What is a spousal lifetime access trust?

The term “spousal lifetime access trust,” or “SLAT,” is used to describe an irrevocable trust established by a grantor spouse for the benefit of the beneficiary spouse and others. The beneficiary spouse might be the sole beneficiary during his or her lifetime or might be the primary beneficiary among a group of beneficiaries that could include children or grandchildren. Contributions to a SLAT typically do not qualify for the gift tax marital deduction; rather, they are designed as taxable gifts that consume a portion of the grantor’s lifetime exemption from estate and gift taxes.

Advantages of a spousal lifetime access trust:

Estate tax planning: In recent years, the SLAT has become a popular option for those who want to use up their lifetime estate and gift tax exemption with a gift that includes the spouse as a beneficiary. With the potential sunset of the increased exemption amount in 2026, SLATs are likely to receive even more attention as a means of achieving these goals. While the grantor will need to file a federal gift tax return, if the contribution to the SLAT is “covered” by the grantor’s lifetime exemption, no estate tax would be owed at the time of the grantor’s death. In addition, if the grantor allocates generation-skipping transfer tax exemption to the SLAT, the trust assets may transfer tax-free for several generations of family members.

Keeps appreciation outside the taxable estate: Transferring assets to a SLAT locks in their value for estate tax purposes, meaning any potential appreciation of the trust assets occurs outside the grantor’s taxable estate. Many estate planners believe that it can be more effective to make a gift today, at present value, than it is to make a transfer at death, at a value that may be substantially appreciated.

Creditor protection for spouse: Depending on the structure of the SLAT and any applicable state laws, a SLAT may offer a degree of asset protection from the beneficiary spouse’s creditors.

Considerations for a spousal lifetime access trust:

A SLAT is irrevocable: Since a SLAT is an irrevocable trust, the grantor cannot take back the assets he or she contributes to a SLAT. The grantor may, however, have the power to substitute property of equal value. Accordingly, using a SLAT will not appeal to everyone; the grantor will have to be comfortable with forfeiting control over the assets.

No adjustment to basis at death: Under current estate tax law, assets that are included in a decedent’s taxable estate will receive an adjustment to cost basis to their fair market value at the time of death. For assets that have appreciated substantially between the time of acquisition and the date of death, this can provide a significant benefit by eliminating the potential capital gains tax on the appreciation. With a SLAT, however, the grantor will lose that benefit, because the assets in the SLAT are not includible in the grantor’s estate at death.

Divorce: A divorce can complicate the use of a SLAT, so family dynamics should be considered when evaluating the appropriateness of utilizing one.

Grantor trust: Typically, a SLAT is structured as a grantor trust for income tax purposes, meaning the grantor spouse is responsible for paying any income taxes associated with the trust assets. When the grantor, rather than the trust, pays a tax liability, it provides a benefit to the beneficiaries without involving a taxable gift. While this can be very helpful from an overall estate planning perspective, some people will grow weary of paying income taxes for a trust from which they receive no direct benefit.

Reciprocal trust doctrine: When creating two SLATs, each for the benefit of the other spouse, a married couple may risk breaching the reciprocal trust doctrine, which could jeopardize the benefits sought from establishing a SLAT. To avoid this result, it may be necessary to create the SLATs at different times and structure them differently, so that they are not “mirror images” of each other.

Example of preserving family wealth with a SLAT:

Rob and Laura are married and have a combined estate of $25 million. Under current federal estate tax law (in 2024), they are not facing a potential estate tax liability at their deaths. They are, however, concerned about the potential reduction of the estate tax exemption to a level that would cause their estates to be taxable if their deaths were to occur in 2026 or later.

To safeguard against that result, Rob decides to create a SLAT for the benefit of Laura and their children. He funds the SLAT with stock that he believes has significant potential for future appreciation. In doing so, Rob has taken steps to mitigate his potential estate tax liability, which can preserve more wealth for the benefit of his family.

Comprehensive estate planning strategies from Commerce Trust

While a SLAT can be an impactful estate planning tool for tax-efficient wealth transfer, its efficacy depends on careful consideration of your financial goals and a thorough understanding of applicable laws. At Commerce Trust, our wealth management teams are comprised of specialists across multiple disciplines who can help you determine which estate planning strategies best support your comprehensive estate plan. If that includes establishing a trust, we will prepare you to meet with an estate planning attorney by providing holistic guidance in advance and can work closely with them on an ongoing basis to achieve your unique objectives. Contact Commerce Trust today if you want to learn more about our private wealth management and estate planning services and how we can help you incorporate a trust into your estate plan.

The opinions and other information in the commentary are provided as of August 15, 2024. This summary is intended to provide general information only, and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 

Commerce Trust does not provide tax advice to customers unless engaged to do so. Commerce Trust does not provide legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commerce Trust is a division of Commerce Bank.

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