Spousal Lifetime Access Trusts (SLATs) and the Estate Tax

With the potential reduction in the federal estate tax exemption scheduled in 2026, it’s natural to feel apprehensive about the impact on your financial legacy. However, there are proactive steps you can take to mitigate these fears and protect your assets for generations to come. Enter the Spousal Lifetime Access Trusts (SLATs), a strategic tool that can offer peace of mind in the face of uncertainty. 

Understanding SLATs

SLATs are irrevocable trusts that one spouse creates to benefit the other. When establishing a SLAT, you transfer assets into the trust, removing them from your taxable estate. Meanwhile, your spouse gains access to the assets and income during their lifetime should they need it.  

After the beneficiary spouse passes away, the trustee transfers any remaining assets to the remaining trust beneficiaries, usually children or grandchildren. These transfers can occur directly or through another trust structure. In either case, given that the initial funding was irrevocable, the transfer is exempt from estate taxes. 

Benefits of SLATs

• Tax Efficiency: By transferring assets into the SLAT, you can leverage the current higher estate tax exemption and potentially reduce future estate tax liabilities. While alive, grantor spouses can pay associated income taxes on behalf of the SLAT, allowing the trust to grow further and reduce assets in the taxable estate rather than the trust.   
• Financial Security: The SLAT provides for your spouse’s economic needs, ensuring ongoing support and well-being, even in your absence. 
• Asset Protection: Assets held within the SLAT may be shielded from creditors and legal claims, preserving your family’s wealth for future generations. 
• Flexibility: While relinquishing direct control over trust assets, you can still influence the trust’s terms and distributions to accommodate changing circumstances and family needs. 

Implementing a spousal lifetime access trust (SLAT)

A SLAT involves several key steps to ensure it is structured effectively to achieve your financial objectives. Here is a simplified five-step process. 

1. Consultation and planning: Suppose you want to protect assets from future estate taxes while providing for your spouse’s financial security. In that case, the attorney may recommend establishing a SLAT with specific provisions for income and asset distributions to the spouse. 
2. Drafting the trust agreement: Designate your spouse as the primary beneficiary, with provisions allowing for income distributions for their support and maintenance. Couples must ensure that that grantor is contributing separate property to the trust. In some instances, they may already have separate property. In others, they may need to designate property as such with the help of an attorney.    
3. Funding the trust: Transfer stocks and bonds worth into the SLAT to kick-start its funding. This could also involve transferring cash, securities, or real estate.  
4. Executing and signing documents: Sign the trust agreement and formally transfer ownership of the designated assets into the trust. Review and sign the trust agreement and any other necessary legal documents in the presence of witnesses and a notary public. 
5. Trust administration and monitoring: Appoint a professional trustee or trusted family member to manage the SLAT and ensure compliance with the trust agreement. Designate a trustee to administer the SLAT according to its terms and make distributions as outlined.

Utilizing SLATs to alleviate uncertainty about changes to the federal estate tax exemption

SLATs offer a strategic solution to hedge against the potential risks posed by possible changes in tax policy. Here’s how SLATs can help: 

• Utilize the current exemption: You can effectively shield these assets from future estate taxes by funding a SLAT with assets up to the current higher federal estate tax exemption. This proactive approach allows you to lock in the benefits of the current exemption level, providing future tax savings and preserving more wealth for your heirs. 
• Provide Future Flexibility: Establishing a SLAT now offers flexibility and protection against potential changes in estate tax laws. Assets held in the SLAT are shielded from estate taxes, regardless of any future federal estate tax exemption reduction. This ensures that a portion of your wealth is safeguarded for your loved ones, regardless of legislative changes. 
• Addressing Spousal Security: By structuring the SLAT to provide income and assets for your spouse’s benefit, you can address concerns about their financial security. This ensures that your spouse can access financial resources while still achieving estate tax planning objectives, providing them with peace of mind amidst uncertainty. 

SLATs, federal estate tax exemption, and the 2024 Presidential Election

Given the uncertainty surrounding the federal estate tax exemption and its potential reduction in 2026, it’s wise to plan. If the Democrats control Congress and the presidency, it may be reasonable to assume that the estate exemption will not be extended. In this case, it may make sense to implement a SLAT before the end of the year. If the Republicans are in charge, you might consider holding off on implementation until further clarity is available on the future of the estate tax exemption. The critical piece is to start planning now to make swift and efficient action possible regardless of the outcome.   

Proactive estate planning is critical to protecting your financial legacy and providing for your loved ones in the face of uncertainty. SLATs offer a strategic solution to address fears about potential changes in tax policy. By taking proactive steps to establish and fund a SLAT, you can confidently navigate tax policy changes and safeguard your legacy for future generations.