What is a Spousal Lifetime Access Trust (SLAT)?
It is a trust that you (the grantor) set up for the benefit of your spouse and your descendants. You would make a gift to the SLAT, using some of your federal lifetime gift exemption (currently $13.61M in 2024) to shield that gift from gift tax. While you give up all your rights and control over the gifted assets, your spouse will have access to the gifted assets as beneficiary of the SLAT.
When does it make sense to have a SLAT?
You should consider creating a SLAT if you have a federally taxable estate and want to reduce your taxable estate by making lifetime gifts. While making lifetime gifts requires you to give up all your rights to the gifted assets, the SLAT provides a safeguard, because your spouse can receive trust distributions as beneficiary, which she can use for your joint support and maintenance as needed. So, if you are hesitant to give away assets because you will no longer have any access to those assets, a SLAT may be the solution for you.
How much can I gift to my SLAT?
The Tax Cuts and Jobs Act of 2017 (“TCJA”) increased the federal estate and gift exemption from an inflation adjusted $5M per person to $10M per person. For 2024, each individual can gift $13.61M free of federal gift tax. However, this TCJA provision is scheduled to expire by the end of 2025 with the exemption reverting back to $5M per person, adjusted for inflation. While it may seem like you have plenty of time to make large gifts to a SLAT, you should consider that more and more folks will be looking to take advantage of this higher exemption as we approach the end of 2025 – wealth planners and attorneys will be busy making sure the gifts are completed prior to that deadline. If you wait too long, you may run out of time to complete the gifts before 2025 ends. Furthermore, Congress can also lower the exemption amount at any time prior to this scheduled expiration date. Because of this, there may be a “use it or lose it” opportunity to transfer additional wealth free of gift tax.
Is a SLAT included in my estate or my spouse’s estate?
No. If structured correctly and administered properly, the SLAT will be excluded from your taxable estate and your spouse’s taxable estate.
What happens if my spouse predeceases me, or my spouse and I get divorced?
If your spouse predeceases you or if you get a divorce, you will lose the indirect access to the SLAT funds you had through your spouse. To remedy this, the SLAT can be drafted to ensure only your current spouse is a trust beneficiary (not a former spouse). The SLAT can also give your spouse the power to direct the funds back to you upon her passing, if needed. The SLAT can also make loans to you as the grantor.
Can both my spouse and I set up separate SLATs for each other?
Yes. If you and your spouse set up SLATs for each other, the two SLATs must not mirror each other. If the two SLATs are too similar, the IRS will ignore both SLATs for gift tax purposes. To avoid this, certain facets of the SLAT agreements should be sufficiently different, such as having different distribution terms, different trustees, and funding the SLATs with different assets at different times.
Who can be the trustee of my SLAT?
As grantor, you may not act as trustee. Your beneficiary spouse may act as a trustee, but if so, trust distributions should be subject to an ascertainable standard, such as distributions for a beneficiary’s health, education, maintenance, or support only. Naming an independent trustee who is not a trust beneficiary will provide more flexibility, as the independent trustee may be given broad discretion to make trust distributions for any reason.
Does the SLAT pay its own income taxes?
Typically, no. It is more common for a SLAT to be created as a grantor trust for income tax purposes, which means that the grantor pays income taxes on behalf of the trust. A SLAT is a separate legal entity for ownership purposes, but it is ignored for income tax purposes. So even though the SLAT’s assets are excluded from your taxable estate, the SLAT’s income and deductions are reported on your personal income tax return and you pay the income taxes on the SLAT’s income. Paying the tax on the SLAT’s income each year allows you to further reduce your taxable estate without gift tax consequences, while allowing the SLAT to grow income tax free while you are living.