What is a Spousal Lifetime Access Trust (SLAT)?

A spousal lifetime access trust is a trust designed to take advantage of the historically high estate tax exemption that we expect to be cut in half by 2026.

The thinking being, if you use up your lifetime exemption now while the threshold is still 13.61 million (as of 2024), then even if it’s lowered down the road to 7 million-ish you could potentially save over $2.5 million from estate taxes or over $5 million if you and you spouse each do a SLAT.

With that being said, SLATs really only make sense for couples that have an extraordinary amount of wealth - I would argue at least $14 million in assets, before this would even get on your radar (although clients with less than $14 million could use SLATs as a more general creditor protection trust rather than an estate tax savings vehicle if they really wanted to).

Before using a SLAT, you’d probably want to consider other gifting strategies or other irrevocable trusts like an irrevocable life insurance trust (ILIT), grantor retained annuity trust (GRAT), or a qualified personal residence trust (QPRT).

How does a SLAT work?

As the name states, this trust is designed to give your spouse access to the assets you place in a SLAT for as long as he or she is alive. 

During that time you would (hopefully) get the indirect benefit of your spouse having access or being a beneficiary of that trust. You could also name your children as beneficiaries of that trust as well a your grandchildren (just make sure you allocate your generation skipping transfer tax exemption to the trust if you go that route).

Normally you would have some type of independent trustee - which could be a cousin, niece, nephew, attorney, CPA, other family advisor or close friend, and the spouse could then be a co-trustee with that person so long as the distributions of the spouse-trustee are limited to an ascertainable standard (reasonable health, education, maintenance, and support). That way the assets can be out of your estate without inadvertently becoming a part of your spouse’s estate for estate tax purposes.

You could also give your spouse a limited power of appointment on how the trust assets will be distributed or managed after your spouse’s death - which is very important to keep in mind if your spouse predeceases you (otherwise, there goes your indirect access to the trust assets, unless your spouse uses a limited power of appointment to redirect assets to another irrevocable trust for your benefit).

Once again, I wouldn’t recommend this strategy to any client that needed the money that would otherwise be transferred into their SLAT for their own retirement planning. In other words, if you are relying on this money to continue living the way you want to live, do not put it in a SLAT. It’s only intended for excess wealth.

Put differently, this trust is more or less designed for clients who have more money than they ever plan on spending during their lifetime and they just want to make sure their children and/or grandchildren pay the least amount of taxes on it when they (the clients’ descendants) inevitably inherit those assets.

Another thing to keep in mind is that the trust only achieves its objective if you gift over the expected future estate tax exemption amount. For example, just using rounded numbers, if the estate tax exemption is currently $14 million and we think it’s going to $7 million, you should be contributing more than $7 million to get any incremental benefit from the trust.

If you gift only $6 million, for example, then you’ve moved that out of your estate, but when the tax law reverts back to $7 million, they’ll just say you only have $1 million exemption left. Whereas if you gave $8 million to the trust before the tax law change, then even though the new law is at $7 million, your extra $1 million should still be estate tax free because it was grandfathered in (there isn’t a clawback) on the gifts made during the time period when the exemption was higher. And that is why we tell clients if they are going to do a SLAT and get the best bang for their buck they should go as far into the exemption (close to $14 million-ish) so when the law reverts back to $7 million they’ve taken full advantage of higher exemption.

If you have additional questions about SLATs or other irrevocable trusts, or would like me to review or create a trust for you, then click the link below to schedule a call with me today - I’m always happy to help!