Spousal Lifetime Access Trust (SLAT)

A powerful quiver in the proverbial bow of advisors and wealth planners, SLAT is particularly important since 2017’s Tax Cuts and Jobs Act (TCJA). Prior to TCJA, the federal gift and estate tax exemption was $5.49 million, with a total of $10.98 million possible for a married couple leveraging portability. Post TCJA, the exemption equals $11.7 million, with portability potential for married couples of $23.4 million. These amounts will return to pre-TCJA totals, indexed for inflation, on January 1, 2026 pursuant to the reversion (sunset) provision, unless Congress takes further action. For now, SLAT remains a timely and elegant way to maximize the current federal taxation landscape.

Construct

• Created with a gift from a donor spouse to an irrevocable trust to benefit the non-donor spouse.
• Donor spouse can gift up to $11.7 million current exemption amount and non-donor spouse (or any named class of beneficiaries) retains access to principal and income during non-donor spouse’s lifetime.
• Although donor spouse relinquishes all rights to trust assets, he/she may indirectly benefit from non-donor spouse’s ability to receive distributions.
• Structured so SLAT assets are excluded from non-donor spouse’s estate upon his/her death.
  • Donor spouse’s gift is excluded from donor spouse’s gross estate for purposes of federal estate tax
  • Donor spouse may allocate his/her generation-skipping transfer tax exemption amount to the trust, eliminating potential estate taxes for future generations
• Considered a grantor trust for purposes of federal income tax, wherein income generated is attributable to donor spouse.
  • Because donor spouse is obligated to pay taxes pursuant to grantor trust classification, tax payment is not considered a gift to the trust and therefore not subject to gift tax.

Cautionary notes

1. Because the SLAT is not subject to estate tax, trust assets will not be eligible for a step up in basis upon the death of either spouse.
2. Must be carefully drafted to include required attributes of an irrevocable trust in order to be excluded from both spouses’ gross estates.
3. Jointly owned assets must be broken down into individually owned assets before donor gifts them – only individually owned assets should be contributed.
4. In the event of non-donor spouse’s death or divorce, donor spouse will no longer indirectly benefit from SLAT distributions.
5. Divorced non-donor spouse may retain a beneficial interest in the SLAT with access to income and principal, yet the donor spouse’s obligation to pay trust’s income tax would not be abated.
6. Grantors and their trusted advisors can leverage the SLAT in their strategic plan to capture current federal tax exemption amounts. With 2026’s return to pre-TCJA exemption amounts looming, the time to act is now.