Utilizing the Elevated Gift & Estate Tax Exemption Before It's Gone - Spousal Lifetime Access Trust (SLAT)
Recently, I passed the examination and completed all requirements of the Certified Private Wealth Advisor® designation. This designation specializes in issues and strategies that affect high-net-worth individuals, such as complex estate planning, estate tax minimization via efficient wealth transfer to beneficiaries, complex trust planning to minimize taxation and protect wealth from creditors, tax strategies surrounding equity compensation and tax-efficient diversification, effective and tax efficient charitable gifting strategies, Alternative Minimum Tax planning, and much more.
This blog series will touch on some of the more important strategies that can help high-net-worth families navigate their situation most efficiently and effectively!
As the clock ticks toward the expiration of the Tax Cuts and Jobs Act (TCJA), many individuals are grappling with the impending reduction of estate and gift tax exemptions. Currently, the federal estate and gift tax exemption stands at a significant $13.61 million per individual or $27.22 million for couples.
However, in 2026, this exemption is set to revert to pre-TCJA levels—potentially dropping to around $5 million, adjusted for inflation to about $7 million per individual or $14 million per couple in 2026. This looming change has prompted financial planners and estate planners to seek strategic options for managing wealth, and one option that stands out is the Spousal Lifetime Access Trust (SLAT).
What is a Spousal Lifetime Access Trust?
A SLAT is an irrevocable trust in which one spouse creates and gifts assets to, typically up to the estate/gift tax limit. Once the assets are in the trust, the donor spouse no longer has access to the income from the assets unless the receiving spouse chooses to share with the donor spouse. Both spouses generally utilize these if the family's assets are high enough to take advantage of their entire gift/estate tax exemption.
This strategy not only helps in reducing the taxable estate but also allows for the potential growth of the assets outside of the taxable estate. This would allow for a family to utilize the increased estate/gift tax limit before they are set to be lowered in 2026! After the beneficiary spouse passes, the trust then passes to the contingent beneficiaries, generally their children.
Benefits of a Spousal Lifetime Access Trust
Tax Exemption Utilization: With the looming reduction of the estate and gift tax exemption, now is a strategic time to use your exemption. Assets transferred into a SLAT are considered completed gifts, thereby reducing your taxable estate. Importantly, there is no "clawback" on gifts made while exemptions are at their current levels, meaning that you won’t be penalized if the exemption decreases in the future.
Access to Trust Assets: One of the main advantages of a SLAT is that the non-donor spouse retains access to the trust’s income and principal during their lifetime. This access can provide financial security and flexibility, ensuring that the surviving spouse has the resources they need. Generally, the surviving spouse will share the income they receive with the donor spouse, allowing the donor to retain income from the assets.
Protection from Creditors: Assets held within a SLAT are generally protected from creditors. This can be a significant advantage in shielding wealth from lawsuits or other financial liabilities.
Estate Growth Outside of Taxable Estate: Any appreciation on assets held in the SLAT occurs outside of the donor's taxable estate. This can be particularly advantageous in a rising market, as it allows the wealth to grow without increasing estate tax exposure. Meaning that the growth of these assets will not be subject to estate tax under current law. So, if executed correctly and before the estate/gift tax exemption reduction, it could allow assets over the estate tax exemption to pass to the next generation without any estate tax due!
Control and Flexibility: While the donor gives up direct control over the assets placed in the SLAT, they can still influence how the assets are managed and distributed, as they typically can appoint the trustee.
Drawbacks of a Spousal Lifetime Access Trust
Irrevocability: The decision is final once assets are transferred into a SLAT. The donor cannot easily change the terms or reclaim the assets, which can be a significant disadvantage if personal circumstances change. In the case of divorce, if the SLAT is not drafted properly, this could leave the donor spouse in a bad spot. However, a "floating spouse" provision can require the spouse to remain married to the donor to continue accessing the assets, which can offer some protection.
Potential Tax Implications: Depending on the structure, income generated within the SLAT may be taxable to the spouse who created the trust, leading to unexpected tax liabilities. As long as you know this is the case, it can even be a benefit in some cases, with the ability to further reduce the donor's estate by utilizing the remaining estate that could not be included in the SLAT to pay the income tax generated from the trust.
Trust Administration: Managing a SLAT requires ongoing administration involving costs and legal complexities. Proper record-keeping and compliance are essential to ensure the trust operates within legal guidelines.
Limitations on Benefits for the Donor: The donor spouse cannot receive distributions from the SLAT, which may limit financial access for the individual who created the trust. This is a very complex strategy and requires the help of experienced advisors and knowledge from both spouses so that no unexpected issues arise.
Possible Gift Tax Consequences: While contributions to a SLAT utilize the gift tax exemption, if the value of the assets exceeds the exemption, it could trigger gift tax liabilities.
As we approach the expiration of the TCJA, considering a Spousal Lifetime Access Trust could be a smart strategy for couples looking to protect their wealth and minimize tax liabilities. While there are significant benefits, such as utilizing high exemption limits and protecting assets from creditors, potential drawbacks like irrevocability and tax implications should be carefully weighed.
Consulting with financial and estate planning professionals can help navigate these complexities, ensuring your strategy aligns with your long-term financial goals and family needs. In uncertain times, proactive planning can provide peace of mind and secure your legacy for future generations!