Spousal Lifetime Access Trusts—a Treasure Chest for Married Couples

architect composition data demonstration
Photo by energepic.com on Pexels.com

There’s an old axiom that says, “All good things must come to an end.” And unless Congress makes some changes, that’s what will happen to the current level of the federal estate tax exemption. As it stands now, every individual can give away $11.7 million of their estate free of inheritance and gift taxes. Married couples have a combined exemption of $23.4 million. The gifting can happen during their lifetime or at their death.

The current exemption amount is at an all-time high, but it’s set to decrease to $5.5 million on December 31, 2025, when the sunset provision of the law kicks in. It may fall even further, to $3.5 million if the current administration gets its way. Additionally, there is talk about increasing the inheritance tax rate above its current level of 40%.

But all is not lost. According to estate planning attorney James Fleming, “The current environment presents a unique ‘use it or lose it’ planning strategy because the IRS has stated that if exemption amounts are reduced in the future, it will not attempt to claw back amounts that were used when the exemption amounts were at their peak. In other words, gifts made under today’s rules will not be subject to estate taxes in the future if the exemptions are reduced.”

A popular estate planning strategy for married couples to take advantage of the ‘use it or lose it’ exemption is the Spousal Lifetime Access Trust (SLAT). Estate attorney Brad Henry describes it this way.

“Generally, when establishing trusts for your children and grandchildren, you must surrender your interest in the assets you give to the trust. However, a SLAT allows you to indirectly access these trust assets. Why? Because, in addition to your descendants being beneficiaries, your spouse is also a beneficiary of the SLAT. Practically, you have access to the assets through your spouse. If your spouse passes away before you, then the assets will typically flow to you through a separate Family Trust.”

In 2021, assuming you have never made a taxable gift during your lifetime, you can transfer up to $11.7 million in assets into your own SLAT, where the assets will grow and appreciate outside the estate tax system. Both spouses can create a SLAT, using their combined exemptions to shelter up to $23.4 million from gift and estate taxes.

There are some things to keep in mind as you decide if a SLAT is right for your situation.

  • Assets in a SLAT will not get a step-up in cost basis upon either spouse’s death.
  • The terms of a SLAT can allow for the power to substitute or swap assets of equal value with the SLAT, providing beneficial income tax treatment when the assets are liquidated or sold by the SLAT beneficiary. Your estate attorney has to include those provisions in the SLAT document.
  • Spouses who want to create SLATs should keep in mind the reciprocal trust doctrine, which prevents couples from creating trusts that mirror one another.

It’s advisable to bring your team together—estate planning attorney, financial advisor, and CPA—to help you avoid the pitfalls that will keep your SLAT from giving you all the benefits you’re hoping for.


This article is presented as information only and should not be considered as legal or tax advice.

Previous articleWeekly Market Pulse (VIDEO)
Next articleAsk Bob: Social Security Survivor Benefit