SLAT: A key strategy for married couples making large gifts

A Spousal Lifetime Access Trust (SLAT) can be an effective strategy if you are seeking to utilize your lifetime gift and estate tax exclusion while preserving the availability of the trust property for the support of your spouse.

In appropriate circumstances, a SLAT can be an excellent addition to your family’s estate plan, as it offers the following key benefits:

• Use of lifetime exclusion amounts that may be decreasing. The federal lifetime gift and estate tax exclusion is currently $13.61 million, but is scheduled to be reduced by approximately half in 2026. New legislation would be needed to preserve the current amount, and proposals already introduced to Congress seek to make even deeper cuts. IRS regulations issued in 2019 have confirmed that there will be no “clawback” of completed gifts made within the current exclusion amount if there is a later exclusion decrease, which makes using it now to avoid losing it later more attractive.
• Preservation of access for your spouse, and indirectly, you. SLATs are typically designed with the spouse as primary beneficiary, in part so that the ultimate reduction in estate taxes achieved is not at the expense of your spouse’s standard living, but also in part so you (the grantor-spouse) will indirectly benefit from the distributions made. Caution is warranted, however, as the untimely death of or divorce from your spouse (beneficiary) could severely impact you.
• Long-term transfer tax protection. While the gift itself utilizes your lifetime exclusion, the appreciation on the gifted assets would avoid inclusion in your estate. To the extent the generation skipping transfer tax (GST) exemption is allocated to the gift, distributions to grandchildren and later generations would be protected from GST tax (currently 40%).
• Augmentation of your gift by paying income tax. Because the income of a SLAT is distributable to your spouse, you, as the grantor, will be considered the owner of the trust for income tax purposes. This means that the trust income is taxed to you, not in the trust. Freeing the trust from the payment of income tax preserves more of the trust property for growth, in addition to the tax payments serving to reduce your taxable estate – all without additional gift tax. There is an important caveat, however: without careful drafting, you would still bear the income tax burden in the case of a divorce.

To ensure proper structure, a SLAT must be drafted by experienced legal counsel. As previously mentioned, this irrevocable trust agreement will most likely designate the spouse as the sole beneficiary for life, but may include descendants, other individuals or (less likely) charities as permissible beneficiaries as well.

The trustee would be authorized to make distributions to your spouse (or among the beneficiaries if others are included) in accordance with as strict or liberal a standard as you (the grantor) desire. In addition, your spouse may be given an annual power to withdraw a portion of the trust, limited to the amount that would not cause the entire trust property to be exposed to estate tax inclusion.

When the trust terminates (usually on the death of the spouse, but it could also be on the death of the survivor of the couple), the property will pass to the remainder beneficiaries, most often in continuing trust for extended estate tax and creditor protection. The spouse may be granted a limited power to appoint (direct the distribution of) the remaining trust property to allow for any desired adjustment to the shares of the remainder beneficiaries.

The funding of the trust must come from assets belonging only to the grantor, so property that is not already separate, such as joint investment accounts or community property, must be separated first. Caution should be taken when the spouse receives distributions from the trust, making sure payment is not to a joint account with the grantor.

Like any irrevocable trust, you should thoughtfully consider the implications of relinquishing control of the gifted property. As noted above, there can be adverse consequences in the event of divorce, or if your spouse predeceases you, depriving you (the grantor) of indirect access to the assets.

Couples wishing to utilize two full lifetime exclusions may consider creating SLATs for each other, but this structure requires careful preparation to avoid the adverse tax consequences of the “reciprocal trust doctrine.” Simply put, if after the creation of the SLATs, each grantor is in essentially the same economic position as before the transfers to the trusts, the trusts will be disregarded and the assets will be exposed to estate tax inclusion. If two SLATs are desired, sophisticated estate planning counsel is required to ensure that the trusts are materially different from one another and to advise on the risks of the trusts being disregarded.

If you think a SLAT might be the right enhancement to your wealth planning, our advisors are available to collaborate with you and your attorney to craft a trust to meet your needs.