Why Transferring Joint Account Balances to a Spousal Lifetime Access Trust Makes Sense
Introduction
Many married couples maintain joint bank or brokerage accounts for convenience, shared financial goals, and household management. However, such joint accounts are vulnerable to future creditors of either spouse. To enhance asset protection and maximize estate planning benefits, spouses should consider a proactive strategy: one spouse (the participating spouse) unilaterally transferring the entire balance from their joint accounts into a Spousal Lifetime Access Trust (SLAT) for the benefit of the other spouse (the non-participating spouse).
Asset Protection from Creditors
Joint accounts are not shielded from future creditors of either account holder. If either spouse faces a lawsuit, judgment, or debt collection, the funds in these joint accounts may be at risk. By transferring the entire balance to a SLAT, the assets become owned by the trust, not by either spouse individually, offering a robust layer of protection against potential future creditor claims affecting both spouses.
Estate Tax Advantages
Moving joint account funds into a SLAT offers substantial estate planning benefits. Once the assets are in the trust, they are removed from both spouses’ taxable estates. This means the value of these assets will not be subject to federal estate taxes upon either spouse’s death, potentially saving significant amounts for heirs. Additionally, funding a SLAT now locks in the use of the currently high federal estate tax exemption amounts, which could someday be decreased. Acting today ensures you maximize the available exemption before any potential legislative changes reduce its value.
How a SLAT Works and Why It’s Not Settled by the Non-Participating Spouse
A SLAT is an irrevocable trust created by one spouse for the benefit of the other. The participating spouse transfers assets to the SLAT, and the non-participating spouse is named as the beneficiary. Importantly, because the non-participating spouse does not contribute any assets to the SLAT, the trust is not considered to be “settled” by the two of them. This distinction is crucial for tax and asset protection purposes: it ensures that the transferred assets are not included in the non-participating spouse’s estate for tax purposes, nor are they accessible to that spouse’s creditors as if such spouse had created the trust for himself or herself.
Additional Benefits
- Retained Access: The non-participating spouse can receive distributions from the SLAT, providing ongoing financial support.
- Flexibility: SLATs can be structured to benefit children or other family members, offering multi-generational planning opportunities.
- Growth Outside Estates: Any appreciation of assets inside the SLAT occurs outside both spouses’ estates, further reducing future estate tax exposure.
Conclusion
Transferring joint account balances to a SLAT for the benefit of your spouse is a powerful strategy to protect assets from creditors, eliminate them from both spouses’ taxable estates, and lock in favorable estate tax exemptions. This approach also preserves access and flexibility for your family’s financial future. Consult with an experienced estate planning attorney to tailor a SLAT strategy that fits your unique situation and ensures your assets are protected for generations to come.
