The Basics of Spousal Lifetime Access Trusts

Just about everyone can benefit from building an estate plan. A well-crafted plan not only ensures that your wealth is transferred to your heirs in a tax-efficient manner but also helps you navigate the probate process and protect your assets during your lifetime. Trusts are commonly used tools in estate planning because they address many of these needs. One such example is the spousal lifetime access trust (SLAT).

What Is a SLAT?

A SLAT is an irrevocable trust that you create for the benefit of your spouse. When you contribute assets to the trust, you forfeit the right to use or manage those assets. In return, those assets are removed from your taxable estate. Your spouse can access those assets as stipulated in the trust document, which is typically drafted to let them pull from those funds immediately. In essence, this means that your spouse can access your estate while you are still living. If you stay with your spouse and share finances, it also means that you can continue to benefit from those assets — albeit indirectly — while reaping the protections of a trust. SLATs have a few notable benefits.

SLATs are excluded from your (and your spouse’s) taxable estate.

When you pass on, the assets in your SLAT are removed from your gross estate and from the estate of your spouse. Neither of you will owe federal estate taxes on the value of your SLAT.

SLAT appreciation escapes the estate tax.

If all goes according to plan, the assets held within your SLAT will appreciate over time. This appreciation is excluded from your taxable estate. If you had forgone a SLAT and simply held on to those assets until your death, both the assets and the appreciation on those assets would be included in your taxable estate. Creating a SLAT (or some other irrevocable grantor trust) is a simple way to transfer tax-free appreciation to your heirs.

SLATs protect your assets from creditors.

If you transfer assets into a SLAT, you have no legal claim over those assets. This means that your creditors cannot lay claim to those assets. Depending on how the trust document is written, the assets may also be protected from your spouse’s creditors.

SLATs allow you to lock in today’s high estate tax exemption.

The most noteworthy benefit of SLATs is being able to utilize your estate tax exemption now, when the exemption is at its highest. As part of the Tax Cuts and Jobs Act in 2017, the estate tax exemption got a significant boost. The $5.49 million lifetime exemption nearly doubled beginning in 2018, and today, the exemption is at a record $13.61 million. This number will grow each year as it is adjusted for inflation, but in 2026, the exemption is scheduled to drop back to $5.49 million. When you contribute to a SLAT (or any irrevocable trust), you can do so without paying gift or estate taxes up to the amount of your remaining estate tax exemption. This means you could contribute $13.61 million to a SLAT in 2024 without owing a cent in gift or estate taxes. SLATs effectively let you accelerate your use of the estate tax exemption. You can use the exemption that is in place today rather than the exemption that is in effect the year you pass away. SLATs, like most tax-planning mechanisms, do have some downsides.

SLAT appreciation is taxable as income.

When assets within your SLAT appreciate, you, as the grantor of the trust, must pay income tax on those earnings. And because you have no rights to the assets within the SLAT, you cannot draw upon SLAT assets or earnings to help you pay those liabilities.

You must be careful who you assign as trustee.

You cannot be a trustee of your own SLAT, and it can be problematic if your spouse is a trustee. It’s best to appoint a trustee who has no interest in the trust.

You can only contribute assets that you own individually.

If you own assets jointly with your spouse, you must separate those assets before you contribute your share into the SLAT. And the timing of these actions is key; if there is not sufficient time between transfers, the IRS may argue that your spouse effectively contributed to the SLAT, which could cause the transfer to be taxable to your spouse.

You cannot change the beneficiary of your SLAT.

An irrevocable trust cannot be altered or amended. If you and your spouse divorce, your ex-spouse would continue to be the beneficiary. You would be required to pay income taxes on the earnings of a trust that benefits your former spouse.

Seek Guidance for Complex Financial Decisions

It's crucial to seek guidance when navigating complex financial decisions such as estate planning, tax strategies, and investment management. Doing so ensures you make informed choices that align with your long-term goals and protect your assets. Trusts should always be considered in wealth management. To discuss SLATs or any other type of trust, please contact your CRI advisor today. These powerful tools, combined with professional guidance, can help you make the most informed decisions in comprehensive wealth management.