SLATs as an Estate Planning Tool

When it comes to estate planning, trusts, and wills, you have many options—which begs the question: Which estate planning options are suitable for you and your family? There's no quick answer to that question because everyone's situation is unique, but one tool to consider is Spousal Lifetime Access Trusts or SLATs.

What is a Spousal Lifetime Access Trust (SLAT)?

A SLAT is an irrevocable trust created for the benefit of the grantor's spouse. The donor spouse takes advantage of their gift-tax exemption by making a gift to the trust, and their spouse is the current beneficiary of the trust.

When setting up a SLAT, you can only allow your beneficiary spouse to access the funds throughout their lifetime, with the remaining assets being granted to your other heirs (children and grandchildren) upon their death. Or you can choose to permit simultaneous distributions to your beneficiary spouse and children.

Pros of SLATs

The primary benefit of a SLAT is that you can take advantage of potential tax savings. In 2025, the estate and gift tax exemption will be $13,990,000 per individual. Individuals can give their spouse (or another beneficiary) this amount tax-free irrespective of whether they are a US taxpayer or not.

In addition to transferring this amount tax-free into a SLAT, you can gift various assets, such as cash, securities, and real estate. This means that assets that may appreciate could be even more advantageous if transferred to a SLAT because any appreciation is outside your taxable estate.

Considerations of SLATs

The primary consideration is that all assets in the trust are irrevocable. This means that the donor spouse can't retain any beneficial interest in the trust and that the SLAT is not included in their estate. Assets contributed to a SLAT can't be taken back from the trust.

Another consideration is that divorce is always a possibility. While we don't like to consider a happy marriage coming to an end, there is a risk involved in creating a SLAT. With a SLAT, you no longer have direct access to the assets, and without the proper construction, those assets could end up going to an estranged spouse. It is possible to draft your SLAT so that the assets are only available to your current spouse (rather than an ex-spouse), but it's important to get this correct with your estate planning attorney.

Who are SLATs Right For?

While SLATs may be beneficial for estate planning, they aren't right for everyone. But, they could be a good fit for:

• High net worth individuals who want to maximize gifting opportunities.
• Those who have appreciating assets, as appreciation of assets in a trust doesn't count against your lifetime gift exclusion amount.
• Those seeking to establish an intergenerational legacy.

A proper estate plan requires diligent planning, and SLATs are just one strategy to consider. A comprehensive estate plan can help you provide an inheritance for your children, spouse, loved ones, or charity. 

Sources:

https://www.investopedia.com/articles/retirement/07/reduce-estate-tax.asp

https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-ta