The clock is ticking on the reversion of the federal gift and estate tax exemption (currently $13.61 million per individual) as the higher limits set by the Tax Cuts and Jobs Act of 2017 are set to expire at the end of 2025 unless Congress acts. Clients may need to explore how to lock in the higher limits. One possible solution is the spousal lifetime access trust, or SLAT.
Addressing estate and gift taxes, Anne Rhodes, Chief Legal Officer at Wealth.com, defined SLATs: “These irrevocable trusts involve one spouse making a gift into a trust for the benefit of the other spouse. With this arrangement, one spouse can exclude assets from that spouse’s taxable estate, maximizing the utilization of that one spouse’s increased exemption.”
Even if Congress extends the higher exemptions, high and ultra-high net worth married clients may reap other benefit from establishing a SLAT, or two SLATs, one to benefit each spouse. SLATs are complex structures that advisors should consider for clients only after consulting with estate planning experts.
To gain more insight into the uses of a SLAT for estate planning, we spoke with Jack Elder, SVP of Advanced Markets at CBS Brokerage. Elder addresses the use of SLATs for asset protection, tax planning and multi-generational wealth transfer, addresses how life insurance may fit into possible plans and speaks to potential concerns over irrevocability.
WSR: How does a SLAT offer asset protection for both the donor and beneficiary spouse?
Elder: A SLAT protects the donor and beneficiary spouse by placing assets outside their taxable estates and shielding them from creditors. Once the trust is established, assets transferred into the SLAT, such as life insurance policies, are legally separate from the donor’s personal property. This separation makes it difficult for creditors to claim these assets in case of a lawsuit or financial distress.
For the beneficiary spouse, the trustee controls the distributions, which offers protection from their creditors. The assets are not considered part of the beneficiary spouse’s estate, limiting creditor access. Additionally, the trust’s irrevocable nature ensures that assets are insulated from both parties’ financial liabilities. This combination of legal and tax protections makes the SLAT a highly effective vehicle for safeguarding wealth.
The combination of legal and tax protections makes the SLAT a highly effective vehicle for safeguarding wealth.
WSR: How can advisors design SLATs as multi-generational wealth transfer vehicles?
Elder: Advisors can design SLATs as multi-generational wealth transfer vehicles by incorporating provisions that benefit not only the beneficiary spouse but also future generations. A SLAT may be drafted to be a dynasty trust, which ensures assets remain within the family across generations, bypassing estate taxes at each generational transfer. Life insurance policies inside the SLAT further enhance this design by providing tax-free death benefits to future generations.
Structuring the SLAT with flexibility in distribution terms, such as health, education, maintenance and support (HEMS), provides control over when and how beneficiaries can access the assets. This approach can ensure that SLATs remain a powerful tool for preserving wealth over generations.
WSR: What strategies can be used to address client concerns about the irrevocability of SLATs and how do they balance flexibility?
Elder: To address concerns about the irrevocability of SLATs, spousal access provisions provide flexibility. While a SLAT is irrevocable – meaning the donor spouse cannot reclaim the assets once transferred – the beneficiary spouse may access funds during the donor’s lifetime. This access offers a balance between the permanence of the trust and the practical need for liquidity.
Spousal access provisions can be structured flexibly to accommodate changing circumstances.
Distributions are typically governed by a trustee, allowing the beneficiary spouse to receive financial support if needed, which helps ease concerns about locking away assets. Spousal access provisions can be structured flexibly to accommodate changing circumstances, such as unexpected financial needs or shifts in family dynamics. Although the assets are no longer part of either spouse’s estate, spousal access ensures that both the donor and beneficiary can maintain financial security, even within the framework of an irrevocable trust.
WSR: How does overfunded life insurance enhance the flexibility and tax benefits of a SLAT?
Elder: Overfunded life insurance in a SLAT provides flexibility and tax benefits by keeping both the cash value and death benefit outside both spouse’s taxable estates. This allows the trust beneficiaries to receive the death benefit income and estate tax-free, significantly reducing the overall tax burden on transferred wealth. As the policy accumulates tax-deferred cash value, the beneficiary spouse can access these funds through tax-free withdrawals or loans, providing added financial flexibility during the donor’s lifetime.
Additionally, the death benefit passes to heirs without triggering estate taxes, preserving more wealth for future generations. This combination of income tax-deferred growth, estate tax-free transfers and the ability to access funds while living makes overfunded life insurance within a SLAT a highly efficient tool for wealth transfer and tax minimization. The strategy helps families protect and grow their legacy while maximizing the financial benefit to heirs.
Michael Madden, Contributing Editor and Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com.
