As you and your spouse look toward your future, you’ve probably found that, with each new stage of your financial life, estate planning seems to get more and more complicated. It’s hard to know the best strategies and financial tools to protect your financial legacy, and make sure your spouse and family are taken care of.
Financial planners like to joke that an estate tax is entirely optional tax. This is because if you spend all of your money or give it away to charity, there won’t be anything for the government to tax your estate on (Financial planners are not known for their sense of humor, mind you.) However, many people are looking to have their cake and eat it too. Understandably, they want to pass on more to their beneficiaries and less to the government, but they aren’t ready to give up complete control of their assets.
The Spousal Lifetime Access Trust (SLAT) is a sophisticated way for married couples to reduce their taxable estate and maintain financial flexibility. A SLAT works double duty to protect your assets from estate taxes and give your spouse access to funds when they need them.
Let’s explore how SLATs work and whether they might be the right solution for your estate planning needs.
Getting Started with SLATs
What is a Spousal Lifetime Access Trust (SLAT)?
Transfer assets from your taxable estate into a SLAT, which is a trust that gives your spouse lifetime access and reduces your estate taxes.
What are the pros of a SLAT?
Reduce your taxable estate
Lifetime access for your spouse
Enhanced protection from creditors compared to having assets held in your name or that of a revocable trust
You have 45 days from the sale of your property to identify a replacement.
Potential to pass growth on investments estate tax-free
What are the cons of a SLAT?
SLATs are irrevocable
Loss of access to assets after divorce or death of your spouse
Heirs inherit investments at their original tax basis as opposed to receiving a “step up”
SLATs set up for each other must be unique and will require advanced planning
What is a Spousal Lifetime Access Trust (SLAT)?
A SLAT is an irrevocable trust for married couples that helps you reduce the amount that your family will pay in estate taxes, all the while maintaining some level of control over your assets and as a kicker, protection from creditors.
SLATs come in handy by allowing you to:
- Optimize your estate tax strategy: Moving assets into a SLAT is a smart way to take advantage of higher exemption limits.
- Maintain financial flexibility: SLAT assets are out of your estate, but your spouse can still access them as needed.
Is a SLAT Right for You?
Generally, a SLAT is going to be a strategy to consider if you are currently exposed to Federal estate tax. In simpler terms, keep reading if you’re sitting on $13.6 million in assets (or $27.2 million for all you power couples out there).
It’s important to note that this strategy is especially timely, because the numbers mentioned above are the Federal estate tax exemption amounts as they stand today. However, these amounts are going to change dramatically in the absence of any additional legislation.
While a SLAT may significantly reduce your overall taxable estate, it must be considered within the context of your own financial plan and overarching goals.
What’s the Hurry?
The Tax Cuts and Jobs Act (TCJA) doubled the federal estate tax exemption, allowing individuals to shield up to $13.6 million (or $27.2 million for married couples) from estate taxes. The TCJA is set to expire by the time the ball drops on 2026, potentially slashing the exemption amount by half.
How Does a SLAT Work?
You might currently have a revocable trust as part of your estate plan. For tax purposes, the revocable trust is a disregarded entity. A SLAT, however, is an irrevocable trust and is considered a separate entity. Therefore, when you fund a SLAT, you are making a completed gift which is how you remove the assets from your estate. While the SLAT is considered a separate entity, it is an entity that you create with your attorney for the purpose of financially providing for your spouse.
Establishment and Funding
The donating spouse, or grantor, sets up the trust for the beneficiary and funds it with cash, securities, or property. Transferring these assets into a SLAT removes them from your taxable estate. Cash or marketable securities are easy, uncomplicated funding sources. Funding with more illiquid assets, such as a privately held business or real estate will require having a valuation done.
Beneficiary Access
The beneficiary can set up distributions from the SLAT as needed. Distributions may be used as a safety net or to simply fund your everyday expenses. The donating spouse may not have access to the fund, but it doesn’t mean assets can’t be enjoyed together.
