lack of flexibility can make SLATs a significant point of contention during high-asset divorces.
Further, if the parties did not structure the SLAT carefully when it was drafted, an unintended consequence can occur upon a divorce. Since a SLAT looks at the parties’ relationship at the time the SLAT was entered into, not at the time of a divorce, the grantor will not only lose indirect access to the SLAT’s assets upon a divorce but if not worded properly, the grantor may also remain liable for the SLAT’s income taxes upon the divorce. This may happen even though the beneficiary-spouse remains a beneficiary of the SLAT and the grantor spouse no longer has access to any of the assets.
To avoid this unintended outcome, married couples are advised to seek the assistance of a qualified trust attorney and an experienced family law attorney to collaborate in drafting the relevant language of the SLAT carefully from the onset.
Addressing SLATs During a Divorce
Ideally, SLATs are established with care to ensure that the grantor spouse does not lose access to the assets should a couple separate or divorce. The inclusion of a clause specifically addressing what should occur in the case of a divorce or legal separation can go a long way to preventing unnecessary litigation.
If the trust is already established, grantors are advised to seek legal counsel from experienced high-asset divorce attorneys to discuss their options for retaining control over the trust’s property. Every SLAT is unique, so there is no single solution for addressing them during divorces. Depending on the circumstances, a skilled high-asset divorce attorney may recommend alternatives such as:
- Decanting (Modifying) the SLAT into a new trust with more appropriate terms
- Dissolving the SLAT entirely and returning the assets to the marital estate
- Negotiating spousal support and property divisions with the SLAT’s ongoing existence in mind
The most effective method will depend on the language used to establish the trust. Grantors or beneficiaries with questions or concerns about how a SLAT might be handled during a California marital dissolution should feel free to schedule a consultation with the experienced high-asset divorce attorneys at Flicker, Kerin, Kruger & Bissada LLP.