Spousal Lifetime Access Trusts

As the 2026 deadline for the significant reduction in the federal estate tax exemption approaches, high net worth individuals and estate planning professionals are seeking effective strategies to mitigate potential tax burdens. One possible strategy is the Spousal Lifetime Access Trust (SLAT), a tool that can offer substantial tax advantages while providing financial security for spouses. Our latest bulletin, "Using Spousal Lifetime Access Trusts in Estate Plans", delves into SLATs, offering an explanation of their benefits, mechanisms, and considerations.

Understanding SLATs

A SLAT is an irrevocable trust designed to provide income to a beneficiary spouse while removing the principal assets from the donor spouse’s taxable estate. This strategy can significantly reduce estate taxes and ensure financial stability for the beneficiary spouse during their lifetime.  The following are some of the key components and characteristics of SLATs:

• Irrevocability: Once assets are transferred into a SLAT, the trust cannot be modified or revoked, and the assets cannot be returned to the donor spouse. This permanence is crucial for excluding the assets from the donor spouse's taxable estate.
• Trustee Management: A trustee, who can be the beneficiary spouse, another individual, or multiple co-trustees, manages the SLAT’s assets. The trustee’s role is to ensure that the assets are used according to the trust’s terms and in the best interests of the beneficiary spouse.
• Beneficiary Distributions: The beneficiary spouse receives income from the trust during their lifetime, providing ongoing financial support. Upon the beneficiary spouse’s death, the remaining trust assets are distributed to designated beneficiaries, such as the couple’s children, free of estate taxes.

Estate Tax Advantages of SLATs

SLATs offer two primary mechanisms for reducing estate taxes:

• Exclusion from Taxable Estates: Assets transferred to a SLAT are excluded from both the donor and beneficiary spouses’ taxable estates. This means that any future appreciation of these assets is not subject to estate taxes.
• Pre-Exemption Reduction Transfers: By transferring assets to a SLAT before the federal estate tax exemption is reduced, individuals can lock in the current higher exemption amount. Any value exceeding the new, lower exemption amount set for 2026 is not "clawed back" into the estate, providing significant tax benefits.

Practical Considerations

While SLATs offer substantial benefits, their effectiveness depends on careful planning and consideration of several factors:

• Appreciation of Transferred Assets: The strategy is most beneficial when the transferred assets are expected to appreciate in value, as the growth occurs outside the taxable estates.
• Exceeding the Exemption Amount: SLATs are particularly advantageous for individuals whose wealth exceeds the new estate tax exemption amount. Large transfers made before the reduction can result in significant tax savings.

Advantages and Disadvantages

Like most estate planning strategies, there are both advantages and disadvantages.  The advantages include:

• Exclusion from Estate: Assets transferred into a SLAT are not included in either spouse’s estate, protecting any appreciation in value from estate taxes.
• Lifetime Benefits: The beneficiary spouse can receive income and, in some cases, principal from the trust, providing financial support during their lifetime.
• Asset Protection: SLATs offer a level of protection from creditors, safeguarding the assets from potential claims against either spouse.

Disadvantages to consider are:

• Irrevocable Nature: The donor spouse loses control over the assets once they are transferred into the SLAT, which can be a drawback for individuals who prefer flexibility.
• Dependency on Spousal Relationship: The effectiveness of a SLAT is tied to the stability of the marriage. Divorce or the death of the beneficiary spouse can impact the donor spouse’s ability to benefit indirectly from the trust income.
• No Step-Up in Basis: Heirs do not receive a step-up in tax basis upon inheriting assets from a SLAT, potentially resulting in significant capital gains taxes.

Conclusion

The Spousal Lifetime Access Trust (SLAT) is a valuable estate planning tool that can help reduce estate taxes, especially in anticipation of the potential reduction in the federal estate tax exemption in 2026. While a SLAT is not suitable for everyone, it can be effective in specific situations, particularly for individuals with highly appreciating assets or those who can gift assets near the current federal estate tax exemption limit. Implementing a SLAT requires careful planning and close collaboration with legal and tax advisors. As always, consult with an experienced attorney and tax advisor to ensure that a SLAT aligns with your estate planning goals and complies with all relevant laws and regulations.

For more detailed information and practical insights, see the new bulletin, "Using Spousal Lifetime Access Trusts in Estate Plans" available at farmoffice.osu.edu.