Contributed by: Brian W. Sak, CFP®, CLU®, ChFC®

In the complex world of estate planning, the Spousal Lifetime Access Trust (SLAT) can be an attractive strategy for married, high-net-worth couples looking to manage taxes, preserve wealth, and transfer assets across generations. Understanding a SLAT's benefits is crucial for those aiming to secure their family's financial future. This knowledge is vital for comprehensive financial planning, providing a foundation for informed, strategic decisions in legacy planning.

Defining Spousal Lifetime Access Trust (SLAT)

The Spousal Lifetime Access Trust (SLAT) involves the transfer of separate property assets from one spouse to an irrevocable trust, for the benefit of the other spouse during his or her lifetime, and then to future generations at the death of the surviving spouse. This transfer, executed by the grantor spouse, leverages their gift tax exemption, serving a twofold purpose: it is a gift that also allows the spouse access to the trust’s principal and the income it generates through distributions as a beneficiary.

Despite the complexity that Spousal Lifetime Access Trusts may initially suggest, their structure is designed with elegance and simplicity to meet three primary objectives:

1. Maximize Current Estate and Gift Tax Exemption Limits: This strategy ensures that each spouse can fully utilize their lifetime estate and gift tax exemption, currently set at $13.61 million in 2024, to minimize potential transfer tax liabilities for future generations. The sunset provision of the Tax Cuts and Jobs Act (TCJA) is set to reduce the estate exemption limits from their current levels back to the pre-TCJA amounts after 2025. This means that individuals may face a significantly lower exemption for estate taxes, potentially impacting estate planning strategies for many families, highlighting the need to execute transfer and gift strategies now under the current limits.
2. Allow for Access by the Beneficiary Spouse: A SLAT allows the beneficiary spouse to access trust assets during their lifetime. This flexibility means that the beneficiary can benefit from the trust's resources while ensuring that the principal and future appreciation remains sheltered from transfer taxes for future generations.
3. Maximize Growth of Assets Outside of the Taxable Estate: By establishing a SLAT, the growth of assets within the trust is excluded from the taxable estate of both spouses. This mechanism not only shields asset appreciation from estate taxes but also creates a secure environment for long-term growth, effectively allowing the assets to compound outside of the taxable estate, thereby enhancing financial security for heirs.

Implementing the SLAT Strategy: Essential Considerations and Strategic Approaches

The execution of a Spousal Lifetime Access Trust (SLAT) involves sophisticated analysis of various factors and requires a carefully planned strategy. Here are a few key considerations:

Trust Framework: Understanding the three parties in a trust is important:

1. The grantor is the person who creates the trust and puts their assets into it. They decide how the trust will be managed and who will benefit from it. In a SLAT, this would be spouse #1.
2. The trustee is the person or institution responsible for managing the trust according to the grantor's wishes. They make decisions about the assets and ensure the trust operates smoothly. In a SLAT, this would typically be spouse #2, sometimes combined with a co-trustee, perhaps the oldest child.
3. The beneficiary is the person or group who receives the benefits from the trust, such as money or property. They are the ones the grantor intended to help or provide for. In a SLAT, this would typically be spouse #2, sometimes combined with children.

Tax Implications: SLATs use tax laws for wealth preservation but require awareness of the complex and changing tax environment, including state income taxes(if applicable) and federal laws.

Trust Flexibility: Ensure the design of SLATs has flexibility to adapt to financial or legal changes, ensuring the trust can handle unpredictability.

Legal Compliance and Common Risks: SLATs should be structured to avoid key pitfalls such as reciprocal trust doctrine issues, maintaining the trust’s independence and legal compliance, premature death, and potential divorce in the future.

This and other complex estate planning strategies require a thoughtful and disciplined approach to implementation, simplifying the complexities involved. Due to the complexity of establishing a SLAT, investors should always consult their tax, legal, and financial advisors prior to embarking on such a strategy.

Spousal Lifetime Access Trusts (SLATs) offer a strategic wealth preservation method for high-net-worth couples, fostering family harmony and leveraging expert guidance for tax efficiency and adaptability. The complexity of SLATs underscores the need for professional advice to accurate and effective execution. Our team works closely with clients and their strategic partners, including estate attorneys, to ensure legacy preservation is done in a way that suits the individual needs of the family.

To explore your unique situation, schedule a complimentary consultation with one of our experienced Wealth Advisors today.