Preserve Wealth With a Spousal Lifetime Access Trust
A spousal lifetime access trust (SLAT) can reduce estate taxes while allowing your spouse to access trust assets as needed.
For families with significant assets, estate taxes can take a sizable portion of the legacy they leave to their heirs. One way to preserve more of those assets while still retaining potential access to them is by creating a spousal lifetime access trust (SLAT). Tom Meyers of Fifth Third Private Bank discusses potential ways to reduce estate taxes and preserve wealth through SLATs.
What is a spousal lifetime access trust?
As the name suggests, a SLAT is a tool for moving assets out of one spouse’s taxable estate while allowing the other spouse lifetime access to those assets for specified purposes. A SLAT can be funded with equities, bonds, real estate or other assets, provided they are solely owned by the grantor spouse.
"When you put assets in a SLAT, and the assets continue to grow in value, all of that growth is excluded from your estate for estate tax purposes," says Tom Meyers, vice president and senior wealth strategist at Fifth Third Private Bank. "Although a SLAT is an irrevocable trust, one key benefit is the beneficiary spouse can request funds from the trust if an unforeseen need arises, such as for health or maintenance."
SLATs allow assets to continue to appreciate free of estate tax
Meyers offers this scenario: An individual owns $4 million in equities that are expected to grow in value over time but are not needed for income. They put the equities in a SLAT using a $4 million portion of their lifetime gift tax exclusion, which rises to a total $20 million in 2026. All appreciation of the assets in the SLAT is free from estate tax to your heirs.
While this strategy can be highly effective for estate planning, it is also important to consider the embedded capital gains taxes on the assets in the trust. Meyers says those assets will not receive a step-up in cost basis once added to the SLAT.
Before considering a SLAT, Meyers says it’s important to work through a cash flow analysis with your wealth advisor to ensure the assets outside the SLAT are sufficient to maintain your lifestyle and meet future expense goals.
His-and-her SLATs
Some couples create his-and-hers SLATs, each naming their spouse as beneficiary. "In that way, a benefit—direct or indirect—will always accrue to the couple, whether it’s the grantor or the spouse," Meyers says. "These dual structures can create a wider safety net than a single, one-way SLAT."
With that said, the two spouses’ trusts must avoid being too similar because of the so-called "reciprocal trust doctrine," under which the IRS objects because neither of the spouses has really given up anything. The IRS could seek to unwind such trusts if they are too similar. It is crucial to consult with your drafting attorney to avoid reciprocal trusts.
Because the trust can’t be changed once established, it can prove problematic in cases involving a divorce or death of the spouse after the trust has been created. "If the marriage ends, through divorce or the death of your spouse, the indirect benefits disappear, since the grantor is not permitted to access the trust themselves," Meyers says. "And when the beneficiary passes away, the benefits will go to the next generation."
Although the trust is irrevocable, a key point is that the spouse can access distributions for specific defined expenses: health, education, maintenance and support, which is known as the HEMS standard. Maintenance and support is often referred to as the customary standard of living before the trust was created, which can include food, housing and vacations but not buying a vacation house.
Why an independent trustee strengthens a SLAT
While choosing an experienced trust attorney to draft the SLAT is essential, selecting a trustee to administer it is equally critical. Many people in this scenario opt for a professional fiduciary.
An independent trustee should have extensive experience administering trusts, a thorough understanding of applicable laws and relevant tax and accounting issues. Decisions about discretionary distributions draw on the knowledge of a coordinated team of professionals, providing a safety net beyond the capabilities of an individual trustee.
Notwithstanding their versatility, SLATs are not suitable for everyone, Meyers cautions. “Whether they’re right for you depends on a careful analysis of multiple factors, including your age, the value of your estate, your current finances and long-range goals and even the stability of your marriage.” Of course, unless the value of your estate exceeds the $15 million lifetime gift tax exclusion—$30 million for a married couple—your estate will not be subject to tax, precluding the need for a SLAT.
For more information, contact your Fifth Third Private Bank advisor