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Over the last decade, Spousal Lifetime Access Trusts (SLATs) have emerged as the most important and efficient tools that we use for tax-efficient wealth transfer. However, when the shadows of divorce cast their uncertainty, these trusts can become a source of contention and complexity. As estate planning attorneys, we recognize the importance of helping our high-net-worth clients understand the nuances of SLATs in divorce situations. This article seeks to provide those clients and their family law attorneys with insights into the issues surrounding SLATs and offer guidance on how to navigate these challenges effectively.


Defining Spousal Lifetime Access Trusts
Spousal Lifetime Access Trusts are irrevocable trusts created by one spouse for the benefit of the other, typically funded with assets that are expected to appreciate over time. The grantor spouse relinquishes control and access to the trust assets, while the beneficiary spouse enjoys income and, in some cases, principal distributions. SLATs are particularly attractive due to their ability to leverage the gift and generation-skipping transfer tax exemptions, preserving wealth for future generations.


The Interplay of SLATs and Divorce
When the bliss of marriage gives way to the complexities of divorce, SLATs can present challenges that must be navigated with precision. One primary concern is the potential inclusion of trust assets in the marital estate, subjecting them to division in divorce proceedings. Determining the nature of the SLAT and the legal landscape surrounding its establishment is crucial for an equitable resolution.
Understanding the Irrevocable Nature of SLATs


The irrevocable nature of SLATs poses a unique challenge in divorce cases. Since the grantor relinquishes control over the assets, one must carefully assess the trust instrument to ascertain the extent to which trust assets can be considered marital property. Any ambiguity in the drafting of the trust or the intentions of the parties involved can lead to long and expensive legal battles.
Valuation and Distribution Challenges


Valuing the assets within a SLAT can be complex, especially when considering the potential for appreciation over time. Determining the present value of future income streams and distributions requires financial acumen and a deep understanding of the intricacies of high-net-worth portfolios. Frequently, these trusts will own interests in family partnerships or family limited liability companies, which add to the difficulties in valuing assets. Additionally, navigating the equitable distribution of trust assets, which may be subject to restrictions on transfer, requires a nuanced approach.
Impact on Alimony and Support Determinations


The income and distributions generated by a SLAT can impact alimony and support determinations in divorce proceedings. Family law attorneys need to scrutinize the terms of the trust to assess the beneficiary spouse’s financial standing accurately. This includes understanding any discretion granted to the trustee in making distributions, as well as the impact of such distributions on the beneficiary spouse’s financial needs.
Tax Considerations in Divorce-Related SLAT Issues
For estate planning attorneys, the tax implications of divorce-related SLAT issues are of paramount importance. A crucial consideration is the potential triggering of gift tax consequences if trust assets are distributed to the non-grantor spouse as part of the divorce settlement. Careful planning and coordination with tax professionals are essential to mitigate any adverse tax consequences that may arise during the divorce process.
Navigating Consent and Modification Issues
Modifying or terminating an irrevocable SLAT after divorce proceedings have commenced may require the consent of both parties, and possibly court approval. Family law attorneys must be vigilant in addressing potential issues related to the enforceability of such modifications and ensuring compliance with state laws governing trusts. Additionally, understanding the implications of any modifications on the tax efficiency of the trust is crucial to protect the interests of both parties.
Conclusion
Spousal Lifetime Access Trusts have become integral components of high-net-worth estate planning, providing a tax-efficient means of wealth transfer. However, when divorce becomes a reality, these sophisticated planning tools can complicate matters. High-net-worth clients and their family law attorneys must be equipped with the knowledge and skills to navigate the complexities surrounding SLATs, including the irrevocable nature of the trusts, valuation challenges, tax implications, and consent and modification issues. By collaborating closely with the estate planning and tax attorneys at Dana Whiting Law, we can help ensure a comprehensive and equitable resolution for our clients, even in the most intricate divorce situations involving SLATs.