Is a SLAT Trust Right for You?
A Spousal Lifetime Access Trust (SLAT) can be a powerful tool in estate planning—especially for high-net-worth couples concerned about future changes to the federal estate tax exemption. This in-depth guide explores how SLATs work, the benefits and risks they pose, and why accurate asset valuations and careful planning are key. If you’re looking to transfer your wealth efficiently while ensuring your spouse has access to those assets, read on to learn whether a SLAT might be right for you.
1. Understanding the Estate Tax Landscape
The current estate and gift tax exemption—currently at $13.61 million per individual—is at an all-time high. However, unless Congress takes action, portions of the existing tax law may sunset, potentially reducing the exemption by about half starting in 2026. This shift would expose more estates to higher estate taxes, making the present moment particularly advantageous for proactive planning.
One strategy to mitigate future tax liability is establishing a Spousal Lifetime Access Trust (SLAT). By transferring selected assets into a SLAT, you can remove them from your taxable estate while still providing your spouse access to the trust’s assets during their lifetime.
2. How a SLAT Trust Works
A SLAT is an irrevocable trust funded by one spouse (the “donor spouse”) for the benefit of the other (the “beneficiary spouse”). Because the donor spouse relinquishes direct control of the assets when placing them into the SLAT, the trust assets are generally excluded from the donor’s estate. Meanwhile, the beneficiary spouse retains certain rights to access or manage the assets, depending on how the trust is structured.
Funding the SLAT
You may contribute cash, real estate, marketable securities, or other valuable assets.
The fair market value of these assets counts toward your lifetime gift tax exemption.
In community property states, you may need to convert joint or community property into separate property before funding the trust.
Spousal Access
The beneficiary spouse can receive distributions from the trust, either as a regular income stream or as lump-sum payments for specific needs.
Although the donor spouse is not a direct beneficiary, they can still benefit indirectly if funds support joint living expenses or shared financial goals.
Future Beneficiaries
When the beneficiary spouse passes away, the remaining assets can pass tax-free to your children, grandchildren, or other designated heirs—potentially avoiding or reducing estate taxes.
3. Key Benefits of a SLAT
Significant Reduction of Taxable Estate
By transferring assets to a SLAT, you remove them from your taxable estate—potentially minimizing your estate tax burden when assets ultimately pass from your spouse to your heirs.
Lifetime Access for Your Spouse
A SLAT ensures your spouse has direct access to the trust’s assets, providing financial security without tying up wealth you may need for daily living expenses or emergencies.
Flexibility in Trustee Selection
Although you cannot be a beneficiary of your own SLAT, you typically have the right to remove or replace the trustee with another independent trustee, offering a measure of oversight on how the trust is managed.
Indirect Access for the Donor Spouse
The donor spouse cannot directly withdraw funds from the SLAT but can benefit indirectly through the beneficiary spouse’s access to trust assets.
4. Potential Drawbacks and Risks
Loss of Direct Control
Since a SLAT is irrevocable, the donor spouse gives up direct ownership and control over the assets. You can’t simply change your mind and reclaim the assets; distributions and management decisions must align with the trust’s documented rules.
Divorce Complications
If a marriage ends in divorce, you lose any indirect benefit via your ex-spouse’s access to the SLAT. Provisions can be included to address this risk, such as limiting the trust’s beneficiary status to the “current spouse,” but it requires thoughtful legal drafting.
Loss of Access If Your Spouse Passes
Should the beneficiary spouse pass away first, the donor spouse can no longer rely on indirect access. In many cases, the SLAT’s assets will go to the next set of beneficiaries (like children or grandchildren). You may want to include special provisions allowing your spouse to redirect assets back to you under specific circumstances.
5. Key Tax Implications
Estate and Gift Tax Exemptions
High Lifetime Exemptions: The SLAT leverages the historically high lifetime gift exemption to shield future appreciation from estate taxes.
No “Clawback”: The IRS has clarified that if exemptions decrease in the future, previously used exemptions won’t be taken back.
Income Tax Responsibilities
Grantor Trust Status: Most SLATs are structured as grantor trusts, meaning you, as the donor spouse, pay the income taxes generated by the trust’s investments.
Growth Within the SLAT: Since the SLAT itself doesn’t pay taxes, the assets inside can grow tax-free—potentially compounding the long-term benefit of the trust.
Capital Gains Considerations
No Step-Up in Basis: Assets in a SLAT do not receive a step-up in basis upon the donor’s death. Your heirs could face higher capital gains taxes if they sell assets, although this is often outweighed by the estate tax savings.
Long-Term Planning: Depending on your family’s financial goals, your estate planning attorney and tax advisor can help weigh the trade-offs between estate tax savings and potential capital gains liabilities.
6. Importance of Accurate Valuations
When funding a SLAT, especially with business interests or real estate, you must accurately determine fair market value. Here’s why:
IRS Scrutiny: Large or complex asset transfers can draw closer examination from the IRS.
Qualified Appraisers: Having an independent, qualified appraiser provides a legitimate valuation that’s more likely to stand up if audited.
Proper Reporting: You’ll need to report any gifts above the annual exclusion amount on your gift tax return, so an accurate valuation is essential to avoid future disputes or penalties.
7. Setting Up a SLAT with Falcon Wealth Planning
Establishing a SLAT is not a one-size-fits-all solution; it requires tailored advice from legal, tax, and financial experts. At Falcon Wealth Planning, we help high net worth individuals make informed decisions about advanced estate planning strategies like SLATs. Here’s how we can guide you:
Personalized Analysis:
We review your overall financial picture, including net worth, family structure, and specific goals, to see if a SLAT fits your estate plan.Collaborative Approach:
Our team works in tandem with your estate attorney, tax advisor, and appraisers, streamlining the process from asset valuation to final trust documentation.Strategic Trust Structuring:
From choosing the trustee to deciding on distribution provisions, we help you strike the right balance between control and flexibility.Long-Term Support:
As tax laws evolve and your family’s needs change, Falcon Wealth Planning can assist in updating or refining your estate plan to keep it aligned with your objectives.
8. Is a SLAT Trust Right for You?
A SLAT can be an invaluable tool for high net worth couples who want to lock in current tax exemptions, protect and grow their assets for the next generation, and still offer financial security to a spouse. However, it’s not the ideal choice for everyone—particularly if you’re uncomfortable with relinquishing direct control or have concerns about marital stability.
Careful planning with an experienced team of estate planning attorneys and financial advisors is critical. By working closely with professionals, you can structure a SLAT to meet your unique needs while minimizing unintended consequences.
Ready to Explore Your SLAT Options?
At Falcon Wealth Planning, we specialize in guiding high net worth individuals through the complexities of estate planning. Contact us today to schedule a consultation and learn how a Spousal Lifetime Access Trust—or another advanced strategy—might fit seamlessly into your long-term wealth management plan.