Does a SLAT offer the safety valve your estate plan needs?

The spousal lifetime access trust (SLAT) is a permanent gifting strategy used by married couples with significant wealth who want to take advantage of the federal lifetime gift and estate tax exclusions, while maintaining a limited level of control and access to those funds. It’s an irrevocable trust where one spouse — the donor — makes a gift into a trust for the benefit of the other spouse (and possibly other beneficiaries) with the primary goal of removing the assets from the donor’s taxable estate. One spouse may fund a SLAT for the benefit of the other spouse, or the spouses may fund SLATs for each other with careful planning as to not trigger reciprocal gifting issues.

SLATs offer two key advantages:

• Estate tax benefits: The SLAT can be an effective way to take advantage of the federal lifetime gift and estate tax exclusions, which are currently at an all-time high. Depending on individual circumstances, it can remove up to the exemption amount of $11.70 million per person in 2021 (or $23.40 million per married couple) from the taxable estate, and there’s potential for post-gift appreciation to accrue outside the taxable estate.
• Future access to the funds: While the gift to the SLAT is irrevocable, a properly structured SLAT provides the donor with limited, indirect access to the trust assets in the event of an unforeseen financial setback. The access is “indirect” as the beneficiary spouse, who is often the sole or at least co-trustee of the trust, will have discretionary principal and income access to the trust for health, education, maintenance, and support. Many donors find it comforting to know that even though they’re financially independent after funding the trust, they have a “safety valve” to ensure their needs are met if something unforeseen happened. However, should the beneficiary spouse pass or if the couple gets divorced then access to the trust will be terminated.

Setting up a SLAT

There are a two critical requirements to set up a SLAT.

First, as the name implies, the strategy is only available to spouses.

Second, the strategy requires a donor who’s financially independent and has a taxable estate with assets in excess of what’s needed to support their needs and their spouse’s needs for the remainder of their lives. Once that threshold is met, the SLAT can be a great planning tool for optimizing the excess.

What’s a typical threshold? The answer depends on the composition of the couple’s balance sheet and future financial plan.

Beyond that, there’s no restrictions — the trust can be done at any stage in life. However, in terms of timing, the SLAT could make sense now in view of the new administration’s discussion on lowering the current estate and gift tax exemption before its scheduled sunset in 2025.

How SLATs work

To illustrate how a SLAT works, let’s say you have a balance sheet of $17 million and, based on your financial plan, you’re likely to require $5.3 million for future spending. With the 2021 exemption level of $11.70 million — the maximum available assuming you haven’t used any of your lifetime gifting prior to this — you could set aside $5.3 million and put the excess into a SLAT for the benefit of your spouse and eventually your heirs. If, due to unforeseeable events, you need access to the assets in the trust, you’d have limited, indirect access through your spouse.

Keys to a successful SLAT

The SLAT is a valuable estate planning tool in the right circumstances. Here are a few important considerations to ensure a successful SLAT.

• Start with a personal balance sheet: In determining whether a SLAT is right for you, the first step is to work with your wealth management team to build a personal balance sheet. This creates an accurate inventory of all of your assets and liabilities, a record of how they’re titled, and details about the liquidity features of each item. Next, you’ll build a financial plan based on your projected lifestyle.
• Understand the implications of the death or divorce of the nondonor spouse: A commonly cited downside of a SLAT is the risk of death or divorce of the nondonor spouse and subsequent removal of donor access to the funds. As long as you remain married and the nondonor spouse is alive, you theoretically have access to the funds through your spouse. But in the event of divorce, you potentially lose access, and in the event of death of your spouse, the assets will pass to the remainder beneficiaries of the trust — typically your children or grandchildren. Remember, a SLAT isn’t for someone who expects to need access to the funds — the ability to reach them is something that adds comfort to an otherwise solid plan.
• Identify the right assets: For maximum effectiveness of a SLAT, it’s important to identify the right assets to put in the trust. For example, if you have an illiquid asset like a closely held business, it may be possible to take a discount on the value when putting a portion of the ownership into the trust. This also enables the couple to leave more liquid assets on the balance sheet for easier access. Ideally, the assets that go into the trust will also appreciate over time because the increase in value is going to be free of estate tax.
• Short-term investment risks: The performance of a SLAT should be viewed with a long-term investment horizon. It’s possible the trust could be funded and, six months later, the assets could be lower than their initial value due to market fluctuations.
• Drafting considerations: Most SLATs provide the nondonor spouse with income at the trustee’s discretion, providing for flexibility to take income if your spouse needs it, but keeping it outside of the taxable estate if they don’t. Spousal access to principal is typically limited to health, education, maintenance, and support at the trustee discretion. In many cases, the nondonor spouse/beneficiary will be the trustee; however, there are situations where it makes sense to have an independent trustee to add additional flexibility or ensure family harmony in blended family situations. The addition of a third-party independent trustee is key to allowing for more broad discretionary distribution standards, such as best interests.

Is a SLAT right for you?

The SLAT can be a very effective estate planning tool for married couples with taxable estates who have excess capital in their financial plan. To be successful, it’s important to develop an accurate personal balance sheet and financial plan and understand the strategy from an estate planning perspective. A SLAT is a particularly good option for financially independent couples with significant wealth who aren’t prepared to gift to future generations but want to do beneficial tax planning that enables flexible access to their excess capital.

The SLAT can be the best of both worlds. To find out whether it’s right for you, give us a call.