How to Structure a Spousal Lifetime Access Trust (SLAT) in Wisconsin for High-Net-Worth Couples
For high-net-worth couples in Wisconsin, Spousal Lifetime Access Trusts (SLATs) offer a powerful estate planning tool. Due to Wisconsin's marital property laws, couples must legally partition their assets into separate property before funding the trust to avoid adverse IRS tax implications.
For high-net-worth families in Wisconsin, effective estate planning is crucial. While federal estate tax exemptions have been permanently fixed at a higher level, strategies like the Spousal Lifetime Access Trust (SLAT) remain powerful for managing substantial wealth. A SLAT allows one spouse to transfer millions of dollars out of their taxable estate while still allowing the other spouse to access the funds if needed. However, because Wisconsin is a marital property state, setting up a SLAT here requires navigating complex state laws to avoid accidentally triggering a massive tax bill. This guide explains how to properly structure a SLAT in Wisconsin.
What is a Spousal Lifetime Access Trust (SLAT)?
A SLAT is an irrevocable trust created by one spouse (the grantor) for the benefit of the other spouse (the beneficiary). By moving assets into the SLAT, the grantor removes those assets-and all future appreciation-from their taxable estate, taking advantage of the federal estate tax exemption. Because the beneficiary spouse can request distributions from the trust, the couple does not completely lose access to the wealth.
The Wisconsin Marital Property Hurdle
Structuring a SLAT in Wisconsin is uniquely challenging. Wisconsin is one of a handful of community property states, governed by Wis. Stat. § 766.31, which dictates that all property acquired by a married couple during the marriage is presumed to be marital property (owned equally). Funding a SLAT improperly can destroy its tax benefits.
Funding with Separate vs. Marital Property
To avoid severe tax consequences, a SLAT must be funded exclusively with the grantor spouse's separate, individual property. If you fund a SLAT using marital property, the IRS will consider the beneficiary spouse to be a 'grantor' of half the trust. Under 26 U.S.C. § 2036, this causes the assets to be pulled right back into the beneficiary spouse's taxable estate, completely ruining the estate tax benefits.
To prevent this, couples must execute a Marital Property Agreement (postnuptial agreement) before funding the trust. This agreement legally partitions marital property into individual property. The precedent established in In re Estate of Kobylski, 178 Wis. 2d 158 (WI Court of Appeals 1993) underscores how Wisconsin courts view the strict tracing and classification of marital versus individual assets.
Selecting the Right Trustee
Under Wis. Stat. § 701.0402, creating a valid trust requires a designated trustee to manage the property. For a SLAT, the grantor cannot be the trustee, or the assets will be dragged back into their estate. While the beneficiary spouse can serve as the trustee, their power to distribute money to themselves must be strictly limited by an Ascertainable Standard (Health, Education, Maintenance, and Support). To provide the strongest tax and creditor protection, many Wisconsin families hire an independent corporate trustee, such as a state-chartered trust company overseen by the Wisconsin Department of Financial Institutions, Madison.
Tax Implications of a SLAT
SLATs are typically structured as 'grantor trusts' for income tax purposes. This means that even though the trust owns the assets, the grantor spouse remains responsible for paying the income taxes on the trust's earnings. This is actually a massive benefit, as it allows the trust assets to grow tax-free, while the tax payments further reduce the grantor's taxable estate.
When you fund the SLAT, you must file a gift tax return. Your CPA will need to file Form 709, FED, IRS, United States Gift (and Generation-Skipping Transfer) Tax Return to report the transfer and allocate your lifetime exemption to the trust. If real estate is involved, deeds will need to be recorded at the Dane County Register of Deeds, Madison or your local county office.
Divorce Risks and the SLAT
While nobody plans for divorce, a SLAT requires preparing for the worst. If the grantor and the beneficiary spouse divorce, the beneficiary spouse may still have access to the trust assets, while the grantor completely loses indirect access. Furthermore, the grantor might still be legally obligated to pay the income taxes on the trust's earnings under the grantor trust rules.
To mitigate this risk, Wisconsin estate planning attorneys draft specific 'floating spouse' clauses. This means the trust benefits whoever the grantor is married to at the time. If a divorce occurs, the ex-spouse automatically loses all rights to the trust, and a future spouse could step into that role.
How Much Does a SLAT Cost in Wisconsin?
Because a SLAT requires complex legal drafting, tax analysis, and marital property partitioning, it is a premium legal service.
| Service | Estimated Cost |
|---|---|
| Legal Drafting of the SLAT | $5,000 to $10,000+ |
| Marital Property Agreement | $2,000 to $4,000 |
| CPA Fees (Form 709 Preparation) | $1,000 to $2,500 |
| Appraisal Fees (for Business Interests) | $3,000 to $7,000 |
Timelines for Funding a SLAT
Establishing a SLAT is not an overnight process. Gathering financial records, drafting the Marital Property Agreement, securing business valuations, and finalizing the trust document typically takes 2 to 4 months. Top-tier attorneys fill their schedules quickly, so timely action is important.
Frequently Asked Questions (FAQ)
Can a SLAT be changed after it is created?
A SLAT is an irrevocable trust, meaning the grantor cannot simply change their mind and rewrite the terms. However, a trust protector can be appointed to make limited administrative changes to adapt to new tax laws.
What happens if the beneficiary spouse dies first?
If the beneficiary spouse passes away, the grantor loses all indirect access to the trust funds. The remaining assets typically pass down to the couple's children or other designated heirs, remaining free from estate taxes.
Can we set up two SLATs for each other?
Couples often try to set up reciprocal SLATs (Husband creates one for Wife, Wife creates one for Husband). However, under the IRS Reciprocal Trust Doctrine, if the trusts are too similar, the IRS will uncross them and nullify the tax benefits. They must have significantly different terms and funding dates.
Does a SLAT protect assets from creditors?
Yes, because the grantor no longer owns the assets and the trust is irrevocable, the funds are generally protected from the grantor's future creditors, lawsuits, and bankruptcies.
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