A Spousal Lifetime Access Trust (SLAT) is an estate-planning tool that can benefit high-net-worth couples looking to reduce estate taxes while preserving access to their wealth. With estate tax exemptions potentially halving in 2026 once the 2017 Tax Relief Act sunsets, SLATs offer an effective strategy to lock in current limits and reduce taxable estates. Here's an overview of how SLATs work, their advantages, and key considerations.

How SLATs Work

A SLAT is an irrevocable trust where one spouse, the "donor spouse," transfers assets such as cash, stocks, or real estate into the trust. These assets are managed for the benefit of the other spouse, the "beneficiary spouse," while the trust's assets and future appreciation are excluded from the donor spouse's taxable estate. This allows the donor to utilize their lifetime gift tax exclusion, which is currently set at $13.61 million per individual ($27.22 million per couple in 2024), without directly losing access to the assets. As long as the donor and beneficiary spouses remain alive and married, the beneficiary spouse can request distributions to support their standard of living, indirectly benefiting the donor spouse.

Dual SLATs for Couples

Couples may create two SLATs to benefit each other, ensuring that each spouse takes advantage of their respective estate and gift tax exemptions. However, it's critical that they structure the trusts differently to avoid triggering the reciprocal trust doctrine, which prevents spouses from creating substantially similar trusts and can lead the IRS to treat the trusts as invalid for federal tax purposes. Differences in trustees, timing of trust creation, or beneficiaries are commonly recommended.

Key Advantages

• Tax Benefits: SLATs remove assets and their potential appreciation from the taxable estate. This can be especially valuable as assets grow over time, helping reduce the size of the estate and potential tax burdens on heirs.
• Asset Control: The beneficiary spouse can control how trust assets are distributed after their death, offering flexibility in estate planning for children or other beneficiaries.
• Indirect Access to Funds: The beneficiary spouse can request distributions for health, education, maintenance, and support, allowing for indirect benefit to both spouses while maintaining the tax advantages of the trust.

Drawbacks and Considerations

While SLATs offer numerous advantages, there are important risks and limitations to consider:

• Loss of Access: If the beneficiary spouse passes away before the donor spouse or the couple divorces, the donor spouse may lose indirect access to the trust's assets. However, this can be mitigated by including provisions to continue the trust for future spouses.
• Capital Gains: SLAT assets do not receive a step-up in cost basis upon the death of the donor spouse, potentially increasing capital gains taxes for the heirs.
• Community Property States: Residents of the nine community property states, Nevada being one of them, may first need to convert any community property assets into separate property assets.
• Divorce and Death: Couples should carefully consider the implications of divorce or the beneficiary spouse's death. SLATs can include provisions to terminate the beneficiary spouse's interest in the event of a divorce.

Professional Guidance

Given the complexities involved, professional advice from an estate planning attorney and financial advisors is critical. Tax laws can change, and crafting SLATs requires careful structuring to avoid pitfalls like the reciprocal trust doctrine. Couples should plan early, especially with the 2026 reduction in gift tax exemptions approaching, to maximize the effectiveness of a SLAT. Jordan Klein, an advanced planner at Fidelity, suggests: "If you're not ready to fund a SLAT or other gifting structure, one option is to draft the legal documents with the attorney, but delay on funding." If you decide to proceed with the trust, it will be ready to receive assets when you are. "If the laws stay as they are, I expect it will be difficult to go into the attorney's office in late 2025, trying to get help creating a SLAT, right before the estate tax exclusion sunsets," Klein explains. Sundvick Legacy Center also recommends preparing as soon as possible and can answer our clients' questions about their options to take advantage of the current exclusions.

Conclusion

Spousal Lifetime Access Trusts can be a highly effective tool for high-net-worth couples looking to reduce estate taxes while preserving financial flexibility. By creating a SLAT, couples can remove appreciating assets from their taxable estate while ensuring their financial needs are still met. However, SLATs require careful planning and professional guidance to navigate potential risks and maximize benefits. For a couple who have spent a lifetime building their wealth, a SLAT might be an ideal way to preserve their wealth and legacy for themselves and future generations.

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