A Spousal Lifetime Access Trust (SLAT) is a valuable tool in the arsenal of financial advisors and wealth planners, especially in the wake of the Tax Cuts and Jobs Act (TCJA) enacted in 2017. Before TCJA, the federal gift and estate tax exemption was $5.49 million, with a potential total of $10.98 million for a married couple using portability. After the enactments of TCJA, the exemption increased to $11.7 million, with portability potentially reaching $23.4 million for married couples. However, these amounts are set to revert to 2017 levels, adjusted for inflation, on January 1, 2026, unless Congress takes further action. For now, SLATs remain a timely and effective way to optimize the current federal tax landscape.

How SLATs Work

• A SLAT is established with a gift from one spouse to an irrevocable trust designed to benefit the other spouse.
• The donor spouse can gift up to the current exemption amount of $11.7 million, and the non-donor spouse (or a specified class of beneficiaries) retains access to both principal and income during their lifetime.
• While the donor spouse surrenders all rights to trust assets, they may indirectly benefit from the non-donor spouse’s ability to receive distributions.
• A well-structured SLAT ensures that trust assets are excluded from the non-donor spouse’s estate upon their death.
• The gift made by the donor spouse is excluded from their gross estate for federal estate tax purposes.
• The donor spouse can allocate their generation-skipping transfer tax exemption to the trust, potentially eliminating estate taxes for future generations.
• The SLAT is considered a grantor trust for federal income tax purposes, with income generated attributed to the donor spouse. The tax payment by the donor spouse is not considered a gift to the trust and is thus not subject to gift tax.

To learn more about what a Spousal Lifetime Access Trust (SLAT) is click here.

Benefits of a Spousal Lifetime Access Trust for Married Couples

• Maximize Estate and Gift Tax Exemptions: Currently, the estate, gift, and generation-skipping transfer tax (GST) exemption is at an unprecedented high, exceeding $11 million per person. Whether an individual’s estate is substantial or more modest, it can be advantageous to utilize as much of this exemption as possible before the scheduled sunset in 2025 or any potential changes. As with most irrevocable trusts, making completed gifts using this exemption, combined with potential future appreciation, provides protection against future estate and gift taxes.
• Mitigate Capital Gains Tax: SLATs can assist in mitigating capital gains tax upon the grantor’s death. Presently, under existing tax laws, if a trust holds appreciated assets, the grantor (or the spouse under Section 1041) can execute a swap or purchase the appreciated assets out of the trust and into their own name before death, usually by transferring assets of equal value to the trust (typically cash). This is a transaction that does not impact estate taxes, as it maintains the same value in both the trust and the grantor’s estate. However, the appreciated assets, when held by the grantor (or spouse) and, consequently, the grantor’s or spouse’s estate, qualify for a step-up in basis upon death. This step-up eliminates unrealized appreciation or gains. If estate tax is repealed and replaced by a capital gains tax at death or for gifts of appreciated assets, transferring assets to a SLAT before such a change can potentially avoid capital gains tax by gifting. In the event of death, the same swap or substitution power used previously can be applied in the opposite direction as a reverse swap. If the grantor has appreciated assets in their estate before death, they may have the ability to transfer them into the SLAT before death and thus avoid capital gains tax upon death. In both scenarios, the SLAT can provide an opportunity for income tax planning.
• Asset Protection from Creditors: SLATs, being irrevocable trusts, can offer substantial asset protection against potential future creditor claims (e.g., safeguarding assets from malpractice claims, divorce settlements of beneficiaries, and other legal actions). This protection applies to assets transferred to the trust unless they are deemed a fraudulent conveyance. When a SLAT also serves as an Irrevocable Life Insurance Trust (ILIT), it protects policy cash values during the insured’s lifetime as well as death benefit proceeds.
• Leverage Grantor Income Tax Rate: Since SLATs are classified as “grantor trusts,” they are taxed to the grantor of the trust. Consequently, any trust earnings, such as dividends, interest, and capital gains, are reported on the grantor’s individual tax return. This tax structure allows the trust to potentially grow tax-free from the perspective of the beneficiaries, as the grantor assumes the tax liability.

Important Considerations when Establishing a SLAT
When setting up a Spousal Lifetime Access Trust as part of an estate plan, several important considerations should be taken into account:

• Naming Trustees: The grantor should not serve as the trustee. The beneficiary spouse may serve as trustee but should be limited to making distributions based on an “ascertainable standard,” typically covering health, education, maintenance, and support (HEMS).
• Naming Beneficiaries: While the primary beneficiary is often the grantor’s spouse, other family members such as siblings, children, grandchildren, or descendants can also be named as current or remainder beneficiaries.
• Naming Trust Protector(s): Consider appointing a trust protector, a non-fiduciary role, responsible for various duties outlined in the trust agreement. The trust protector can have the power to remove a trustee, appoint a new trustee, or make other important decisions. It is often advantageous to select a non-beneficiary for this role due to tax considerations and to avoid conflicts of interest.
• Funding the Trust: A SLAT can be funded with various assets, but it is crucial to maintain a clear separation of property between the grantor and beneficiary spouse. Funding with jointly owned assets may risk being perceived as a gift to the trust, potentially including trust assets in the beneficiary spouse’s estate, thus wasting the grantor’s gifting exemption.
• Drafting Flexibility: SLATs offer flexibility in gifting and estate planning. Additional provisions, such as a limited power of appointment or the ability to decant the trust, can enhance flexibility and future planning options.
• Avoiding Reciprocal Trust Doctrines: When both spouses use SLATs in their estate planning, it is essential to maintain distinct differences between the trusts. Overly similar trusts could raise IRS concerns of tax avoidance and jeopardize the intended estate planning benefits.
• Marital Considerations: SLATs may not be suitable for all marriages, especially those facing difficulties. In case of divorce, the grantor loses the indirect access to trust assets through the spouse. SLATs can be structured to terminate the spousal beneficiary’s interest in the event of divorce, providing some protection.
• State Income Tax: SLATs are grantor trusts, meaning income generated within the trust is taxed to the grantor. If the grantor resides in a state with a state income tax, they may be required to pay state income tax on trust income. Depending on the specific goals and income tax considerations, other structures like Domestic Asset Protection Trusts (DAPTs) or Incomplete Non-Grantor Trusts (ING trusts) might be more suitable.

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Note: The information provided here is for general educational and informational purposes only. It is not legal advice and should not be interpreted as such. For a thorough understanding of these topics relevant to your specific circumstances, we recommend consulting a qualified estate planning attorney. Peak Trust Company cannot provide legal advice; however, we can serve as an informational resource and provide referrals to highly skilled attorneys who can offer legal and tax guidance tailored to your specific needs.