Three Necessary Elements of Drafting Spousal Lifetime Access Trusts to Take Advantage of New Creditor Protections

Florida has become the 11th state to offer its residents asset protections in spousal lifetime access trusts (SLATs) under a new law that applies to trusts established after June 30, 2022. As long as a trust meets all the eligibility requirements set out in the Florida SLAT law, creditors of the grantor spouse won’t be able to reach the trust assets under certain circumstances. This arrangement can be highly beneficial for federal estate tax purposes and to shield assets from creditors. An estate planning lawyer at Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. can help determine if a SLAT is an appropriate part of your estate plan and all other types of estate planning vehicles.

Eligibility Requirements for Spousal Lifetime Access Trusts

SLATs are trusts that one spouse establishes for federal estate tax purposes to benefit the other spouse if they ever need distributions of assets. Trusts are eligible to be SLATs, and their assets to receive protection from creditors if they meet all the requirements outlined in Florida Statutes § 736.0505, as follows:

  • The grantor spouse cannot be a beneficiary of the SLAT until the initial beneficiary spouse passes away;
  • The initial beneficiary spouse must remain a beneficiary of the SLAT for their lifetime; and
  • All transfers to the SLAT must be completed gifts as per the requirements of Internal Revenue Code § 2511;

Effects of SLATs on Creditors

If a grantor spouse places assets in a properly-executed SLAT, the law doesn’t consider the grantor spouse to have contributed to the trust. As a result, the creditors of the grantor spouse will be unable to reach the trust assets after the death of the lifetime beneficiary spouse, with a few exceptions.

Similarly, the beneficiary spouse can enjoy protection of the trust assets from their creditors, as long as one of the following is true:

  • The SLAT has a trustee separate from the beneficiary spouse who has the discretion to determine if and when distributions to the beneficiary spouse occur; or
  • If the beneficiary spouse serves as trustee, the terms of the SLAT limit them to receiving what is reasonably needed for health, education, maintenance, and support.

Florida Statutes § 736.0503 provides for certain “exception creditors.” These creditors can reach into a spousal lifetime access trust to obtain the grantor spouse’s assets to pay their debts. Exception creditors include:

  • Spouses and ex-spouses to whom the grantor spouse owes alimony;
  • Children to whom the grantor spouse owes child support; and
  • Creditors who have paid attorney’s fees and other costs incurred by the beneficiary of the trust when being represented concerning that trust, if the beneficiary has no other resources.

Possible Problems with SLATs

One problem with establishing a SLAT, at least from some perspectives, is that there is no practical way to account for a situation in which the couple divorces. For instance, the SLAT cannot contain a provision that the grantor spouse becomes a beneficiary upon the parties’ divorce or the initial beneficiary spouse’s death. Likewise, the SLAT cannot provide for the removal of the initial beneficiary spouse as a beneficiary in the event of a divorce. These provisions would invalidate the SLATs under Florida law so that their protections would be unavailable.

Certain situations might cause the IRS to impose federal estate tax on the SLAT assets. For instance, some fear that if exception creditors can reach the SLAT assets, the assets will become subject to federal estate tax inclusion. Similarly, suppose a SLAT provides that the trustee can reimburse the grantor spouse for taxes paid on the trust income. This type of provision may open the trust assets to federal estate taxes and creditors because a grantor spouse cannot become a trust beneficiary until after the initial beneficiary spouse’s death.

Finally, trust protectors that allow the initial beneficiary spouse to be removed as the beneficiary of the trust, which would benefit the grantor spouse, would violate the requirements of a SLAT. Therefore, this type of provision also would invalidate the trust as a SLAT.

Contact Our Office Today for All Your Estate Planning Needs

At Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A., an estate planning attorney can provide you with a full range of estate planning services, including creating spousal lifetime access trusts where appropriate. In addition, if you lose a loved one, we are here to assist you with all estate and probate-related needs.

We can guide your family through the complicated legal landscape of estate and probate law as quickly and efficiently as possible. Call us at (954) 966-2112 or learn more about the legal services we can offer you online. Schedule an appointment to talk to us about your legal needs right away.

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