Should You Consider a Spousal Lifetime Access Trust (SLAT)?

For most Americans, estate taxes are a non-issue. Under current tax law, the first $13.61 million of an individual’s estate is excluded from the tax in 2024. A married couple, therefore, could leave an estate worth up to $27.22 million in 2024 without being subject to estate tax.

But estate taxes are a perennial political football, and the goalposts can move. The current estate tax regime, enacted in 2017 as part of the Tax Cuts and Jobs Act (TCJA), is temporary and set to expire on Dec. 31, 2025. Starting in 2026, unless new legislation is passed, the lifetime estate tax exemption with expected adjustments for inflation will drop to about $7 million per person. As a result, some people who may not have an estate tax problem today may become subject to taxation at a 40 percent rate unless the law is changed.

Whether you already have an estate tax issue or are simply concerned about the rules changing in the future, one option for married couples concerned about the possibility of estate taxes is to transfer assets to an irrevocable trust.

“Many irrevocable trusts aren’t designed to make distributions to beneficiaries until after the death of the spouse who transferred assets into the trust or sometimes even until after the death of both spouses,” says Marie-Claire Hart, a sophisticated planning strategies attorney at Northwestern Mutual. “This lets the value of the assets of the trust grow over time but keeps the growth of the assets from being subject to estate tax.

“But some couples are reluctant to give up complete control of assets until one or both spouses pass away, just in case circumstances change in the future,” Hart says. “For example, they might be concerned that their financial situation could change, and they may want to access the assets that they already gave away to the irrevocable trust. A SLAT still gives them some access to the assets. Or, as we’ve seen in the past, future law changes might change the estate tax exemption amount (or even eliminate it altogether), making it unnecessary to keep assets in the trust for tax-planning purposes.”

An answer for those who want to remove assets from their taxable estates but want to maintain some ability to enjoy the assets before death is to use an estate planning tool known as a spousal lifetime access trust, or SLAT.

What is a spousal lifetime access trust (SLAT)?

A SLAT is an irrevocable trust, which means it generally can’t be changed once created. It enables one spouse to make a gift that can benefit the other spouse even while the spouse who made the gift is still alive. In 2024, the lifetime gift tax exemption—or how much an individual can give in gifts over his or her life without paying a gift tax—is $13.61 million. Gifting assets to a SLAT removes those assets from a couple’s combined estate.

How a spousal lifetime access trust works

Without getting too deep in the legal weeds, here’s how a SLAT works: One spouse, known as the grantor or donor, creates the trust. He or she then gifts property to the trust for the benefit of the other spouse, known as the non-grantor or non-donor spouse. The donor usually also includes other family members, typically children and grandchildren, as beneficiaries of the SLAT. The non-donor spouse might be the sole beneficiary of the trust while alive, with the children or grandchildren becoming beneficiaries only after his or her death, or the non-donor spouse and everyone else may be beneficiaries at the same time.

A SLAT can be funded with a variety of assets. Cash, securities and life insurance are examples. But it is important that only assets owned by the donor spouse individually—not those owned jointly by the couple—be gifted. Using property owned by both spouses would negate the benefits of the SLAT.

What are the advantages of a SLAT?

One key advantage of a SLAT, in addition to reducing an estate’s assets, is that it permits the non-donor spouse to request distributions of income or principal, if needed, to maintain the couple’s normal standard of living.

Residents of states that impose their own estate tax also may benefit from having a SLAT, even if they do not expect to be subject to federal estate tax, because the trust will remove assets that could be subject to a state tax.

Finally, if a SLAT is a so-called “grantor trust,” which is typically the way a SLAT is structured, another benefit is that the trust will not owe any income tax. Instead, while the donor spouse is living, he or she is responsible for any tax on the income the trust earns. That allows assets inside the trust to grow without being reduced by income tax.

What are the disadvantages of a SLAT?

One disadvantage of a SLAT is that if the non-donor spouse dies before the donor, the donor spouse loses indirect access to trust assets. Nonetheless, the trust assets can continue to benefit the donor's children and other family members either by remaining in trust for their benefit or being distributed to them outright.

Another potential negative involves divorce. Aware of that possibility, estate attorneys drawing up a SLAT typically mitigate the risk by including language that terminates the non-donor spouse's beneficial interest in the trust in the event of divorce. However, this also causes the donor spouse to lose indirect access to trusts assets.

Also, while the non-donor spouse can serve as the SLAT’s trustee and authorize distributions to him- or herself, those distributions must be limited. Distributions beyond what are considered reasonable to cover costs related to health, education, maintenance or support would generally cause trust assets to be included in the taxable estate of the non-donor spouse. If the non-donor spouse does not serve as trustee, distributions to the non-donor spouse can normally be more generous without causing estate inclusion.

What’s more, to prepare for unforeseen changes in estate tax law or the couple’s circumstances, the trust might even be drafted to permit the SLAT provisions to be removed in the future if need be. One way to do this is to perhaps include a “trust protector” (an independent third party) in the trust, who could be empowered to make such changes.

Is a SLAT a good idea?

A SLAT may be a useful tool for a couple who wants to avoid estate taxes by giving assets to an irrevocable trust but are not ready to completely remove the ability of both spouses to enjoy those assets. If you have questions about SLATs, your Northwestern Mutual financial advisor is a great place to start. With access to the resources like our proprietary financial modeling technology and team of in-house estate planning attorneys and tax experts, our financial advisors can help you get started on your plan today.

Tax rates as of 2024, subject to change.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.