SLATs: Lock in the Current Estate Tax Exemption

The fate of the estate tax exemption, as it now stands, remains uncertain. So, you may want to consider using the current large exemption to transfer assets to a trust to benefit your spouse. A spousal lifetime access trust (SLAT) can help you do this, by transferring assets outside of your estate.

Wait, What's Happening to the Estate Tax Exemption?

The current federal estate tax exemption is $12.92 million for individuals and $23.4 million for couples (in 2023). That means that if your estate's value is less than this exemption amount, it will not pay any federal estate taxes. The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $12.92 million (in 2023).

Unless Congress enacts changes, this exemption will revert in 2026 to the previous exemption amount of $5.49 million (adjusted for inflation).

Now may be a good time to capitalize on the large exemption currently in place. One way to accomplish this is to move money from your estate into a trust.

What Is a Trust?

A trust is a kind of legal relationship where one party has legal title to property for the benefit of others.

The person who establishes the trust is the grantor. The individual (or entity) named to manage the trust is the trustee. The trustee must follow the rules outlined in the trust document. (Sometimes, the grantor and the trustee may be the same person.)

The individuals or entities who will benefit from the trust are the beneficiaries.

There are numerous types of trusts used in estate planning. Some allow the grantor to maintain control over the trust throughout their lifetime. Other kinds of trusts allow only a third party to to serve as trustee.

What Is a Spousal Lifetime Access Trust (SLAT)?

A SLAT is a type of irrevocable trust. (This means that, once created, it cannot undergo any changes.)

Given the potential changes coming in 2026, married couples are increasingly considering SLATs as part of their estate planning strategy. With a SLAT, one spouse, known as the donor, makes a gift to the trust for the benefit of their spouse. (You can also name additional individuals, such as children or grandchildren, whom would benefit from the trust.)

When you give a gift to a trust, you usually must pay a gift tax. However, a grantor making a gift to the SLAT can transfer money to the trust without paying a gift tax. This can be done using a federal exemption. (Again, given the current rules, you could not make a gift of more than $12.92 million to the SLAT.)

Once the donor spouse transfers funds to this type of trust, those funds are no longer in their taxable estate. The SLAT is also excluded from the taxable estate of the spouse who will benefit from the trust.

The Pros and Cons of a SLAT

In addition to the grantor avoiding a gift tax, the benefits of establishing a spousal lifetime access trust include the following:

• The funds in a SLAT can appreciate over time (without the appreciation being part of your estate).
• The beneficiary spouse can still make withdrawals from this type of trust as necessary. This allows the donor spouse a level of indirect access to the funds.
• SLATs protect the funds from your creditors. SLATs may protect the funds from the creditors of your spouse as well. (This will depend on how the SLAT is set up.)

There are a few downsides to SLATs to keep in mind, too:

• Once you have transferred the funds to a SLAT, they are no longer under your control.
• If your spouse dies or you get divorced, you will also no longer have any access to the funds.
• The funds in a SLAT will not receive a “step up” in basis when the donor spouse dies.
• In addition, a SLAT is typically a grantor trust. With grantor trusts, the donor spouse must pay income tax on any appreciation of the funds in the trust.

Connect With an Estate Planner

In order to take advantage of the benefits of a SLAT, you must set it up properly. This includes the task of carefully choosing a trustee. Note that the donor spouse cannot be the trustee. The spouse who will benefit from the trust can only serve as trustee if their power to make withdrawals is limited.

What if both spouses want a spousal lifetime access trust? It is possible; a professional will have to structure the trusts to avoid them being reciprocal. (This would add them to the spouses’ taxable estates.)

Talk to an estate planning attorney to determine whether a SLAT is a smart estate planning tool for your family. These experts will have the detailed knowledge necessary to navigate the finer points of setting up a SLAT. Find a qualified attorney near you today.

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