Spousal Lifetime Access Trust (SLAT)

With rising interest rates and the lifetime gift tax exemption set to revert to $5M (adjusted for inflation) in 2026, clients with an excess of $24M of combined wealth should consider various lifetime gifting strategies before certain estate tax saving opportunities are gone.

The SLAT is a special wealth transfer technique that can be particularly attractive when asset values are low or expected to appreciate significantly after being contributed to the Trust. SLATs achieve dual goals of using the current lifetime gift exemption for the benefit of descendants while allowing the donor potential indirect access to assets gifted into the trust. Most gifting techniques require you to give assets away with no control or rights to future income.

It is important to stress the need for careful planning and implementation of the SLAT, as well as having a clear understanding of the indirect rights each spouse will have in the other spouse’s trust. After all, funding a SLAT is an irrevocable gift; the grantor cannot expect the assets to be available to them after the gift is made.

Further, if both spouses create a SLAT, they cannot be so similar that they run afoul of the Reciprocal Trust Doctrine. The trust terms cannot be identical; therefore some careful thought should be made regarding the rights of the spouse and identification of beneficiaries for each trust. The assets contributed to each trust should also not be identical. For example, one trust may contain real estate and certain types of investable securities while the other trust might contain a broad, diversified portfolio of traditional investments.

Divorce can cause unexpected complications. The trust funds would still be available to the recipient spouse after the divorce unless the term “spouse” is defined more generically, or divorce is defined as a triggering event that immediately transfers the assets to the remainder beneficiaries. To define a spouse generically (for example, stating instead of a specific named beneficiary, defining as “the individual to whom the grantor is married”) may allow the assets to remain in trust in the event of remarriage.

The basic premise—each spouse makes a gift of assets with value up to their unused lifetime exemption to the other spouse’s SLAT. The recipient spouse has the right to access income and principal from the assets in the trust. Upon the death of either spouse, their respective SLATs will then pass to specified remainder beneficiaries, often the next generation.

John makes a $12M gift of assets into a SLAT for the lifetime benefit of his wife Jane. Jane can withdraw income and has some ability to withdraw principal, if necessary. She can also manage or sell assets inside her trust. When Jane dies, the assets will pass to their children. John uses up his lifetime exemption, even though as a married couple he might indirectly benefit from distributions of income or principal Jane may receive from the Trust.

Jane sets up a SLAT using her $12M lifetime gift exemption for the lifetime benefit of John. When John dies, however, the trust assets will pass to their grandchildren. Jane might indirectly benefit from the income and principal John can access. Alternatively, Jane could have the same beneficiaries but different withdrawal rights for John and/or use other different powers in the trust (this is just one example).

Advantages:

• Indirect benefit of the income and potential access to trust assets, if needed
• Uses gift and GST (Generation Skipping Transfer) exemption now, before the exclusion decreases in 2026
  (or earlier if Congress acts)
• Future appreciation of trust assets avoids estate tax

Disadvantages:

• Divorce or death ends the indirect access to assets or income for the spouse who made the gift
• Careful legal drafting and maintenance is necessary to ensure trusts are not considered to be “reciprocal”
• If assets are withdrawn from the trust, this strategy can be inefficient and waste the estate tax exemption
• If the value of assets declines significantly, it results in an inefficient estate tax transfer
• Most SLATs are set up to be grantor trusts, meaning the spouse making the contribution to the trust will pay
  the income tax on all the trust earnings.

This condensed example of SLAT mechanics merely touches on the scope of the specific provisions required to avoid the Reciprocal Trust Doctrine and other aspects. Should you be interested in exploring the SLAT further, we recommend engaging an estate planning attorney with experience with these trusts and collaborating as a team to ensure the best overall tax efficiency of this irrevocable gift. Your advisors at Aldrich Wealth, in conjunction with your estate planning attorney, can evaluate this opportunity and help you determine if it will achieve your wealth transfer goals.