The Benefits of a Spousal Lifetime Access Trust

There are many details and options to consider when it comes to estate planning. A Spousal Lifetime Access Trust (SLAT) is a legal arrangement that allows one spouse to use their federal gift and estate tax exemption to transfer assets into a trust for the benefit of the other spouse. It’s an irrevocable trust, meaning it generally cannot be changed once created.

Understanding SLATs

Gifts to a spouse are often included in the marital deduction, meaning they are not taxable gifts, and the assets will be counted towards the recipient spouse’s taxable estate. Utilizing the marital deduction does not use the donor spouse’s federal gift and estate tax exemption, but there are some situations in which the donor spouse may want to use their exemption to benefit their spouse. A SLAT is a valuable estate planning tool that can offer significant benefits. The spouse who creates the SLAT, also known as the donor spouse, makes a completed gift into the trust using their federal gift and estate tax exemption.

The donor spouse may distribute funds to the beneficiary spouse without the remaining trust assets counted in their taxable estate. The donor spouse also can include other family members as beneficiaries who could similarly benefit.
SLATs generally are structured in one of two ways: the beneficiary spouse is the sole beneficiary of the trust while alive, with other family members becoming beneficiaries only after the beneficiary spouse’s death. The other option is the beneficiary spouse and other persons are beneficiaries simultaneously.

In 2024, the lifetime gift and estate tax exemption is $13.61 million
for individuals and $27.22 million for married couples.
Absent a change in the law, the exemption amount will reduce to
pre-2018 levels, indexed for inflation, beginning January 1, 2026.

Funding a SLAT
A SLAT can be funded with a variety of assets, including cash and marketable securities. It can also own life insurance on the life of the donor spouse. However, the SLAT should not own insurance on the beneficiary spouse or a joint policy on both spouses for estate tax purposes. It is important to note that only assets owned by the donor spouse individually can be gifted—not community property or assets owned jointly by the married couple.

Example: John and Jane are a married couple with an estate exceeding the current lifetime gift and estate exemption of $13.61 million each. To preserve their wealth and avoid potential estate taxes should the exemption sunset at the end of 2025, John creates a SLAT for Jane by transferring $13 million of stocks into it. In doing so, John has “locked in” use of his gift tax exemption and any future growth in value of the stocks will happen within the trust, not in his estate.

As the trust beneficiary, Jane can request distributions from the trust for living expenses (or other reasons specified in the trust document), but the trust assets will not be deemed part of Jane’s taxable estate. A SLAT is considered a grantor trust under the IRS’s grantor trust rules, so John is responsible for paying taxes on the income generated by the trust’s assets (even if they later divorce¹).

The SLAT also names their children and grandchildren as remainder beneficiaries who will become current beneficiaries after Jane passes away. John could allocate his generation-skipping transfer tax exemption to the trust, allowing the trust to benefit multiple succeeding generations without being subject to transfer tax until the SLAT ultimately terminates.

Advantages of a SLAT

• The beneficiary spouse is permitted to request distributions of income or principal.
• The grantor trust status permits the assets to accumulate within the SLAT without being reduced by payment of income taxes.
• By paying the tax obligation with assets outside the trust, the donor’s assets that have yet to be subject to estate tax are reduced, providing a discount on the income tax obligation (to the extent that the assets would have otherwise been subject to estate tax).
• Residents of states that impose their own estate or inheritance tax may benefit because the SLAT might remove assets that could be subject to a state tax.
• A SLAT can shield assets from creditors and potential future lawsuits, offering peace of mind for both spouses.
• The SLAT provides the donor spouse control over how and when the assets are ultimately distributed to other beneficiaries, such as children or grandchildren, through the terms of the trust.

Disadvantages of a SLAT

• If the beneficiary spouse dies before the donor, the donor spouse loses indirect access to the SLAT’s assets.
• Depending on the trust’s design, the spouse may have limited access to the principal, potentially inhibiting their ability to meet their financial needs.
• In the event of divorce, a SLAT will typically include language that terminates the beneficiary spouse’s beneficial interest in the trust.
• However, this also means that the donor spouse will lose indirect access to the assets1.
• If SLAT assets are or can be used to satisfy a donor spouse’s legal obligation of support or to relieve the donor spouse of debt, this will result in inclusion of the assets in the taxable estate of the donor spouse.

Planning for Contingencies
Upon the death of the beneficiary spouse, the donor spouse will not have access to the SLAT’s assets. If there is a situation when the assets are needed, a SLAT may not be the appropriate trust. Additional options may include buying life insurance or, in some limited cases, providing the beneficiary spouse a power to direct the remaining SLAT assets at the beneficiary’s death to a group of secondary beneficiaries. Such a power must be precisely crafted and carefully exercised to avoid estate tax inclusion; however, in many states, if the will of the beneficiary spouse appoints the property to or for the donor spouse, it will be subject under state law to the donor spouse’s creditors, which has the adverse effect of causing federal estate tax inclusion in the estate of the donor spouse.

Early Planning with Experienced Guidance

A SLAT is designed to create a reserve pool of assets for a beneficiary spouse that can be accessed if needed, while not being included in either spouse’s taxable estate. It can be a powerful tool in estate planning, offering both financial security and estate tax benefits for married couples. However, these benefits are only made available through thoughtful planning and professional guidance.

1 The trust could include a “floating spouse” provision which defines the beneficiary spouse as the spouse to whom the donor beneficiary is married at the time of a distribution.

This material provides information of possible interest to Glenmede’s clients and friends, and does not provide investment, tax, legal or other advice. Any opinions, recommendations, expectations and/or projections expressed herein may change after the date of publication. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Any potential outcome discussed, including but not limited to performance, legislation or tax consequence, ultimately may not occur due to various risks and uncertainties. Clients are encouraged to discuss any matter discussed herein with their tax advisor, attorney or Glenmede Relationship Manager.