Alicia Adamczyk
4 min read
High-net-worth couples have no shortage of tools and strategies at their disposal to lower their tax obligations and pass on their wealth. But financial planners say one especially favorable arrangement has become a go-to in recent years—one that helps them pass on generational wealth while still benefiting from it during their lifetimes. It’s called a spousal lifetime access trust, or SLAT.
SLATs are irrevocable trusts that let the spouses maintain access to their assets while keeping them out of their taxable estate. A growing number of wealthy customers are using them to take advantage of high estate and gift tax exemptions, a strategy that can lead to significant tax savings over a lifetime.
Here’s how it works: One spouse, called the grantor, transfers her individually owned assets from her estate into the SLAT for the benefit of her spouse, called the beneficiary. Once removed from the grantor’s estate, the future appreciation of the assets is also removed, meaning those gains won’t be taxed.
But the couple aren’t cut off from the money: The beneficiary spouse can access the assets in the SLAT for health, education, maintenance, and support for both him and his spouse, says Bob Peterson, senior wealth advisor at Crescent Grove Advisors. “Some would say you are having your cake and eating it too.”
The primary purpose of a SLAT is to move future asset growth out of the estate, says Peterson. He gives the example of moving $5 million into the SLAT. If it eventually grows to $15 million, the $10 million appreciation is not subject to estate taxes upon the grantor’s death. Establishing a SLAT can also be a good way to safeguard assets from creditors or claims against either spouse.
“It should be remembered that SLATs are an estate tax strategy, not necessarily an income tax strategy,” says Peterson. “SLATs are typically structured as grantor trusts, so the grantor continues to pay income taxes on the trust earnings.”
This is an especially beneficial arrangement to some couples because many irrevocable trusts don’t allow beneficiaries to take distributions until after the death of the grantor. With a SLAT, however, beneficiaries are able to withdraw the income or principal to maintain the couple’s standard of living.
While those benefits may seem too good to be true, there are also drawbacks, says Peterson. The main one being that any gift is irrevocable—the grantor gives up all rights to the funds. That “can become problematic in the event of divorce or the spouses passing,” says Peterson. Additionally, jointly owned assets cannot be transferred into the SLAT.
