Why Married Couples Might Consider a Spousal Lifetime Access Trust Before 2026

Why Married Couples Might Consider a Spousal Lifetime Access Trust Before 2026

Married couples looking to transfer significant wealth to future generations have several estate planning tools available. One key vehicle that might help them transfer wealth and leave a more impactful legacy is the Spousal Lifetime Access Trust (SLAT).

SLATs can be particularly effective for married couples who have a net worth or anticipated net worth greater than their combined federal lifetime estate and gift tax exemptions, which currently are historically high but are legislated to essentially be cut in half at the end of 2025. Establishing a SLAT now can help couples take advantage of the extra exemption amounts they have currently, which they may not have in the future.

What is a SLAT?

With a SLAT strategy, one spouse (the donor) gifts assets to an irrevocable trust, removing the assets from the donor’s taxable estate. Over the donor’s lifetime, he or she can fund the trust using annual exclusion gifts or taxable gifts of assets such as cash, securities, real estate, business holdings and even life insurance. The SLAT can make distributions of income and principal to the trust beneficiaries, who will typically be the donor’s spouse and descendants, during and after the donor’s lifetime. This makes SLATs an attractive option for donors who can afford to make a large gift, but also prefer the financial security of potentially having indirect access to the funds in the future via their spouse.

The SLAT Structure

1. One spouse establishes an irrevocable trust with gifted assets, naming the other spouse (along with any children, grandchildren and/or more remote descendants) as beneficiaries. (If both spouses desire to establish individual SLATs, special care should be given to such arrangements due to heightened IRS scrutiny of this approach.)
2. Trustees may distribute trust income and principal to the beneficiaries for “ascertainable standards” (including health, education, maintenance and support) or other discretionary reasons, as defined by the trust’s distribution standards. Also, beneficiaries may be permitted to withdraw the greater of $5,000 or 5% of the trust principal annually.
3. The grantor spouse may continue to make irrevocable gifts to the trust from his or her separately owned property and may choose to use the gift tax exclusions ($18,000 annual exclusion and $13.61 million lifetime exemption for tax year 2024) in doing so.
4. A gift tax return is filed to report any transfers during a tax year and the filing should commence the statute of limitations for audit if the gifts are adequately disclosed.
5. Upon the death of the donor spouse, any trust assets will pass, estate-tax-free, to the beneficiaries, if the SLAT was structured properly.

Taxation of SLATs

SLATs are generally structured as grantor trusts, which means they are not separate income-tax-paying entities. Rather, the trust’s income is taxable to the grantor, and sales or other transactions between the grantor and the trust are not recognized or taxable.

For transfer tax purposes, the trust is a separate entity. While the initial transfer may utilize gift and generation-skipping transfer (GST) tax exemption, when properly structured, the value of the trust, regardless of what it appreciates to, is not included in the estate of the grantor, the grantor’s spouse, or the grantor’s descendants (assuming GST exemption is allocated to the trust).

SLAT Hypothetical Example

John and Mary have been married for 25 years. They have two grown children and a sizeable net worth, having recently sold their family farm. John establishes a SLAT with a taxable gift of $13.61 million (the current federal estate tax exemption amount for tax year 2024) to the trust and defines the parameters by which Mary and their descendants may receive distributions.

Assuming a growth rate of 3.0%, an income rate of 2.5%, upon Mary’s death 30 years after the SLAT’s creation, an  accumulated $67.83 million will pass to the SLAT’s remainder beneficiaries transfer tax-free.

SLAT Advantages and Considerations

As with any estate planning and tax strategy, SLATs have their own set of pros and cons, depending on your objectives. Here are some of the  advantages:

• The grantor’s spouse or descendants can act as sole or co-trustees.
• The grantor’s taxable estate is reduced, given that the value of the trust assets (as well as the subsequent appreciation on the assets) is not included in the grantor’s estate at death.
• Future appreciation on the trust assets can be shifted to the trust beneficiaries generally without any gift, estate, or GST tax consequences. This is ideal for any property that will appreciate significantly in value over time.
• Trustees can make certain distributions to the grantor’s spouse (and other beneficiaries) while keeping the assets out of both spouse’s estates.
• If structured as a Legacy Trust, the trust may provide support for heirs for multiple generations while minimizing gift, estate, and GST taxes.
• The trust has the potential to protect beneficiaries from potential creditors, divorce, professional liability or other threats.
• The trust can be established in a jurisdiction favorable for asset-protection purposes.
• The grantor paying income tax on the trust income further reduces the grantor’s taxable estate and allows the trust income to compound, aiming to optimize investment return.
• Upon the grantor’s and/or grantor’s spouse’s passing, trust assets could be used to provide liquidity to the estate (i.e., for death tax and estate settlement purposes).

SLATs do have some disadvantages:

• The grantor spouse must have sufficient assets in his or her individual name to fund the trust. In community property states, this might require additional documentation and transfers.
• Because the grantor does not own the trust property for estate tax purposes, the assets in the trust do not receive a step-up in the income tax cost basis upon the grantor’s death.
• If the grantor’s spouse dies first or there is a divorce, the grantor can lose indirect access to trust.

Consult with your Private Advisor to explore all the pros and cons of these strategies and to determine what other options might be optimal for your estate plan.