A spousal lifetime access trust (SLAT) is a trust created by one spouse (trustmaker spouse) for the benefit of the other (beneficiary spouse).
This estate planning tool can be used to retain as much control over your property and assets as possible while not paying any more taxes than you have to.
Spousal Lifetime Access Trusts
A SLAT is an irrevocable trust used to transfer money and property out of the trustmaker spouse’s estate into a trust for the other spouse’s benefit.
Using a SLAT, the trustmaker spouse can take advantage of their lifetime gift and estate tax exclusion amounts by making sizable, permanent gifts to the SLAT.
This decreases the value of their estate while still allowing some limited access to the trust’s money and property.
Here’s how it works:
- The trustmaker spouse gifts money or property to the SLAT to benefit the beneficiary spouse. The trustmaker spouse must be the sole owner of these assets. If the couple lives in a community property state, they will probably need to convert their community property into separate property through a partition agreement.
- The trustmaker spouse reports the gift to the SLAT on a gift tax return.
- The beneficiary spouse receives distributions from the SLAT, which indirectly benefits the trustmaker spouse.
- When the beneficiary spouse dies, the assets are transferred to the remaining trust beneficiaries, either outright or in a trust. These beneficiaries are typically the couple’s children or grandchildren.
What are the main benefits of a SLAT?
SLATs offer many potential advantages for people looking to reduce their tax burden, including:
- Reduce estate value: The value of the property gifted by the trustmaker spouse to the SLAT is removed from the estate. All future appreciation is also removed. The beneficiary spouse receives distributions from the SLAT, but the trust property is excluded from their estate.
- Reduce tax burden: SLATs are typically structured as grantor trusts. The trust’s taxable income is taxed to the trustmaker spouse. This reduces their estate value. As long as the trustmaker spouse is alive, they do not need to submit a separate tax return for the SLAT. A separate tax return is required if the SLAT is not structured as a grantor trust.
- Financial security: A SLAT allows the trustmaker spouse indirect access to the assets in the SLAT through the beneficiary spouse.
What are the main drawbacks to a SLAT?
There are potential drawbacks to a SLAT that should be considered, including:
- Irrevocable trust: Gifts made to a SLAT is permanently transferred, and the transfer cannot be undone.
- Access depends on the beneficiary spouse: If the beneficiary spouse dies or divorces the trustmaker spouse, the trustmaker spouse will lose access to all assets gifted to the SLAT. Upon remarrying, the trustmaker could potentially regain access.
- Loss of step up in cost basis: The property gifted to the SLAT will not receive a step up in cost basis when the trustmaker spouse dies. To minimize the effect of this drawback, Trustmakers can include a trust provision that allows the trustmaker spouse to substitute low-basis trust property with high-basis property or cash of equal value.
- Cannot construct two similar trusts: If two spouses are trying to create SLATS that fully utilize each other’s exemption amount, they may run afoul of the reciprocal trust doctrine. In this case, the Internal Revenue Service may undo the trusts and include the trust property in the spouses’ taxable estates. This defeats the purpose of the trust. Creating SLATs at different times, using different trustees, choosing different beneficiaries, or providing different distribution terms may help overcome this obstacle.
SLATs may be a limited-time option
SLATs may be considered a limited-time option because of changes in tax laws and regulations. In 2023, the gift and estate tax exemption amounts are $12.92 million for individuals and $25.84 million for married couples.
This historically high level provides opportunities for people with high-value estates that lower tax exemptions would not.
Under current law, gift and estate tax exemption amounts will decrease to $5 million (adjusted for inflation) on 1/1/26. Of course, Congress could decrease the exemption sooner.
Because tax laws could change at any time, the opportunity to use SLATs to their greatest advantage may be limited.
If you are a married couple and need to reduce your federal estate taxes or have questions about SLATs, schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.