Today’s federal estate and gift tax laws may be remembered as the most generous to wealthy families since the Great Depression. The 2017 Tax Cuts and Jobs Act (TCJA) doubled the federal estate, gift, and generation skipping transfer (GST) tax exemptions. With inflation adjustments, these exemptions increased to $13.61 million per person, or $27.22 million per married couple, in 2024. However, unless Congress and the President act, these exemptions will automatically will be cut in half on January 1, 2026, when the increase in exemption provided in the TCJA sunsets.
Married couples with a net worth (including life insurance benefits and retirement accounts) greater than $14 million may want to revisit their estate plans and consider transferring assets to heirs before any potential changes in estate and gift tax laws take effect. Prudent estate planning for wealthy families takes time and requires consideration of much more than estate and gift tax consequences, so be sure to engage with your estate planning and business advisers sooner rather than later.
The SLAT as a Vehicle for Making Large Gifts in Trust
A gift of any size to a properly structured and administered irrevocable trust can generate estate and gift tax benefits for wealthy families, but to take advantage of the temporary increase in the federal estate tax exemption, it’s necessary to make a gift with a value greater than half the current exemption amount. (See our previous client alert for more detail on the “estate freezing” benefits of gifts to irrevocable trusts, and the math behind the need to make larger gifts to take advantage of the increased exemption.) Even for high net worth families, though, making a gift of more than $7 million can be financially intimidating. You don’t want to give the bulk of your assets to your children in pursuit of tax savings, only to find yourself unable to maintain the lifestyle to which you are accustomed.
For married couples, the risk of “gifting yourself into the poor house” can be mitigated through the use of a “spousal lifetime access trust,” or “SLAT.” A SLAT is an irrevocable trust created when one spouse (the “donor spouse”) makes a gift to a trust for the benefit of the other spouse (the “beneficiary spouse”). While the beneficiary spouse is alive, trust assets can be distributed to the beneficiary spouse or (possibly) to the couple’s children. Upon the beneficiary’s spouse’s death, the assets remaining in the trust are typically divided among the couple’s children.
SLATs have become particularly popular estate planning tools over the past decade because they allow married couples to achieve the gift and estate tax benefits of a large taxable gift, while retaining indirect access to donated property through discretionary distributions to the beneficiary spouse. Despite their popularity, gifts to SLATs entail several important complexities and risks that need to be addressed at the planning stage.
Key Questions for Couples Considering a SLAT
If you think a SLAT might be a prudent strategy for your family, you will want to talk with your estate planning attorneys, financial advisors, and accountants about the amount you should contribute to a SLAT, and which assets in your portfolio might be the best vehicles for funding your SLAT. (In general, we favor contributing assets with the highest growth potential to SLATs.) In addition to these fundamental questions that should be considered before making a substantial taxable gift in any form, you will need to work through several more complex details that are unique to the SLAT structure, including the issues described below:
- Divorce. Any couple considering a gift to a SLAT should carefully consider what happens to the SLAT in case of a divorce. Will the beneficiary spouse remain a beneficiary of the SLAT, or will the SLAT be divided into separate trusts for children upon divorce?
- Death. If the beneficiary spouse predeceases the donor spouse, the donor spouse will no longer have indirect access to funds in the SLAT. Before making a gift to a SLAT, the donor spouse should be comfortable that their assets outside the SLAT will be sufficient to sustain their lifestyle in the event of the beneficiary spouse’s death.
- Reciprocal Trusts. The risks of death and divorce can be mitigated if both spouses make gifts to SLATs for one another. However, when both spouses create substantively identical SLATs for one another, the IRS may argue that the assets in both SLATs should be included in the donor spouses’ estates for tax purposes under the “reciprocal trust doctrine.” While it is possible to structure SLATs that are sufficiently different from one another to avoid the reciprocal trust doctrine, it’s important to work with an experienced estate planning attorney to navigate the nuances of this strategy.
- Income Taxes. While both spouses are living and married, a SLAT will be treated as a “grantor trust” for income tax purposes, and the donor spouse will be required to pay income tax on the trust’s earnings. Before making a gift to a SLAT, couples and their advisers need to review post-gift cash flow projections, taking into account the donor spouse’s obligation to pay tax on the SLAT’s income. Income tax consequences should also be considered in the discussion of how the SLAT will change (or not) upon divorce.
Opportunities and Challenges
The structure of the federal estate and gift tax system has always provided opportunities for tax savings for wealthy families who plan well and plan early. The increased exemptions provided by the TCJA enhance those opportunities – at least until the end of next year – and the SLAT structure described in this article can reduce the financial risk of pursuing those opportunities. Because of the looming changes in estate tax laws, attorneys, accountants, and others involved in the estate planning process are likely to be very busy assisting clients who are eager to capture the value of the TCJA exemptions before their sunset in 2026. If you would like to review your estate plan and discuss whether you should consider making gifts prior to January 1, 2026, we encourage you to contact your estate planning attorney as soon as possible.
