Estate planning is one of the best things you can do for your family members to remove any unnecessary stress during their grieving period. However, the process can be complicated and costly. You’ve also probably encountered the term SLATs in estate planning and wonder what it means. 

STATs is an innovative estate planning strategy known as a spousal lifetime access trust (SLAT). This irrevocable trust is one of the biggest gifts you can give your spouse after your passing.    

In this guide, we’ll explore this estate planning strategy, how it works, and some pros and cons you need to know. 

Key Takeaways 

• SLAT is an innovative estate planning strategy that gives your spouse lifetime access to a trust.
  
  

• SLAT is used to reduce income taxes and take advantage of the state's lifetime gift tax exemption, which is currently $13.61 million.
  
  

• Some disadvantages of using a SLAT include a limit on distributions, its subjectivity to upcoming changes to tax regulations, and its irreversibility. 

  
  

What Is a SLAT in Estate Planning?

In detailing what a SLAT is, Christopher Small from CMS Law Firm explains:

“SLATs are a type of irrevocable trust… This means once you create it, sign it, execute it, you cannot change it. You cannot change the downward distributions. There are some things you can draft into the trust to be able to swap property for example, but generally, an irrevocable trust is a trust you cannot change once it is created.”

This is both a pro and a con. As a pro, this gives you and your spouse peace of mind that they’ll be cared for after your death. However, things could get a little tricky in the instance of a divorce.

A SLAT reduces income taxes and takes advantage of the state’s lifetime gift tax exemption, which is currently $13.61 million. Other irrevocable trusts don’t distribute to beneficiaries until after the donor spouse passes away. Using a SLAT still gives the donor spouse some access to these funds in the trust should their financial situation change. 

Basically, using a SLAT allows you to move your assets out of your trust for tax exemption purposes and into your spouse's trust while still having some access to those funds. Doing this lets the assets grow in value while avoiding being exempt from estate tax, which is why this estate planning strategy is becoming more popular. 

Estate planning comes with a lot of paperwork, important emails, and information that can become hard to keep track of. Stay organized using a family-operating system like Trustworthy to keep your documents in one secure location. Trustworthy’s access features allow you to permit access to these folders, which is helpful when consulting with a good estate planning attorney. 

How Does a Spousal Lifetime Access Trust Work?

To begin with, the donor spouse will need to gift assets like money or property to the SLAT, which is the non-donor spouse’s trust. It’s important to note the donor spouse is the sole owner of the assets. If you and your spouse live in community property, you must convert it into a separate property. We recommend consulting an estate planning attorney to assist with this.

To take advantage of gift tax exemptions and avoid estate tax, the donor spouse must report these moved assets as a gift by filing a gift tax return. The first $13.61 million in gifts is tax-free. In 2024, married couples can leave an estate worth up to $27.22 without being subject to any estate tax. During this period, the non-donor spouse can receive distributions in the form of a monthly income. So, while you, the donor spouse, can’t directly access the funds in the SLAT, your spouse can, which you will ultimately benefit from. 

Children and grandchildren can also become future beneficiaries of the trust. The non-donor spouse becomes the trustee and makes decisions about distributions. Use Trustworthy to keep track of all important documents, contact information, and decisions made regarding the trust. 

Pros & Cons of a Spousal Lifetime Access Trust Work

Before you decide whether a SLAT strategy will work for you, it’s a good idea to weigh up the pros and cons first. 

No Estate Tax (Pro)

One of the biggest reasons many people use a SLAT in estate planning is to avoid costly estate tax. Because this type of trust sees the donor gifting their assets to their spouse, no federal estate tax is charged on these assets unless the amount is higher than the threshold. This is especially beneficial for high-net-worth couples. For couples or families with a net worth under $100 million, directly gifting family members via dynasty trusts is a better option. 

Free From Income Tax (Pro) 

Using a SLAT, any future growth of the assets are free of income tax if the donor spouse pays annual income tax on taxable trust income. The estate value is reduced because the trust’s taxable income is taxed to the donor spouse, and a separate tax return for the SLAT does not need to be filed. 

