No one wants to pay more taxes than they have to. To carry out this objective, many people search for the perfect estate planning tool that will allow them to control as much of their money and property as possible while reducing the amount they or their loved ones will have to pay the government. If you have looked for the tax-saving estate planning tools, chances are you might have come across the spousal lifetime access trust (SLAT). Here are some important things you should know before you settle on this tool as your estate planning solution.
What is a spousal lifetime access trust?
A SLAT is a type of irrevocable trust created by one spouse (trustmaker spouse) for the benefit of the other spouse (beneficiary spouse) that is used to transfer money and property out of the trustmaker spouse’s estate. This strategy allows married couples to take advantage of their lifetime gift and estate tax exclusion amounts by having the trustmaker spouse make sizable, permanent gifts to the SLAT that decrease the value of their cumulative estate while maintaining some limited access to the money and property that is gifted for the beneficiary spouse’s benefit.
How does it work?
The trustmaker spouse gifts money or property (of which they are the sole owner) to the SLAT for the benefit of the beneficiary spouse. If the couple resides in a community property state, they will likely need to convert community property into separate property through a partition agreement. The trustmaker spouse reports the gift on a gift tax return. The beneficiary spouse can receive distributions from the trust, from which the trustmaker spouse may also indirectly benefit. Upon the death of the beneficiary spouse, the trust assets are transferred to the remaining trust beneficiaries (usually children and grandchildren of the couple), either outright or in trust.
What are the pros and cons?
SLATs offer several advantages to those looking to minimize the value of their estate:
- Not only is the value of the property that is gifted to a SLAT removed from the trustmaker spouse’s estate, but all future appreciation is also removed. The trust property is also excluded from the beneficiary spouse’s estate, even though the beneficiary spouse may receive distributions from the SLAT.
- SLATs are typically structured as grantor trusts, meaning that all the trust’s taxable income is taxed to the trustmaker spouse, further reducing the trustmaker spouse’s estate. Plus, no separate trust tax return will be required for the SLAT while the trustmaker spouse is living. However, if the SLAT is not structured as a grantor trust, a separate trust tax return will be required.
- A SLAT can also be structured as a non-grantor trust. Some clients who reside in high income tax states (like Minnesota) seek to create non-grantor SLATs in jurisdictions with lower income tax rates (like South Dakota) to reduce income taxes.
- SLATs provide a way to “have your cake and eat it too.” While spouses may be concerned about losing control over money and property that is gifted away and whether that property will be needed in the future, a SLAT can address this uncertainty by allowing the trustmaker spouse indirect access to the property through the beneficiary spouse.
Some potential drawbacks to using a SLAT are as follows:
- Gifts made to a SLAT are final and cannot be undone.
- If the beneficiary spouse dies before the trustmaker spouse, the trustmaker spouse may lose access to the money and property that was gifted to the SLAT. This could also be the case if the couple were to divorce. The trustmaker could potentially regain indirect access to the trust assets by remarrying.
- The property gifted to a SLAT will not receive a step up in cost basis at the death of the trustmaker spouse. This drawback could be minimized by including a trust provision that allows the trustmaker spouse to swap trust property, thus allowing the trustmaker spouse the ability to substitute low-basis property with high-basis property or cash of equal value.
- Spouses looking to create SLATs for each other to utilize each spouse’s exemption amount fully will need to ensure they do not run afoul of the reciprocal trust doctrine. If the Internal Revenue Service interprets the two trusts as being substantially similar, it can undo the trusts and include the trust property in the spouses’ taxable estates. This drawback can be avoided by creating the SLATs at different times, using different trustees, choosing different beneficiaries, or providing for different terms for distributions. Given the complexity and tax implications, it is highly recommended that you consult an experienced estate planning attorney.
Why are people talking about them so much?
In 2024, the gift and estate tax exemption amount is $13.61 million for individuals (and double that for married couples—a historically high amount). However, under current law, this amount is slated to shrink to $5 million (adjusted for inflation) on January 1, 2026. This decrease in the exemption amount could happen even sooner if Congress acts to change it. Because the law could change at any time, the window of opportunity to take advantage of this estate planning technique is very narrow.
Married couples who are considering taking such a step should contact an estate planning expert as soon as possible. We can help talk you through the pros and cons of using a SLAT and whether this technique makes sense for your situation.
