Understanding SLATs: Spousal Lifetime Access Trusts
They say an ounce of prevention is worth a pound of cure. And when it comes to taxes, some proper planning could potentially save you a fortune in taxes. At the end of 2025, the Tax Cuts and Jobs Act (TCJA) of 2017 will sunset unless Congress acts. If this happens, the current estate and income tax environment will look massively different than today.
While the outcome of the 2024 election could certainly have an impact, I’d rather plan ahead than count on politicians in Washington being competent and getting something done.
We want to help you get ahead of the possible sunset with actionable steps you can take in spite of the uncertainty.
And while there are likely to be significant shifts in the income tax landscape, we’re going to spend our time in this series on no-regret estate planning strategies you can do NOW to get ahead of the upcoming sunset…
And potentially save big money for your heirs in the future.
The first strategy we’ll discuss is something called a SLAT (Spousal Lifetime Access Trust). Let’s get into it.
What are SLATs?
Designed for married couples, a Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created by one spouse (the donor spouse) for the benefit of the other (the beneficiary spouse).
You can fund the trust with your lifetime gift and estate tax exemptions (explained below).
This achieves three things:
- Removes future asset growth from your taxable estate
- Your heirs won’t pay estate taxes on the assets you’ve moved to the trust
- Your spouse gets access to lifetime income from the SLAT
The next year (if so inclined) your spouse could do a “reciprocal trust” where you’re the income beneficiary.
But be careful. If done incorrectly this could invite scrutiny from the IRS.
What are the Benefits of SLATs?
Asset protection. By transferring assets into an irrevocable trust, the donor spouse removes those assets from their taxable estate. This reduces the couple’s combined estate tax liability AND shields the assets from potential creditors.
Tax advantages for estate planning. The donor spouse can use their lifetime gift tax exemption when funding the trust, allowing a substantial transfer of wealth without incurring gift taxes. Also, any appreciation on the assets within the SLAT occurs outside of both spouses’ estates, further minimizing future estate taxes.
Income distributions to the beneficiary spouse. The trust can be structured to provide the beneficiary spouse with access to income that the trust assets generate, or potentially more for health, education, maintenance and support.
Consult with a qualified estate tax planning attorney who has experience with SLATs to ensure the trust is structured properly.
Why Establish a SLAT in 2024?
For context, the 2024 federal lifetime gift and estate tax exemption amount is set to $13.61 million per person.
This means, as it stands, you can gift up to $13.61 million over your lifetime tax-free (IF you correctly submit a Form 709 — a tax return to report gifts made during the year that exceed the annual gift tax exclusion amount).
However, if the TCJA sunsets as planned, this amount will be cut in half by the end of 2025.
This gives married couples a limited time to take advantage of the full benefit of SLATs.
How SLATs Work
First, the donor spouse establishes an irrevocable trust and names their spouse as the primary beneficiary.
The donor spouse then transfers assets into the trust. If you do so as a gift, and use your lifetime gift tax exemption, this transfer is not taxable.
Once the assets are in the trust, the trustee is responsible for administering the trust according to its terms — including making distributions of income or principal to the beneficiary spouse.
For example:
- Sarah and Neil have joint and separate assets totaling $30 million
- They transfer $12.06 million of their separate assets each into two SLATs benefiting each other (this must happen at separate times and with different structures)
- They exclude the full $24.12 million (plus future appreciation) from their taxable estates
- They’re able to take ongoing income from their SLATs within certain guidelines
After the beneficiary spouse dies, the SLAT passes on to the remaining trust beneficiaries tax-free.
If you’re considering utilizing a SLAT this is NOT a do-it-yourself strategy. It is crucial that you work with a qualified estate planning attorney to make sure you do things correctly.
What are the Disadvantages of SLATs?
Compared to other estate planning tools, such as outright gifts or revocable trusts, SLATs offer a unique combination of asset protection, tax efficiency, and some access for the beneficiary spouse.
However, there are some potential drawbacks.
- SLATs are irrevocable, meaning that once assets are transferred into the trust, the donor spouse relinquishes control over them. The beneficiary spouse is not obligated to establish a reciprocal trust.
- The donor spouse’s access to the assets within the SLAT is typically limited to health, education, maintenance and support — however, there are ways to set it up so the trustee has discretion
- The trust must be properly drafted and administered to ensure compliance with tax laws and avoid unintended consequences
Is a SLAT Right for You?
SLATs can be a valuable tool for married couples looking to minimize their estate tax liabilities and protect their assets.
However, they are not a one-size-fits-all solution. You need to carefully consider your unique financial situation, long-term goals, and the nature of your relationship with your spouse.
If you want help to evaluate if a SLAT is right for you (in light of your big-picture financial plan), we can help. However, time is ticking on the TCJA lifetime gift tax exemption.
We’re offering a free consultation to give you a head start, before the TCJA sunsets.
In the meantime, keep an eye out for our next installment in the 3 No-Regret Tax Planning Strategies series: Charitable Giving.
