With current federal lifetime gift and estate tax exemption amounts scheduled to sunset at the end of 2025, spousal lifetime access trusts can be an important wealth transfer tool. Here’s how to determine if the strategy is right for you.
Absent action from Congress, the current federal lifetime gift and estate tax exemption of $13.61 million per person ($27.22 million for a married couple) is scheduled to sunset at the end of 2025. Should it happen, the exemption is set to be cut in half from the present all-time high to roughly $7 million per person ($14 million per married couple) in 2026. The impact of this reduction will be significant for many high-net-worth families. If this includes your family, a spousal lifetime access trust (SLAT) may be a valuable strategy to implement before the potential sunset.
What is a SLAT, and why would I use it?
The SLAT is a permanent gifting vehicle used by married couples with significant wealth who want to take advantage of the federal lifetime gift and estate tax exclusions while maintaining a limited level of control and access to those funds. It’s an irrevocable trust where one spouse — the donor — makes a gift into a trust for the benefit of the other spouse (and possibly other beneficiaries) with the primary goal of removing the assets from the donor’s taxable estate. One spouse may fund a SLAT for the benefit of the other spouse, or the spouses may fund SLATs for each other with careful planning as to not trigger reciprocal gifting issues.
The SLAT is a permanent gifting vehicle used by married couples with significant wealth who want to take advantage of the federal lifetime gift and estate tax exclusions.
SLATs offer two key advantages:
Estate tax benefits. The SLAT can be an effective way to take advantage of the federal lifetime gift and estate tax exclusions. Depending on individual circumstances, it can remove up to the exemption amount of $13.61 million per person in 2024 (or $27.22 million per married couple) from the taxable estate, and there’s potential for post-gift appreciation to accrue outside the taxable estate. Additionally, these trusts are typically grantor trusts, meaning the person who created the trust, in this case each spouse, is the taxpayer. This means the spouses can pay taxes associated with the SLATs from their personal funds rather than the SLATs, allowing the SLATs to continue to grow estate tax-free while also not paying income nor capital gains taxes.
Future access to the funds. While the gift to the SLAT is irrevocable, a properly structured SLAT provides the donor with limited, indirect access to the trust assets in the event of an unforeseen financial setback. The access is “indirect” as the beneficiary spouse, who is often the sole or co-trustee of the trust, will have discretionary principal and income access to the trust for health, education, maintenance, and support. An independent trustee, whether an individual or professional, is required as a co-trustee to broaden access to the trust for other needs. Many donors find it comforting to know that even though they’re financially independent after funding the trust, they have a “safety valve” to ensure their needs are met if something unforeseen happens. However, should the beneficiary spouse pass or if the couple gets divorced, then access to the trust will be terminated.
While the gift to the SLAT is irrevocable, a properly structured SLAT provides the donor with limited, indirect access to the trust assets.
Who should use a SLAT?
First, as the name implies, this type of irrevocable trust is only available to married couples. Second, as a best practice, this wealth transfer strategy should be largely utilized by families who would remain financially independent without the assets contributed to the irrevocable trust. For couples meeting both thresholds, a SLAT can be a great planning tool for maximizing amounts transferred to the next generation, without permanently losing access to the assets. Every couple’s financial situation is different, and the amount and type of assets contributed to a SLAT can and will vary.
Keys to a successful SLAT
The SLAT is a valuable estate planning tool in the right circumstances. Here are a few important considerations to ensure a successful SLAT.
Start with a personal balance sheet: In determining whether a SLAT is right for you, the first step is to work with your wealth management team to build a personal balance sheet. This creates an accurate inventory of all of your assets and liabilities, a record of how they’re titled, and details about the liquidity features of each item. Next, you’ll build a financial plan based on your projected lifestyle.
Understand the implications of the death or divorce of the nondonor spouse: A commonly cited downside of a SLAT is the risk of death or divorce of the nondonor spouse and subsequent removal of donor access to the funds. As long as you remain married and the nondonor spouse is alive, you theoretically have access to the funds through your spouse. But in the event of divorce, you potentially lose access, and in the event of death of your spouse, the assets will pass to the remainder beneficiaries of the trust — typically your children or grandchildren. Remember, a SLAT isn’t for someone who expects to need access to the funds — the ability to reach them is something that adds comfort to an otherwise solid plan.
Identify the right assets: For maximum effectiveness of a SLAT, it’s important to identify the right assets to put in the trust. For example, if you have an illiquid asset like a closely held business, it may be possible to take a discount on the value when putting a portion of the ownership into the trust. This also enables the couple to leave more liquid assets inside the estate for easier access. Ideally, the assets that go into the trust will also appreciate over time because the increase in value is going to be free of estate tax.
Short-term investment risks: The performance of a SLAT should be viewed with a long-term investment horizon. It’s possible the trust could be funded and, six months later, the assets could be lower than their initial value due to market fluctuations.
Drafting considerations: Most SLATs provide the nondonor spouse with income at the trustee’s discretion, providing for flexibility to take income if your spouse needs it, but keeping it outside of the taxable estate if they don’t. Spousal access to principal is typically limited to health, education, maintenance, and support at the trustee discretion. In many cases, the nondonor spouse/beneficiary will be the trustee; however, there are situations where it makes sense to have an independent trustee to add additional flexibility or ensure family harmony in blended family situations. The addition of a third-party independent trustee is key to allowing for more broad discretionary distribution standards, such as best interests.
Is a SLAT right for you?
With the sunset of the estate tax exemption currently scheduled for Dec. 31, 2025, now’s the time to implement estate planning strategies to minimize the impact of estate tax law changes. The SLAT can be an effective estate planning tool for married couples with taxable estates who have excess capital in their financial plan. To be successful, it’s important to develop an accurate personal balance sheet and financial plan and understand the strategy from an estate planning perspective. A SLAT is a particularly good solution for financially independent couples with significant wealth who aren’t ready to gift to future generations, but want flexible access to their excess capital through beneficial tax planning.
To be successful, it’s important to develop an accurate personal balance sheet and financial plan and understand the strategy from an estate planning perspective.
