A Spousal Lifetime Access Trust (SLAT) is a popular type of irrevocable trust used during the estate planning process. The purpose of a SLAT is to reduce a person’s taxable estate. In addition to these tax benefits, a SLAT also provides the trust grantor indirect access to the trust assets during their lifetime.
As valuable as a SLAT can be, it is important to understand that changes are coming to federal estate and gift tax exemptions. The current federal estate and gift tax exemption that leverages the use of these trusts is set to expire in 2025. There is no time to delay learning about how a SLAT might benefit an estate plan.
What Is A Spousal Lifetime Access Trust?
A SLAT is similar in many ways to so-called “credit shelter” trusts. These trusts can be funded annually in amounts up to the gift tax exemption. A SLAT also benefits a surviving spouse during their lifetime, all while excluding the funds within the SLAT from the donor spouse’s estate.
Preventing the value of the trust from being included in the donor spouse’s estate could have a profound impact on estate tax liability. Once the funds have been transferred to the trust they are no longer subject to estate tax calculations, meaning it could help limit the chances of owing any estate tax whatsoever.
While there are numerous vehicles that allow married couples to protect their assets from potential estate tax consequences, a SLAT is one of the few options that still allow for spouses to benefit from the trust assets during the course of their life.
Because the trust is funded through gifts, now is an ideal time to develop an estate plan that relies on a SLAT. This is because the maximum gift tax exemption was raised drastically in 2018. This increase was not made permanent, however, meaning that there is a limited window to maximize gifts to a SLAT without facing gift tax liability. Together, all of these benefits make a SLAT an excellent estate planning option.
How A SLAT Works
The process for funding and relying on a SLAT is similar to creating or funding most other irrevocable trusts. One way this type of trust stands out is that it provides the donor’s spouse with ongoing financial support while saving the bulk of the trust for future generations.
Funding a SLAT starts with a transfer of assets from the donor spouse to the trust. Typically, the donor spouse establishes the trust for the benefit of the other spouse. For taxation purposes, this is considered a gift from one spouse to another. If the assets transferred to the SLAT exceed the annual exclusion amount (currently $15,000 per year), the donor spouse will be required to file a gift tax return – but no gift taxes will be payable unless the amount donated exceeds the lifetime exclusion (currently $11.7 million).
Once the funds are in the trust, they are longer available to the donor spouse. During the setup of the trust, the donor spouse must identify a series of beneficiaries. In addition to their spouse, a donor must also elect beneficiaries to inherit from the trust upon their spouse’s death. Typically, these are the children of the marriage. These beneficiaries will not benefit from the trust until the end of the donee spouse’s life.
While the ultimate goal is to transfer wealth to future generations, a SLAT is a useful tool for couples that are unsure if they are financially able to part with large portions of their assets at this point in their life. For that reason, a SLAT is a great option for couples, especially in the era of elevated gift tax exemptions. This type of trust allows for the donee spouse to live off of distributions from the trust for the remainder of their life.
There are limits to be aware of:
- A donee spouse will not have free reign to use the funds of the trust as they see fit.
- The terms of these trusts generally limit distributions to a living spouse through something known as a HEMS provision. HEMS stands for health, education, maintenance, and support.
While this might sound limiting, the reality is that these categories cover the vast majority of expenses a person might face. Most donee spouses are able to live comfortably off of the funds within a SLAT for the rest of their life.
While not technically a beneficiary of the trust, it is not uncommon for the donor spouse to also benefit from the proceeds of the SLAT. For example, the funds paid to the donee spouse are likely to benefit everyone in their household, including the donor spouse. This setup could provide for the vast majority of a couple’s financial needs.
SLATs And Divorce
There are always potential challenges that can arise after developing an estate plan—particularly when couples divorce. This can be the case for couples who have funded a SLAT during the course of their marriage.
One of the primary ways a divorce could impact SLAT beneficiaries is when the donor spouse indirectly benefits. While this arrangement might work for couples that remain married, a separation or divorce could eliminate the donor spouse’s ability to indirectly benefit from trust disbursements.
What’s more, the donor spouse could continue to carry the income tax burden for the trust. Remember: the earnings from these trusts are still considered income for the donor spouse for tax purposes.
Undoing a SLAT could be difficult upon a divorce, too. Unless the trust document allows for the elimination of the donor spouse’s interests upon divorce, it may be impossible to undo a SLAT without the consent of the donee spouse.
Changes To Estate Laws In 2025
There are a number of changes coming to estate planning in 2025. The Tax Cuts and Jobs Act—or TCJA—made broad changes to tax credits, trusts, depreciation, and various other important factors in the estate planning process. This legislation includes a mixture of permanent changes to the tax code as well as temporary benefits that are all set to expire simultaneously.
One of the most notable changes coming in 2025 is the end of the increased gift tax exemption written into the TCJA. Starting in 2018, the basic exclusion amount for the gift tax increased from $5 annually to $10 million. This amount is adjusted for inflation, meaning that the current exemption is over $11.7 million. After December 31, 2025, the exemption amount will fall back to $5 million each year.
While a SLAT will remain an option under current law after December 31, 2025, the benefits of using this planning tool are reduced once the current gift tax exemption sunsets. This is because many married couples rely on the savings from the gift tax exemption to fund their SLAT.
Of course, there is always the possibility that Congress will take additional action to extend this exemption. It remains to be seen if the increased gift tax exemption is allowed to sunset or not. However, estate planners have to rely on the laws as they are currently written, given the disastrous impact that assuming this exemption will be extended will bring.
Taking Advantage Of Current Exemptions
There is little risk in taking advantage of current gift tax exemptions to fund a SLAT. In fact, the Internal Revenue Service (IRS) has issued guidance that clarifies there is no risk of losing the benefits of the higher exclusion levels after 2025 for gifts made between 2018 and 2025.
The rule clarification came in the form of Treasury Decision 9884. In response to a number of public comments that raised concerns of estate tax consequences following the sunsetting of the higher exemption in 2025, the IRS instituted a special rule that allows for the computation of an estate’s tax credit based on either the exclusion for gifts made during life or at the time of death—whichever is higher. This ruling will prevent the federal government from clawing back the benefits of a gift tax exclusion upon the death of a trust donor.
This finding gives someone developing an estate plan the opportunity to use their excess exemption amount to create and fund a SLAT. While a SLAT is already a useful tool for estate planners, making the most of higher exemption levels could provide substantial long-term benefits, even after those exemptions sunset in 2025.
Talk To An Attorney About Developing A SLAT
While a SLAT is a useful tool for providing for both short-term and long-term needs of your loved ones, setting up these trusts is a complicated matter. Attempting to plan for the future without the help of legal counsel could have disastrous consequences that leave you or your loved ones facing substantial tax debt or unwanted outcomes in probate.
The Law Office of Janet L. Brewer is ready to help guide you through the estate planning process. We can advise you on everything from estate tax planning to probate and trust administration.
If you are considering a SLAT for your short- and long-term planning needs, we can help you make the most of temporary tax exemptions when funding your trust. If you are ready to talk about the future, contact us right away.
