Wealth Planning Insights
What is a Spousal Lifetime Access Trust (SLAT)?
Abigail Gunderson, CFP®, April 2024
A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust established by one spouse (grantor) for the benefit of the other spouse, children and grandchildren (beneficiaries). It has become a popular estate planning strategy in the face of an unknown future for estate and gift taxes.
Benefits of a SLAT
Estate and Gift Tax Benefits. One of the primary advantages of a SLAT is the ability to potentially reduce or eliminate future estate taxes. With the estate tax exclusion at $13.61M for 2024 (set to revert to about $7M in 2026), gifting assets to a SLAT can capture the current high exemption. In addition, the appreciation of the SLAT assets (over time) is effectively removed from the grantor’s taxable estate at death. (Of course, irrevocable gifts must total over $7M in order to improve on the status quo exemption after 2025.)
Grantor’s Continued Access to Assets. Though a SLAT is irrevocable, it can also be flexible. The grantor spouse has indirect access to trust income (and in some cases, trust principal) through the distributions made to the beneficiary spouse which is available, if needed, for as long as the beneficiary spouse remains alive. It enhances the couple’s ability to maintain their desired standard of living.
Asset Protection. Assets in a SLAT are typically shielded from the claims of the beneficiary's creditors.
Key Considerations for SLATs
Grantor’s Tax Status. Though the SLAT is a separate legal entity, the grantor is responsible for paying taxes on trust income. In essence, this is an additional “gift” to the trust beneficiaries and another way to minimize the grantor’s estate tax exposure.
Assets Gifted to a SLAT. Assets transferred to a SLAT by a spouse must be the grantor's separate property. In community property states, this can be effectively done by partitioning assets.
Note that there is no step-up in basis for assets gifted to a SLAT at the death of either the grantor or beneficiary. However, they are excluded from the grantor's and beneficiary’s estates.
Reciprocal Trust Doctrine. The IRS has a set of rules that need to be considered in the planning process. Reciprocal SLATs may be disallowed. That is where each spouse funds a nearly identical SLAT trust for the other. Differences can be implemented by varying the distribution terms, powers, or year of creation for each SLAT.
Spousal Relationship. The full advantages of a SLAT are best maintained if the spouses remain married throughout the existence of the trust. In the event of a divorce, complications may arise. Discuss with an Estate Attorney and your Wealth Advisor if this strategy is appropriate for your family’s wealth transfer plans.