Trust Termination
SLATs typically terminate when the beneficiary dies, and all remaining assets in the trust pass to chosen heirs. Depending on how the SLAT is initially structured, this can happen directly or through another trust which may be helpful in retaining creditor protection and restricting access to the funds.
What Are the Primary Benefits of a SLAT?
SLATs are worth considering if you’re concerned about your estate being Federally taxed and you would still like to retain some level of control over your assets.
Shrinking Your Taxable Estate
Reducing your estate tax liability is where SLATS really shine. Transferring assets into the trust is a clever move that saves you a bundle in estate taxes, especially with the current elevated exemption that’s set to expire at the end of 2025.
Lifetime Access for Your Spouse
As the beneficiary, your spouse can tap into the trust throughout their lifetime. Should they need to cover living expenses or come upon a sudden financial need, they can request distributions any time. Your spouse can access the assets within the trust while both of you are still alive to maintain your normal standard of living.
Creditor Protection
For an extra layer of financial security, funds are generally shielded from creditors of the beneficiary. This can come in quite handy should unexpected legal or financial issues pop up down the road.
Tax-Free Growth Potential
If structured as a so-called “grantor trust,” the trust itself is exempt from any income tax. Instead, while the grantor spouse is still alive, they will pay any tax on income the trust earns, thereby further reducing the size of their taxable estate. Meanwhile, the assets inside the trust grow without being reduced by income tax.
What Are Some Potential Disadvantages of a SLAT?
The benefits of SLATs are certainly compelling for anyone concerned about Federal estate taxes. However,there are also drawbacks that beg careful consideration.
Irrevocability
When you set up a SLAT, that’s that. Sure, you can change your mind, but that won’t help you reclaim transferred assets. It’s called an “irrevocable trust” for a reason. Be sure you’re comfortable with the commitment involved in setting up a trust that cannot be dissolved.
Loss of Access Due to Divorce or Death
If you lose your spouse to divorce or death, you lose access to trust assets. Thoughtfully consider the long-term stability of your marriage and your spouse’s life expectancy before setting up a SLAT. We know it’s not exactly romantic dinner conversation, but it’s smart.
Inherited Tax Basis
When somebody inherits an investment or property, they generally get a “step up” in cost basis which allows them to sell the asset with a negligible tax implication. However, when you pass assets through an irrevocable trust like a SLAT, there is no step up. The original tax basis is passed down to the trust’s beneficiaries when they inherit the assets. When they sell, your heirs could be on the hook for substantial capital gains taxes if the assets appreciate. This is generally worth the tradeoff of avoiding estate taxes, but it is a point to consider.
Reciprocal Trust Doctrine
“Mirror image” trusts are viewed as a tax dodge and the IRS doesn’t like that, so if you and your spouse are considering SLATs for each other, they will need to have some distinct differences in how they are structured. While a qualified attorney can recommend ways to make the trusts different enough from each other, one of the big differences they will want to see is when they were created. Your attorney may recommend that the trusts are created in different years. Given that the Federal estate tax is set to be halved in 2026, this means you have limited time if you would like to take advantage of the current levels.
Final Thoughts
Spousal Lifetime Access Trusts are powerful tools in estate planning and tax efficiency strategies. Leveraging the current elevated estate tax exemption before it potentially decreases in 2026 can help you protect a chunk of your wealth from future estate taxes and maintain indirect access to those assets through your spouse.
SLATs aren’t without their complexities and potential drawbacks. The irrevocable nature of these trusts, potential loss of access due to divorce or death, and inherited tax basis issues are all factors that require careful consideration. Be sure to weigh the pros and cons against your long-term financial goals and family dynamics.
If you’re considering a SLAT, don’t wait until the last minute – in fact, start now. The clock is ticking on the current estate tax exemption, and proper planning takes time. Consult with a qualified estate planning attorney and financial advisor to determine if a SLAT is the right move for you. With careful planning and expert guidance, a SLAT could be your ticket to a more tax-efficient future and a lasting financial legacy for your family.
For the last quarter-century, the professionals at SK Wealth have perfected The Integrated Financial Advantage™, a unique financial planning approach crafted to provide our clients with personalized estate planning so they can live with intention both tomorrow and today.
