Estate planning can be difficult. No one likes staring down their own mortality, but thinking about how you want to pass on your legacy after you’re gone is a necessary part of financial planning.
To make matters more complicated, depending on the size of your estate and the state in which you live, many of your financial moves may be susceptible to estate taxes. That means that even when you want to leave something behind for your spouse or heirs, Uncle Sam gets a piece of the pie. That’s where trusts can help.
Establishing a trust (or trusts) is a common part of the estate planning process and is a great way to reduce your estate tax liability. Creating one can help keep more of your money with your family and beneficiaries, especially if you have a large estate.
There are many kinds of trusts that function in many ways, but some of the most common fall under the category of marital trusts, and these represent the best way to ensure your spouse is financially secure after you pass. But even among marital trusts there’s a huge variety, which can make it difficult to determine which one is right for you.
However, the larger your estate, the larger your Federal Estate Tax liability. So, if you have a federal estate worth more than $12 million and are looking to take advantage of higher estate tax exemptions, and you want to see the benefits of your marital trust while you’re still around, then you may want to consider a spousal lifetime access trust (SLAT).
What Is a Spousal Lifetime Access Trust (SLAT)?
A SLAT is an irrevocable trust set up by one spouse for the other during his or her lifetime, meaning the donor spouse does not need to pass away for this trust to be created, which is a stark difference between SLATs and other types of marital trusts that are only established upon death. While the donor spouse makes an irrevocable gift to the trust and gives up any right to the funds, the beneficiary spouse, and potentially other beneficiaries such as children and grandchildren, are provided access to the gifted funds right away.
Basically, you put money into a separate account that only your spouse (and maybe your kids and grandkids) can access. Because SLATs are so flexible, you can also draft the trust so that the money can be used for a wide or narrow variety of purposes, depending on your family’s needs.
The beauty of SLATs is that they can still be used while you're still here, and they have a number of benefits that you can see in your lifetime.
What Are the Advantages of Creating a SLAT?
SLATs allow you to take advantage of the large estate tax exemption during your lifetime, potentially helping to increase what you can pass on estate-tax-free in the event that the exemption amount is reduced. This particularly important for estates worth north of $12 million that are subject to federal estate tax, as the current federal exemption amount established by the Tax Cuts and Jobs Act is set to decrease by half in 2026. If you don’t use the current high exemption rate before the end of 2025, or if a new law is passed before 2026, more of your estate will be subject to estate taxes—which is not ideal for you.
SLATs may also be useful for asset protection. Because you’re putting the money into an irrevocable trust for somebody else’s benefit and giving up all control or use of the assets, it is no longer considered yours for attachment in either bankruptcy or litigation. Additionally, if you use an independent trustee who has discretion over how and when distributions may be made to your spouse, the assets may also be safe from your spouse’s creditors.
Given the flexibility in trust terms, a SLAT can also be combined with other types of trusts such as an Irrevocable Life Insurance Trust (if the SLAT owns an insurance policy), a dynasty trust (if the trust remains in being for children and grandchildren), and a credit shelter trust (to use up your lifetime exemption amount).
What Are Some Things to Consider When Creating a SLAT?
Because the terms of a SLAT are highly customizable, there are many considerations to take into account when establishing the trust:
- Forecast Assets: Make sure an advisor runs forecasts to ensure that you will be able to afford transferring assets to a SLAT. While your spouse will still retain access to the funds, you will likely still want to use assets that remain in your own names for ordinary lifestyle expenses. Additionally, you will need to determine what will happen in the event of death or divorce and you lose access to the funds.
- Determining the Trustee: Because the donor spouse must give up all control over the assets, he or she may not act as the trustee. If the beneficiary spouse acts as the trustee, distributions must be restricted to what’s called an “ascertainable standard,” namely health, education, maintenance or support. Depending on your goals, using an independent trustee may make sense as they have wide discretion to make distributions for any reason.
- Naming Beneficiaries: Typically, the beneficiary spouse is the primary beneficiary of the SLAT. However, children, grandchildren, or other family members may also be named as current or remainder beneficiaries, helping to keep the funds within the family.
- How to Handle Multiple SLATs: If you and your spouse both set up a SLAT for each other, you will want to make sure the two trusts differ enough in order to avoid the “reciprocal trust doctrine.” If your two trusts are too similar, the IRS will treat each trust as being created for the donor and will disregard the trusts for tax purposes. In order to avoid this outcome, you will want to make sure enough of the following terms differ between the trusts:
- Fund with different types of assets
- Fund with different amounts
- Create and fund at different times
- Use different trustees
- Establish the trusts in different states
- Set up different terms for distributions (e.g. one spouse may have wide latitude to access income and/or principal, while the other is limited to specific purposes)
- Provide for different powers of appointment of trust assets, as these powers provide the ability for the beneficiary spouse to direct trust assets to be paid to various other beneficiaries like children and/or grandchildren
- Tax Considerations: Most SLATs are set up as “grantor trusts,” which means that all income generated by the trust is taxed on the tax return of the donor spouse instead of to the trust. This allows you to make additional non-taxable “gifts” to the trust in the amount of the income tax owed. However, a SLAT can also be a non-grantor trust so that all income is taxed to the trust itself. Depending on the state in which the trust is located, this may enable you to avoid state income taxes.
- Liquidity of Assets: You may want to consider allowing the trustee to make loans of trust assets to the donor spouse. This will allow you to access the funds to cover cash flow needs in the event that the assets you own outright become illiquid. The loan would then be paid back by your estate at death.
- Death of Spouse or Divorce: Because you have given up control of the assets for the benefit of your spouse, if that spouse dies prematurely, or if you get a divorce, you will lose the indirect access to the funds you had through your spouse. You will want to speak with your attorney about ways to potentially replace the funds, such as only making the funds available for any current spouse (and not any former or estranged spouse), giving your spouse a power of appointment to be able to direct the funds back to you, or purchasing life insurance to be paid to you upon your spouse’s death.
- Protecting Your Credit: If there is any possibility that you may be sued or have to file for bankruptcy, care must be taken when transferring assets to the trust so that you can avoid any potential fraudulent transfers. Consider having your attorney run an inquiry to determine if there are any claims against you before making any transfers. You may also want to consider making multiple contributions to the trust over a period of time so that even if one transfer may be considered fraudulent to avoid judgment, early transfers will not.
Is a Spousal Lifetime Access Trust Right for Me and My Spouse?
That’s something only you can answer. All couples have different considerations. Wealthy, affluent couples, LGBTQ couples and couples on their second marriage all have different things to consider. Wealth, age, children/beneficiaries and more can all come into play when deciding on what type of trust to establish for your spouse.
With so many different types of trusts, and so many different things to consider when creating one, it’s wise to speak with a financial advisor and/or estate planning attorney. They can provide objective guidance on how best to reduce your estate tax liability and ensure the maximum amount of assets are left with your heirs.
JD, CFP®, Series 7 Securities Registration,1 Series 66 Advisory Registration,† Life and Health Insurance License Kate has been a financial planner at Wealth Enhancement Group since 2007. Previously, she assisted in the management of trusts and portfolios for high-net-worth clients. As a Senior Financial Planner, she is involved with the Roundtable™ and provides her expertise to help walk clients through the best way to organize their estates to ensure...Read More