Estate planning can feel overwhelming, especially with changing tax laws. One tool that’s gaining popularity among high-net-worth couples is the Spousal Lifetime Access Trust (SLAT). If you’re looking to preserve your wealth and minimize estate taxes, understanding SLATs is crucial. Here’s a breakdown of what they are, how they work, and why you should consider setting one up before January 1, 2026.
What’s a SLAT?
A SLAT is an irrevocable trust that one spouse creates for the benefit of the other. The goal? To transfer assets out of your estate while still providing financial security for your spouse. This strategy can help you use the current high federal estate tax exemption before it potentially drops.
Current and Future Tax Exemptions
Right now, each person can transfer up to $13.61 million without incurring federal estate taxes. For married couples, that means you can shield up to $27.22 million. But here’s the kicker: On January 1, 2026, this exemption is set to decrease to approximately $7 million per person ($14 million per couple). Essentially, it’s a “use it or lose it” situation.
How SLATs Work
1. Set Up the Trusts:
Each spouse creates a SLAT, naming the other as the primary beneficiary.
2. Fund the Trusts:
Transfer assets into the trust. These transfers are considered gifts and use up your gift tax exemption of $13.61 million in 2024.
3. Benefits for Your Spouse:
The beneficiary spouse can receive distributions from the trust, ensuring financial security.
4. Tax Savings:
When you establish a SLAT for your spouse’s benefit, you can gift assets up to your lifetime gift exemption— currently $13.61 million per individual — without incurring federal estate taxes.
Here is an example:
Let’s look at John and Jane Smith, a couple with a $30 million estate. They want to make the most of the current $13.61 million exemption per person.
– John’s SLAT for Jane: John transfers $13.61 million into a trust for Jane. These assets are no longer part of his taxable estate.
– Jane’s SLAT for John: Jane uses her exemption to do the same for John.
This way, they effectively transfer $27.22 million out of their estates, potentially saving millions in future estate taxes. The exemption will go down to $7 million in 2026, but this wouldn’t impact Smiths because they preserved their exemption of $13.61 million by using it via gifting to their SLAT.
Advantages of SLATs
– Reduce Your Taxable Estate:
Assets in the trust are removed from your estate, lowering estate tax liability.
– Provide for Your Spouse:
Your spouse can access the trust’s assets if needed, ensuring they have financial security.
– Flexibility with Trustees:
You can remove and replace trustees, giving you some control over the trust’s administration.
– Indirect Access to Funds:
While you can’t access your own SLAT, your spouse can, indirectly benefiting you.
Potential Drawbacks
– Loss of Control:
Once you place assets in a SLAT, you give up direct control and access. However, there are smart ways to pick and choose the assets that are being transferred to a SLAT to minimize the lack of control.
– Divorce Complications:
SLATs aren’t for everyone. If you anticipate friction in your marriage, this option might not be suitable. In the event of a divorce, you would lose indirect access to the SLAT funds.
– Spousal Death:
If your spouse dies before you, you lose indirect access to the trust. Provisions can be made to redirect funds to you, but this requires careful planning.
The Bottom Line
Setting up a SLAT can be a game-changer for estate planning, especially with the looming reduction in the estate tax exemption. It’s a great way to ensure your wealth benefits your loved ones rather than going to taxes.
If you have significant assets, now is the time to act. Remember, with the exemption decreasing in 2026, it’s truly a “use it or lose it” opportunity.
Don’t wait—plan today to protect your tomorrow.