Access to Funds (Pro)

Unlike other trust funds, which only allow access to the asset once the donor spouse passes away, the SLAT allows some access to the funds. This is a great way to ensure your spouse and other intended beneficiaries receive a regular stream of income. This provides great financial stability. 

Irrevocable Trust (Con) 

It’s important to know that a SLAT is an irrevocable trust, and once the assets are gifted, they cannot be taken back. Divorce makes things tricky, but estate attorneys can include terms in the SLAT that terminate a non-donor spouse’s access to the assets. However, this also means the donor spouse can no longer access these funds via the non-donor spouse.  

Limits on Distributions (Con)

Distributions of money from the trust can only be used within a reasonable limit. This means they should be used to reasonably cover costs related to education, health and maintenance. 

SLAT May Be Subject to Tax Law Changes (Con) 

SLATs may actually be a limited-time option with the upcoming changes in the 2024 tax regulations. Another thing to keep an eye out for is the 2017 Tax Cuts and Jobs Act (TCJA), which is due to expire in December 2025. If this legislation is not renewed, a drop in lifetime estate tax exemption due to inflation could result, which puts some estates at risk for estate tax. 

How to Find a Good Estate Planning Attorney

Planning a SLAT on your own can be stressful and prone to mistakes, which can end up costing you money. Consulting with a good estate planning attorney is recommended. Here are some ways to find a good one.

Identify Your Specific Needs

You must first consider your specific needs before choosing an estate planning attorney. Consider what aspects of estate planning you need help with. Are you looking to avoid estate taxes or income tax generated on the estate? Identifying what you need help with can make the decision process a lot easier. 

Make a list of your specific needs on Trustworthy for safekeeping, or give your attorney access to it to decide if they can assist you.   

Ask for Referrals

Ask your friends, family, and colleagues for any recommendations for a good estate planning attorney. This way, you are guaranteed to find someone who comes with a good reputation. 

Request Free Consultations

Many estate planning attorneys offer free consultations. During this time, you can determine whether to use their services, ask questions, and learn more about what to expect from the entire process. 

During this free consultation, you should ask the attorney the following questions:

• Is estate planning your primary focus? 

• What is your estate tax experience? 

• How long have you been practicing estate planning? 

• What do you include in your fees? 

• What should I expect at our first meeting? 

• Are there additional costs I should be aware of? 

Use Trustworthy to store all your questions and answers during this consultation. 

Choose Specialized Estate Planning Attorneys

Don’t just choose any type of attorney. Select an attorney who specializes in estate planning law. They can prepare you for what will happen and know how to make the best SLAT for your and your spouse's needs. 

SLAT Considerations

Choosing to create a SLAT is irreversible, so you need to be 100% sure about creating one. There are a few things you must consider. 

Consider Your Asset Selection 

Consider what assets you wish to share with the SLAT because you cannot take them back once you have gifted them. It’s a good idea to gift assets that appreciate in value because they will not be subject to estate tax. 

Limits on Distributions 

Distributions from the trust should be within a reasonable limit, and access to these funds is limited. A SLAT is not intended to fund a lavish lifestyle. 

Risk of Trust Cloning 

Two spouses can create an SLAT for each other. However, it can become problematic if the IRS deems the two trusts identical (cloned). Should this happen, the IRS can undo the trust, and the assets lose their tax exemptions. This is why consulting with a good estate planning attorney is highly recommended. 

Frequently Asked Questions (FAQs)

What happens to a slat when the beneficiary dies?

When the beneficiary spouse dies, the assets are distributed according to the trust, often the children or grandchildren. 

What assets should you put in a slat?

You can put a variety of assets in a SLAT, like life insurance policies or money. 

How much can I put in a slat?

To avoid estate taxes, you can gift a SLAT a maximum of $13.61 million. 

What is the difference between bypass trust and slat?

The difference between a bypass trust and SLAT is that a bypass is only funded once either of the spouses dies.