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A smart way for couples to preserve wealth

Key takeaways

  • High-net-worth married couples might want to consider a Spousal Lifetime Access Trust (SLAT) as an option for reducing potential estate taxes.
  • A donor spouse can set up a SLAT to benefit their descendants, while giving the beneficiary spouse potential access to the assets.
  • Couples who may be concerned about the potential expiration of the current gift and estate tax exclusions in 2026 can consider drafting SLAT documents now and funding the trust over time.

After a lifetime of building wealth, you may want to protect your financial legacy by minimizing taxes for your spouse and other heirs. In 2024, that maximum amount that you can leave for your heirs without incurring gift or estate taxes is $13.61 million per person, or $27.22 million per couple. However, these exclusion amounts are currently scheduled to expire at the end of 2025 and drop significantly in 2026. Irrevocable trusts can be valuable financial tools for transferring wealth to the future generations, but what if you and your spouse think you might want access to some of those assets in the future?

While there is no estate tax on assets transferred from a deceased spouse to a surviving spouse, when that spouse passes there could be an estate tax due if their estate exceeds the applicable exclusion amount. One option to remove assets from a spouse's taxable estate is a Spousal Lifetime Access Trust (SLAT), an irrevocable trust created by one spouse for the benefit of the other, with the remainder typically benefiting descendants on the passing of the beneficiary spouse. "While SLATs aren't the right choice for everyone, they can be a powerful tool for some high-net-worth folks to use their gift tax exclusion early and efficiently, allowing assets to grow outside the taxable estate," explains Jordan Klein, an advanced planner at Fidelity.

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How SLATs work

Say a married couple has a combined net worth of $50 million. One spouse (the donor spouse) could transfer assets worth as much as $13.61 million into a SLAT for the benefit of the other spouse (and descendants as well), utilizing that spouse's full lifetime gift tax exclusion. The spouse who is the beneficiary of the SLAT can receive distributions from the trust as needed, typically to maintain their accustomed standard of living, and when the beneficiary spouse dies, the gift is passed, without estate tax, to the remainder beneficiaries (usually the children), either outright or in further trust. For individuals residing in states with an estate tax, SLATs may also help reduce local estate taxes.

  1. Removes potential appreciation from the estate: The spouse who sets up the SLAT locks in the gift tax value at the time of funding. Any appreciation of the assets then occurs outside the taxable estate of the donor spouse who completed the gift, as well as the beneficiary spouse, who is not treated as an owner for estate tax purposes. The donor spouse also pays income tax on the SLAT's income from outside assets, helping the SLAT appreciate faster.
  2. Offers access to funds: "What really sets the SLAT apart from other gifting structures is that the beneficiary spouse can usually draw on funds, as needed, for their health, education, maintenance, and support," says Klein. Distributions to the beneficiary spouse can indirectly benefit the donor spouse as well, assuming both the donor and beneficiary are alive and remain married.
  3. Allows for flexibility and control: Often, the beneficiary spouse can adjust how the trust assets will be distributed to remainder beneficiaries when the beneficiary spouse passes away (the ability to make those changes depends on the language in the SLAT). The spouse may exercise this power to leave assets in further trust for their children, rather than outright. "Ultimately, some people may hesitate to make large gifts to descendants because they aren't comfortable giving up control over how the descendants ultimately benefit. The SLAT can help alleviate some of those concerns," says Klein.

Despite the flexibility that SLATs offer, clients should keep in mind that the strategy is most effective when the assets transferred to a SLAT are not needed to fund the couple's standard of living. As a result, couples considering SLATs should work closely with their financial professional to ensure they can comfortably sustain their current and future standard of living without resorting to distributions from the SLATs.

SLATs and divorce

Anyone thinking of a SLAT may want to consider making arrangements to protect themselves in the event of a divorce, cautions Klein. Ordinarily, after a divorce, the beneficiary spouse will continue to benefit from the trust. However, this can be mitigated by including a clause that terminates the beneficiary spouse's interest in the trust in the event of a divorce.

In addition, if the beneficiary spouse dies first, the trust may either continue for the benefit of other family members or be terminated—with assets transferred to the remaining beneficiaries outright or via another trust. Generally, the donor spouse no longer has even indirect access to the trust assets.

Tax considerations to be aware of

Each spouse may create a SLAT for the benefit of the other to take advantage of both gift and estate tax exclusions. However, clients and their attorneys must be careful to avoid what's called the "reciprocal trust doctrine," which allows the IRS to interpret the 2 trusts as overly similar or interrelated—in essence, set up to equally benefit both of you. "Let's say I create a SLAT for my spouse, and my spouse does the same structure back for me," says Klein. "We might want things to be equal, but there is a risk that the structure is unwound and treated as if we each set it up for our own benefit. If that occurs, then the SLAT assets could be pulled back into each donor's estate for estate tax purposes."

Your attorney might suggest structuring each trust differently, funding the trusts at different times, designating different classes of beneficiaries, or varying the distribution terms and withdrawal rights. Given the complexity of this process, it's imperative to work with an experienced attorney or financial professional.

Plan early

With changes to the tax laws only a few years away, estate planning may feel particularly time-sensitive now. "If you're not ready to fund a SLAT or other gifting structure, one option is to draft the legal documents with the attorney, but delay on funding," suggests Klein. That way the trust is ready to receive assets should you choose to go ahead. "If the laws stay as they are, I expect it will be difficult to go into the attorney's office in late 2025, trying to get help creating a SLAT, right before the estate tax exclusion sunsets," Klein explains.

Get professional help

Ultimately, there isn't a single estate plan that works for all families. "A SLAT can be an effective tool for multi-generational tax planning. However, some clients can be troubled by the potential inequality inherent in one spouse creating a SLAT for the other," says Klein. It's important to consider all the potential benefits—and drawbacks—of any given arrangement. Consult your estate planning attorney to determine if a SLAT is right for you and your family.

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Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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