WHAT IS A SLAT AND WHY YOU WANT ONE NOW!

August 16, 2024

With all the election coverage and unrest around the world, thinking about the future is challenging. However, for Trusts & Estates attorneys, one date, December 31, 2025, remains a focal point because that is the date that the current historically high federal estate tax exemption ($13,610,000) sunsets. This means that, assuming Congress does not enact any new estate and gift tax legislation (which seems to be a safe bet), the estate tax exemption will automatically decrease to $5 million indexed for inflation (estimated to be about $6-7 million) on January 1, 2026. Assuming nothing changes beforehand, you have about a year and a half to avail yourself of powerful estate planning strategies before the exemption drastically decreases, limiting your opportunities.

For married couples who seek to manage their wealth and ensure financial security, one increasingly popular method to achieve this goal while also taking advantage of the current estate tax exemption is the creation of one or more Spousal Lifetime Access Trusts (SLATs). A SLAT allows one spouse to transfer assets into an irrevocable trust for the benefit of the other spouse, providing several financial, tax, and estate planning benefits while still allowing indirect access to the assets through the beneficiary spouse. There are many reasons why married couples should consider creating SLATs, not all of which relate to taxes. These include:

Estate Taxes

As mentioned above, one of the primary motivations for establishing a SLAT is to reduce estate taxes. By transferring assets into a SLAT now while the exemption is at a historic high, the assets and any future appreciation are removed from the taxable estate of the grantor (i.e., the creator of the SLAT). The use of a SLAT allows couples to utilize their lifetime gift tax exemption efficiently, potentially saving millions in estate taxes.

For example, a husband can create a SLAT for his wife and fund the trust before 2026, which ensures use of the husband’s current $13.61 million exemption, while also allowing the wife to have funds from which she can still receive distributions if needed. The IRS has indicated there will be no “clawback” of the excess amount gifted over the new 2026 federal estate tax exemption. Meaning, if you die in a year when the estate tax exemption is $7 million, and you made a previous gift of $13 million, then they will not try to tax the difference between those two numbers, or 40% on $6 million. Thus, the current high exemption is preserved, the assets are protected, and the funds can be used by the wife during her lifetime with the remainder passing to the next generation in an estate tax efficient manner. It is a win-win-win.

Preserving Income Streams & Financial Security

While the primary goal of a SLAT is often estate tax mitigation, the SLAT can also serve as a source of income. The non-grantor spouse (i.e., the beneficiary of the SLAT) can receive income distributions from the trust, which can help maintain the couple’s standard of living. This income stream can be particularly useful in retirement planning, especially when the couple is not ready to start gifting assets to children. Additionally, the spouse can even have access to the trust’s principal if needed, providing a measure of financial security.

Asset Protection

SLATs offer a degree of asset protection against creditors. Once assets are transferred into the SLAT, they are generally shielded from the grantor's creditors and legal claims. This can be particularly valuable for individuals in high-risk professions or those concerned about potential lawsuits or financial liabilities.

Flexibility in Trust Management & Generational Wealth

A SLAT can be structured with considerable flexibility. The trust can be designed to allow distributions to the non-grantor spouse for health, education, maintenance, and support (HEMS), or, if there is an independent trustee (i.e., a trustee with no beneficial interest in the trust), managing the trust, distributions for any purpose that benefits the non-grantor spouse beneficiary. Additionally, the trust can provide for distributions to other family members, such as children or grandchildren, ensuring that the assets benefit multiple generations.

Similarly, SLATs can play a critical role in creating generational wealth. By removing assets from the taxable estate and providing for the surviving spouse during his or her lifetime, a SLAT ensures that more wealth can be passed on to heirs. This approach helps to create a legacy and can provide for children and grandchildren long after the original grantor’s death.

Avoiding Probate

As a side benefit, assets placed in a SLAT are not subject to probate, which can be a lengthy and costly process depending on where you live. By avoiding probate, the assets in the trust can be distributed more quickly and privately to the beneficiaries, providing them with timely access to the funds.

Incapacity

In the event that the grantor becomes incapacitated, a SLAT ensures that the trust assets are managed by the Trustee, according to the terms set forth in the trust agreement. This can provide peace of mind, knowing that the spouse and other beneficiaries will continue to be supported even if the grantor is unable to manage his or her own affairs.

Sound too good to be true? Not really, but as with any planning, there are potential downsides to consider. For instance, if you have provided a benefit to your spouse and your spouse predeceases you, the Grantor’s indirect access will be cut off. Also, the issue of divorce must be considered and addressed in the SLAT. There are also opportunities for each spouse to create their own SLAT (for the benefit of the other) but avoiding the triggering of the reciprocal trust doctrine should be taken into consideration with such planning.

With the coming changes to the estate planning landscape in 2026, SLATs offer a versatile and powerful tool for couples in a stable marriage looking to optimize their planning, reduce tax liabilities, and ensure financial security for their spouse and future generations in an estate tax efficient manner. By understanding the benefits and strategically utilizing SLATs, couples can achieve significant financial advantages and peace of mind.

If you are interested in learning more about Spousal Lifetime Access Trusts, the coming estate tax sunset, or for any Trusts & Estates questions you might have in New Jersey or New York, please contact one of our Trusts & Estates attorneys at Pashman Stein Walder Hayden P.C. 

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The information contained herein is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to these materials do not create an attorney-client relationship between Pashman Stein Walder Hayden P.C. and/or its attorneys, and the reader of the materials.