What is a SLAT? – Advantages, What to Watch Out For, and Tax Implications

The SLAT or Spousal Lifetime Access Trust is an irrevocable trust set up by the grantor-spouse for the benefit of his non-donor spouse, with the remainder typically transferring to the common descendants of the spouses upon the non-donor spouse’s death.

The SLAT is generally used by well-to-do married couples to accomplish the following goals:

1. take advantage of the currently high gift tax exemption (at $11.7 million each in 2021 or $23.4 million per couple) while avoiding estate tax;
2. to protect the grantor-spouse’s and beneficiary spouse’s assets from suits such as malpractice or creditor claims; and
3. allow the donor spouse the benefit to enjoy the trust assets and/or income indirectly through the non-donor spouse.

Funding the SLAT

To establish and fund the SLAT, individually owned assets of the grantor-spouse should be transferred to the trust. If it is the separate property of the beneficiary spouse, it can be transferred to the grantor-spouse who can subsequently transfer it to the SLAT. However, enough time must lapse between the transfers. Otherwise, the IRS will apply the step-transaction doctrine which will regard multiple transfers made simultaneously or near in time to each other as one single integrated transaction. This would eliminate the goal of having SLAT assets not be included in the estate of the grantor spouse or the beneficiary spouse.

Community-owned property cannot also be directly transferred to the SLAT. It must first be divided among the spouses and thereafter transferred to the SLAT. In addition to avoiding the step-transaction doctrine, the lawyer assisting the couple must also be aware that dividing the tenancy by entirety property will eliminate the creditor protection offered by the nonseverable tenancy by the entirety. For this reason, SLAT is just one form of estate planning. A skilled lawyer will assist the client in identifying the properties and providing a holistic estate plan using several documents that can help the client accomplish their goals, whether it is avoidance of probate, taking advantage of the high gift tax exemption, or enjoyment of creditor protection.

Gift Tax and Estate Tax

One major reason SLATs are popular among couples is the enjoyment of the high gift tax exemption and avoidance of estate tax. SLATs are normally used in states that impose estate tax (such as Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington).

Currently, individuals have a federal lifetime gift tax exemption in the amount of $11.7 million. However, beginning January 1, 2026, many practitioners are apprehensive that this lifetime gift tax exemption will be lowered to $6 million per individual (or $5 million when adjusted for inflation). The Treasury Department has issued regulations confirming that any individual who utilizes the higher gift tax exemption before January 1, 2026 will be able to retain this enjoyment. There will be no retroactive or “claw back” application of the lower amount of exemption in 2026. For this reason, many high net-worth individuals have been transferring assets to SLATs to enjoy the gift tax exemption and avoid estate tax.

As an example, if an individual owns properties in the total amount of $20 million, he can transfer the $11.7 million to an irrevocable trust, tax free. He may need to file a gift tax return, but no taxes will be paid due to the exemption. The remaining $8.3 million will be retained in the individual’s estate and subject to estate tax upon the individual’s death. The $11.7 million transferred to the irrevocable trust will not be part of the probate assets, will not be subject to estate tax of the grantor spouse or the beneficiary spouse, and will enjoy creditor protection.

Payment of Income Tax

The SLAT generally is considered a grantor trust under 26 U.S. Code § 677 when its income is distributed to the grantor or the grantor’s spouse. As a grantor trust, the grantor still pays for the income tax even if the SLAT is an irrevocable trust. There are two ways to reduce or avoid the grantor-spouse’s payment of income taxes in the SLAT: (a) establish the SLAT in a state with no income tax; or (b) add other people as current beneficiaries aside from the non-donor spouse, such as the children, whose consent would be required for any distributions to the beneficiary spouse. In the latter case, the SLAT would not be considered a grantor trust and income taxes would be paid by the SLAT and not the donor spouse.

Another remedy would be to grant the trustee in a grantor trust discretion to reimburse the donor spouse the income tax that was paid. The trustee’s authority to reimburse the donor-spouse should be discretionary and not mandatory. Otherwise, it would be considered a grantor trust.

Minimizing Consequences of Divorce or Death of the Non-Donor Spouse in SLAT

Major considerations regarding SLAT are the risk of divorce or sudden death of the non-donor spouse. Because SLAT is irrevocable, a poorly drafted SLAT can leave the grantor-spouse with a majority of his assets used for the benefit of a former spouse. This can be remedied by introducing language in the SLAT, terminating the non-donor spouse’s beneficial interest in the event of divorce or defining “spouse” as the current spouse.

To minimize the risk of sudden death of the non-donor spouse and having the trust assets given to the children while the grantor-spouse is still alive, the SLAT can give the non-donor spouse a limited testamentary power of appointment to be used only in a will, where he/she can thereafter direct the SLAT funds back to the grantor-spouse (who would be chosen from one of the many discretionary beneficiaries in the SLAT) upon death.

Minimizing Consequences of Not Having Access to Trust Assets in Cases of Emergency

Another major apprehension of grantors in an irrevocable trust such as SLAT is not having access to trust assets in case there is an emergency. For this reason, a provision can be inserted in the SLAT granting a third party the power, in a non-fiduciary capacity, to loan the grantor-spouse trust assets without security but with interest.

Another way for spouses to have access to trust assets is for both spouses to execute SLATs in favor of each other, so that each spouse can enjoy the benefit of the trust assets. However, the lawyer drafting the SLATs should be aware of the reciprocal trust doctrine, applied by the IRS and enunciated by the Supreme Court in U.S. v. Estate of Grace, 395 U.S. 316 (1969), where trusts executed by spouses in favor of each other are considered interrelated when the arrangement, to the extent of mutual value, leaves the grantor-spouses in approximately the same economic position as if they had created trusts naming themselves as life beneficiaries. In this case, the reciprocal trusts, despite language stating they are irrevocable, will be considered part of the estate of the spouses and will not enjoy creditor protection.

To avoid the application of the reciprocal trust doctrine, trusts can be created at different years in different states with different trustees, assets, and dispositive provisions, resulting to a different economic position for the spouses from what they had before.

To retain control of the trust assets, the beneficiary spouse can also be named trustee. However, in order to still enjoy creditor protection and avoid inclusion in the probate assets, the beneficiary spouse serving as trustee should not enjoy broad distribution rights, but should be limited to an ascertainable standard of health, education, maintenance, or support.

If you are interested in executing a SLAT or just planning your estate to ensure a smooth transfer with the least expense upon death, we, at the Law Offices of Albert Goodwin, are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].

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