Over the past few years, many people have created spousal lifetime access trusts (commonly known as SLATs) for their spouse, which benefits the spouse while he or she is alive (and you indirectly) and then your children when your spouse dies. It’s a common and nifty estate planning tool that allows you to use up your estate tax exemption (currently just over $12 million but dropping to $5 million in 2026) while still being able to access the assets if your spouse (and you) need them. The downside of a SLAT is that if your spouse dies or you divorce, you lose access to the monies.
If you gifted money to a SLAT for your spouse and are now having second thoughts about the marriage, you may think that you can just get that money back during the divorce. Unfortunately, that’s not the case. Here are five issues you need to consider if you have a SLAT and are contemplating divorce:
• Look at the trust to see if it mentions what happens in the event of a divorce. The trust may state that if you divorce, your spouse is no longer a beneficiary. This is unlikely as many attorneys will not include divorce language in a SLAT if they represent both spouses. An estate planning attorney who represents both spouses jointly has an obligation to both of them. Drafting for a divorce creates a conflict of interest between the spouses as their interests become divergent. For this reason, the SLAT may not remove your spouse as a beneficiary if you divorce.
• If you have a prenuptial agreement, it needs to be reviewed. It may address what happens to trusts created during the marriage for estate planning purposes.
• If you are paying the income taxes on the trust (this is known as a grantor trust), check to see if you can “turn off” the grantor trust provisions. In doing so, you will no longer have to pay the income taxes on the trust. After all, if you do get divorced you don’t want to have to pay the tax on the trust assets when they may end up benefitting only your ex-spouse.
• Consider negotiations. During the divorce, you may be able to negotiate that the trust is decanted to a new trust that removes your spouse. Or you and your spouse may enter into a non-judicial settlement agreement whereby the beneficiary spouse is removed from the SLAT. If you and your spouse each created a SLAT for the other, you may be okay with the SLAT’s continuing with only some small changes such as who the trustees are.
• If the SLAT allows the trustee to distribute principal to your spouse for any reason, the assets may be able to be distributed outright to your spouse and then divided up as part of the divorce. However, you will have just wasted your $12 million exemption amount since any assets you receive back will now be taxed for estate tax purposes on your death.
By gifting assets to the SLAT and now divorcing, you have lost access to them. Make sure you look at all your options as part of your divorce. And be mindful not go back to the attorney who drafted the SLAT to ask about what happens if you divorce unless you and your spouse had separate attorneys.