What is a Spousal Lifetime Access Trust (SLAT)?

July 25, 2023

Many people are looking for ways to utilize the current estate tax exemption amount (currently set at $12.91 million per person in 2023) before it decreases. A spousal lifetime access trust (SLAT) may be an appropriate solution for married couples who want to take advantage of the increased exemption amount but who are not sure that they can irrevocably part with so much wealth.

A SLAT is an irrevocable trust where one spouse makes a gift into a trust to benefit the other spouse (and possibly other beneficiaries) while removing assets from their estate. Although the trust is irrevocable, the donor spouse may indirectly benefit from the property gifted to the trust, assuming that the non-donor spouse is living and remains married to the donor spouse. Upon the death of the non-donor spouse, the trust assets are transferred to the remainder trust beneficiaries (e.g., children and grandchildren).

What Are the Benefits of a SLAT?

• The donor’s gift, if structured properly, permanently removes the assets (as well as the future appreciation of the assets) from the donor’s taxable estate.
• Funding a SLAT now allows a donor to utilize a historically high exemption amount ($12.91 million per person in 2023).
• A SLAT can be an effective tool for multi-generational wealth planning due to its transferability in the event of the non-donor spouse’s death.
• If structured as a grantor trust for income tax purposes, the donor would pay the income tax liability on the income generated by the trust to further reduce the estate of the donor and allow assets in the trust to appreciate outside of the estate without the burden of paying income taxes.

What Are Some Things to Consider if You’re Thinking About a SLAT?

• A beneficiary serving as trustee (such as the non-donor spouse) is limited to making distributions to themselves according to the ascertainable standard of “health, education, maintenance, and/or support.” Identifying an independent trustee may result in a greater ability to make broader distributions.
• Upon the death of the non-donor spouse, the donor spouse would no longer have indirect access to the trust assets since the trust would be distributed to the remainder beneficiaries.
• Avoid creating identical SLATs for each spouse – there must be some differences in creating and funding the trusts, or the “reciprocal trust doctrine” may apply, and each SLAT would be included in the donor spouses’ respective taxable estate. Assets transferred to a SLAT will not get a “step-up” in cost basis upon the donor spouse’s death.
• A SLAT can hold many types of assets (including life insurance), but be careful to ensure only assets owned by the donor spouse are transferred to the SLAT (not joint assets) so that the gift is not treated as being made by both spouses thereby contradicting the benefits of the SLAT; you will need to be particularly careful to document correctly in a community property state.
• This strategy works best if sufficient assets remain outside the SLAT to support a married couple’s lifestyle, and they are not likely to divorce.

What Type of Estate Planning Have You Done?

Many factors should be considered in determining the proper estate plan to meet your individual needs. Consult with your tax advisor to determine if a SLAT may be a good fit for you while the estate tax exemption is historically high. Now more than ever, it’s vital to have experienced advisors to assist you. The experts at First Western Trust can help you implement an effective wealth transfer strategy.

Investment and insurance products and services are not a deposit, are not FDIC insured, are not insured by any federal government agency, are not guaranteed by the bank, and may go down in value. First Western Trust cannot provide tax or legal advice.