What is a Spousal Lifetime Access Trust? SLAT?
This couple loves reading about spousal lifetime access trusts.
There are all different types of trusts, but they generally fall into one of two categories: Revocable Trusts and Irrevocable Trusts.
To give you a brief summary:
Revocable trusts allow you to be in control of the trust assets and are primarily used for avoiding probate, but do have some estate tax savings and creditor protections provisions for your kids (after your death). For more information on revocable trusts, you may want to check out Trusts Aren’t Just for Rich People.
Irrevocable trusts are much different than revocable trusts because they generally do not allow you to be trustee (i.e., you are not usually in direct control of the trust assets) and they cannot be changed or modified (in most circumstances) once you’ve signed the document.
For this reason, irrevocable trusts tend to be much more narrowly drafted for a specific purpose or concern. If you put the wrong provision or trustee power in an irrevocable trust, then you may have broken it (and have a potential lawsuit on your hand).
For example, you have Medicaid or MassHealth Trust, and you have Special Needs Trusts (also known as supplemental needs trusts), and then you have Life Insurance Trusts. All of which are irrevocable and serve a very specific purpose.
But today we are going to be talking about Spousal Lifetime Access Trusts, which may become much more popular as we expect the estate tax exemption law to change in the near future.
What is a spousal lifetime access trust (SLAT)? And why should I care about it?
Right now, the federal estate tax threshold is set to 40%, but only impacts you if you have an estate greater than $12 million or $24 million if married (using rough figures). However, on the last day of 2025, that law is going to sunset and result in the estate threshold being cut in half. There have been talks that the government may take it even further by bringing the exemption threshold down to $3.5 million since the current threshold is historically very high.
Just to give you a reference point, back in the early 2000’s the exemption was only $1 million. So it wouldn’t be crazy to see the federal government actually push things down to $3.5 million (adjusting for inflation) as it had been back in 2009.
To ratchet things up a little bit, the estate tax rate may also increase to 45% at that time. So, if you are domiciled in Massachusetts, then you could be looking at an estate tax on certain assets to be over 60% since the Massachusetts estate tax currently goes as high as 16% (i.e, 45% +16% = 61%). Yes, that sounds insane, but based on historical tax law is plausible.
Using those hypothetical figures, it’s possible that more than half of your estate will go to the government, not your kids, if you are wealthy and domiciled in Massachusetts.
That’s where the spousal lifetime access trust (“SLAT”) comes into play.
With a SLAT, you effectively lock in your current exemption amount (about $12 million per person) regardless of what the federal exemption may be at some point in the future. Some quick math means that this type of irrevocable trust could save wealthy families over $7 million!
So, what’s the catch?
Restrictions on Spousal Lifetime Access Trusts
#1 Can’t be considered owner of trust assets (for estate tax purposes).
SLATs have specific conditions that must be met in order to qualify for the intended estate tax benefit. The major idea is that you cannot be considered the owner of the property for estate tax purposes at the time of your death. In practice, this means (similar to the other irrevocable trusts), you cannot be in control of the trust and therefore cannot serve as trustee of the trust or retain certain powers that would otherwise make the trust assets be considered part of your estate for estate tax purposes.
How do you do that?
Make someone else the trustee and only include the power to remove the trustee. Don’t put in a limited power of appointment or retain the right to enjoy or use the property (or the ability to direct that use and enjoyment of the benefits of the assets held in trust). In other words, this will only work if you have a separate trustee you have complete faith and trust in (and is financially / organizationally competent).
#2 Must be aware of the Reciprocal Trust Doctrine
Many clients may think they have no problem with the first obstacle (i.e., estate tax inclusion), because they figure they can just have their spouse be the trustee of their trust (the one they create) and then the other spouse (you) could be the trustee of your spouse’s trust. You may then think to make the trusts virtually identical (similar to how many Wills and Revocable Trusts are structured).
This doesn’t work for SLATs.
If you have reciprocal trusts with virtually the same terms but have just swapped you and your wife as beneficiaries / trustees of one another’s trust, then they can bring up cases like US v. Estate of Grace (1969) and uncross the trusts - which just means they will argue that you are in effect the owners and in control of one another’s trust.
To minimize the risk of the reciprocal trust doctrine and the implications of it, you would need to make sure that your trusts do not have substantially identical terms and you should also space out the creation of the trusts. If it looks like a single transaction, then you run into a potential step-transaction issue.
And, if the tax court finds that you are in approximately the same economic position as you were before creating and funding your SLATs, then they have a strong argument to invoke the reciprocal trust doctrine and break the trust’s purpose.
While this is a gray area, you should typically have an independent trustee on the trust (may be a co-trustee if your spouse is a trustee of your trust and vice versa). If you and/or your spouse are serving as trustee of another’s trust, then you will want to add in an ascertainable standard (health, education, maintenance, support) so the asset doesn’t become includible in the spouse-trustee’s estate or other restrictions that achieve a similar effect.
You may also want to add in a limited power of appointment to one or the other’s trust, and you may want to throw in language about your children being able to be beneficiaries under one trust or the other in addition to varying the terms of such beneficial interest.
You may even switch up the access to principal v. income on each trust to make a further distinction between the two trusts. There may be differences in grantor’s powers as well, but whatever you do, look to recent case law to make sure you don’t inadvertently put in a power that would make the assets includible in your estate. That’s a no-no.
#3 Relying on Non-Subordinate Trustee
Since the above two obstacles require a clear disconnect between you and the assets, you’ll need a non-subordinate trustee that you trust absolutely. While you can reserve the power to replace the trustee, not having the right trustee in place can create an absolute nightmare for you.
If there are beneficiary-trustees (for example, if you make your child a trustee), then they may be able to argue that the adverse party rule makes them a non-subordinate trustee because a related or subordinate trustee is one who is a non-adverse party. Therefore, if you are adverse, you are not considered a related or subordinate party. However, even if a child is an adverse party, that wouldn’t make him or her an independent trustee, since an independent trustee can have no beneficial interest in the trust (apart from reasonable compensation).
Someone might argue that the spouse can serve as trustee so long as they are limited to an ascertainable standard, but in my opinion (with this much money on the line), you do not want to structure your trust so close the line when operating in a fuzzy / gray area. Instead, you should structure the trust to have several reasons as to why it doesn’t fall within the reciprocal trust doctrine or within estate tax inclusion arguments.
By having a non-spouse trustee and/or non-subordinate trustee, you give yourself an extra legal argument. For additional ways to make sure you don’t fall into tax traps, it’s always a great idea to see what others have done in the past to withstand IRS scrutiny.
Here’s a brief list of helpful examples of what to do and NOT to do:
Private Letter Ruling 200426008
In short, SLATs are not for everyone, but if it is something that may interest you, then you need to be aware of all the risks involved before pursuing this strategy further.
Need help with your estate planning?
If you would like to review or update your estate plan, then give me a call at 781 202 6368, email jlento@perennialtrust.com, or click here to schedule your free personal consultation.
I’m always happy to help!
Joseph M. Lento, J.D.
Your Local Estate Planning Attorney
www.PerennialEstatePlanning.com
477 Main Street
Stoneham, MA 02180
