SLAT Trust: An Estate-Planning Solution for the High Net Worth

If you and your spouse are looking for ways to protect your wealth and preserve your legacy, a Spousal Lifetime Access Trust (SLAT) might be one of the most powerful estate-planning strategies at your disposal. This approach can help high-net-worth individuals lock in current estate tax exemptions, reduce potential estate tax liabilities, and still retain indirect access to trust assets. Below, we’ll explore what a SLAT Trust is, how it works, and the key considerations to keep in mind.

Understanding the Estate Tax Exemption Landscape

The federal gift and estate tax exemption is at historically high levels—$13.61 million per individual and $27.22 million per married couple in 2024—but there’s a potential sunset looming. Current laws indicate that these exemptions could be roughly cut in half starting in 2026, unless Congress takes action to extend or revise them. High-net-worth families looking to leverage today’s favorable exemption limits may find that establishing a SLAT now could help shelter a significant portion of their wealth before the exemption potentially decreases.

What Is a SLAT Trust?

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created by one spouse (the “donor” or “grantor spouse”) for the benefit of the other spouse (the “beneficiary spouse”). Here’s how it generally works:

1. Funding the Trust
   The donor spouse transfers assets—such as cash, marketable securities, real estate, or life insurance—into the trust. In community property states (including California), you may need to convert jointly owned or community property assets into separate property before transferring them into a SLAT.

2. Beneficiary Spouse Access
   The beneficiary spouse can receive trust distributions of income or principal. Because the trust is irrevocable, the assets placed inside the SLAT are typically not included in the donor spouse’s taxable estate.

3. Indirect Benefit for the Donor Spouse
   Although the donor spouse is not a direct beneficiary, they can still benefit indirectly from the distributions made to the beneficiary spouse. For many couples, this feature eases concerns about gifting away a large sum of money and losing control or access.

4. Remainder Beneficiaries
   Upon the death of the beneficiary spouse—or at another predetermined point outlined in the trust document—the remaining assets in the SLAT pass to the designated remainder beneficiaries, often children or grandchildren.

Important Considerations and Possible Drawbacks

While a SLAT Trust can be highly advantageous, it isn’t without risks or complexities.

1. Loss of Access if Circumstances Change
   If the beneficiary spouse dies prematurely or if a couple divorces, the donor spouse could lose all indirect access to the trust assets. One possible workaround is including a clause that allows the trust to benefit future spouses, although this can be a sensitive provision to discuss.

2. No Step-Up in Basis
   Assets in a SLAT do not receive a step-up in cost basis upon the donor spouse’s death. Consequently, the remainder beneficiaries could face a larger capital gains tax if they sell those assets in the future.

3. Complex Trustee Arrangements

• If the beneficiary spouse is the trustee, distributions are limited to the Health, Education, Maintenance, and Support (HEMS) standard. This is a strict guideline that can’t be easily changed later.

• A third-party trustee has more flexibility to make distributions beyond HEMS. However, selecting the right trustee is crucial, as they will have significant control over the trust’s administration.

• A compromise is to name the beneficiary spouse initially, but include a clause permitting them to appoint an independent trustee down the line if circumstances change.

4. Dual SLATs
   Some couples consider establishing two SLATs—each spouse creates a SLAT for the other. This strategy, often called “Dual SLATs,” needs careful planning to avoid the “reciprocal trust doctrine,” which could invalidate the intended tax benefits if the trusts are too similar.

Who Should Consider a SLAT Trust?

• Married Couples with Substantial Wealth
  A SLAT is often most beneficial for couples with significant estates—usually those whose net worth exceeds or is close to the estate tax threshold.

• Couples Wanting to Preserve Future Wealth
  If you anticipate that your assets will significantly appreciate over time, removing them from your estate now can help mitigate future tax exposure.

• Families Seeking Asset Protection
  Beyond estate tax considerations, SLATs can offer an extra layer of creditor protection for assets intended to remain in the family.

• Those Concerned About Legislative Changes
  With the possibility of estate tax exemptions dropping after 2025, creating a SLAT sooner rather than later may help you take advantage of the current high threshold.

Working with Falcon Wealth Planning

Designing and implementing a SLAT Trust involves a series of intricate decisions, from selecting the right assets to understanding legal stipulations regarding trustees and distributions. At Falcon Wealth Planning, our experienced financial planners and estate planning professionals work closely with you and your legal team to evaluate whether a SLAT aligns with your overall wealth management strategy.

Here’s what you can expect when partnering with our team:

1. Personalized Analysis
   We assess your net worth, existing estate planning documents, and family goals to determine if a SLAT is appropriate.

2. Collaborative Approach
   Falcon Wealth Planning collaborates with your estate attorney, tax advisor, and other professionals to streamline the process and help ensure your SLAT is structured effectively.

3. Long-Term Planning
   Estate planning is not just about today—it’s about securing your legacy for future generations. We prioritize sustainable strategies that adapt to changing tax laws and personal circumstances.

4. Ongoing Support
   Even after your SLAT is established, our team remains available to review and update your plan as laws evolve or your family’s situation changes.

Take the Next Step

A Spousal Lifetime Access Trust can be an effective way for high net worth couples to lock in current estate tax exemptions and retain some flexibility for accessing assets. However, the decision to create a SLAT is not one to take lightly. You’ll need to weigh potential drawbacks—like losing access if your spouse dies or if you divorce—against the benefits of estate tax savings and creditor protection.

If you’re considering a SLAT Trust, the experienced professionals at Falcon Wealth Planning can help you navigate the complexities and collaborate with your legal and tax advisors. Reach out today to explore how a SLAT might fit into your broader estate plan and secure peace of mind for you and your heirs.