Estate Planning with SLATs: Minimize Taxes, Maximize Access 

With estate taxes on the rise, thoughtful planning has never been more important. For high-net-worth couples, the Spousal Lifetime Access Trust (SLAT) can play a key role in managing estate taxes. 

SLATs offer unique benefits compared to other trust structures. Not only can donors remove assets from their taxable estate, but they can retain access to those assets through their spouse. When utilized as part of a double SLAT strategy, this structure can offer enhanced tax savings and financial benefits. 

SLATs may not be suitable for everyone, as they involve both financial and personal considerations. By working with a trusted advisor, couples can determine whether SLATs are suitable for their estate plan and the best approach to implement them. In this article, we’ll provide a basic overview of how SLATs work and the unique considerations that go into their use. 

What Is a SLAT?

SLATs enable married couples to potentially reduce future estate taxes while preserving current access to their wealth. This is achieved through a structured arrangement where one spouse indirectly benefits from assets gifted by the other. Here is how a SLAT works in practice:

• Spouse #1 creates a SLAT, designating Spouse #2 as a beneficiary. Spouse #1 gifts assets into the trust, which can include cash, real estate, and investment securities.
• Once funded, Spouse #2 can receive distributions from the SLAT. Spouse #1 cannot receive distributions themself, but they can indirectly benefit from Spouse #2’s distributions.
• If Spouse #2 passes away, the trust is distributed to the remaining beneficiaries (typically children or grandchildren).

In this scenario, Spouse #1 would be known as the ‘donor spouse,’ while Spouse #2 would be known as the ‘beneficiary spouse.’ For the beneficiary spouse, distributions are generally quite flexible. If the beneficiary spouse serves as the trustee, distributions can typically be made under the health, education, maintenance, and support (HEMS) standard, covering most household expenses.

Advantages of a SLAT

As an irrevocable trust, a SLAT can be a powerful estate planning tool. Gifting assets into a SLAT removes the immediate value of those assets from a couple’s estate. More importantly, future appreciation on those assets will take place outside their estate as well.

Compared to other types of irrevocable trusts, SLATs feature several specific advantages:

• Indirect benefit. Under many trust structures, donors are not allowed to benefit from their assets once removed from their estate. Although donors cannot take distributions directly from their SLAT, they can indirectly benefit from distributions made to their spouse.
•  Flexibility. Because a beneficiary spouse can still take distributions from a SLAT, this structure can create greater financial planning flexibility. Under less-flexible trusts, couples may struggle to adjust their estate planning strategy in the future.
• Double SLAT strategy. Under a double SLAT arrangement, each spouse creates a trust in which the other spouse serves as beneficiary. This structure can offer mutual financial security and greater estate savings potential.

A double SLAT strategy allows a couple’s assets to end up in the same ultimate destination – with children or other heirs – but in a more tax-efficient manner. However, this strategy can require strict planning to avoid IRS scrutiny. In fact, SLATs come with several nuances that require careful consideration during implementation.

SLAT: Unique Considerations

Although the double SLAT strategy can be powerful, couples need to be wary of the ‘reciprocal trust doctrine.’ Under this doctrine, the IRS may find that separate trusts with overlapping donors and beneficiaries should be viewed as part of a unified structure. If the IRS views the two trusts as mirror images, they may ‘uncross’ them, undoing the estate tax benefits.

Depending on where a couple lives, state laws can create additional hurdles to establishing a SLAT. For example, in Washington, a couple’s assets are generally considered ‘community property.’ This means that assets typically need to be converted into separate property before they can be used to fund a SLAT.

Finally, SLATs can also create complexities in the case of a divorce. If a couple divorces, the beneficiary spouse typically retains access to the SLAT. The donor spouse will no longer be able to indirectly benefit from the trust, which could result in financial planning challenges.

Due to these unique considerations, SLATs generally require a more thoughtful approach than other trust structures. However, working with a professional advisor can help mitigate the risks of encountering future complexities. 

Conclusion: When Does a SLAT Make Sense?

How can couples know whether a SLAT-based strategy makes sense for them? Generally, this structure is suitable for married couples who are concerned about estate taxes, are of similar ages, and have relatively equal personal asset values. Although only a small number of clients may fit this category, those who fall into it can often realize significant benefits from SLATs.

With that said, the decision to establish a SLAT is as much a relationship question as a financial one. This structure is most suitable for long-term, stable marriages with little prospect for divorce. Working with a trusted advisor can help couples navigate both the financial and personal considerations surrounding this strategy.

At Badgley, we serve as one member of our client’s financial team. By working alongside their attorneys, estate planners, and tax professionals, we strive to create a tailored financial plan for each client. To explore whether SLATs can make sense for your estate plan, we invite you to start a conversation today.