How Does a Spousal Lifetime Access Trust (SLAT) Work?

Estate planning involves strategically managing assets for efficient transfer to beneficiaries and minimizing tax liabilities. For individuals with substantial wealth, a Spousal Lifetime Access Trust (SLAT) is a specialized and effective tool. This trust allows for wealth transfer while providing financial flexibility for the grantor’s spouse, playing a significant role in comprehensive estate planning by addressing wealth preservation and the spouse’s financial well-being.

Understanding a Spousal Lifetime Access Trust

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust established by one spouse (the grantor) for the benefit of the other spouse (the beneficiary spouse). Its primary purpose is to remove assets from the grantor’s taxable estate, thereby reducing potential estate tax exposure upon their death. This is achieved by making a completed gift of assets to the trust, which then utilizes a portion of the grantor’s lifetime gift tax exemption.

The SLAT’s design allows the beneficiary spouse to receive distributions from the trust during their lifetime. This arrangement provides a degree of indirect access to the gifted assets for the grantor, as the funds can support the beneficiary spouse’s needs. Despite this access, the assets are legally owned by the trust and are excluded from the estates of both spouses for federal estate tax purposes. Parties involved include the grantor, who funds the trust; the beneficiary spouse, who receives distributions; the trustee, who manages assets and makes distributions; and remainder beneficiaries, who receive remaining assets after the beneficiary spouse’s death. Once assets are transferred, the grantor cannot reclaim them or unilaterally change the trust’s terms.

Establishing a Spousal Lifetime Access Trust

Establishing a SLAT begins with drafting a trust document, a legally binding agreement. This process requires legal counsel specializing in estate planning to ensure the trust adheres to all applicable laws and meets the grantor’s objectives. The document must precisely define the terms for asset management, distribution standards for the beneficiary spouse, and the ultimate disposition of assets to the remainder beneficiaries.

Once the trust document is executed, the grantor funds the SLAT by transferring assets into it. This transfer constitutes a completed gift, utilizing a portion of the grantor’s available lifetime gift tax exemption. For 2025, the federal lifetime gift and estate tax exemption is $13.99 million per individual, meaning a married couple can collectively shield up to $27.98 million from federal transfer taxes if both spouses utilize their exemptions. Any amount gifted beyond the annual gift tax exclusion, which is $19,000 per recipient for 2025, reduces this lifetime exemption.

The trustee cannot be the grantor or the beneficiary spouse if certain tax benefits, such as excluding the trust assets from the grantor’s estate, are to be realized. An independent individual, a trusted family member (other than the grantor or beneficiary spouse), or a professional corporate trustee can serve in this role. The trustee assumes responsibilities upon establishment, including taking legal title to the gifted assets and preparing for their ongoing management.

Operating a Spousal Lifetime Access Trust

Once established and funded, a SLAT’s operation centers on the trustee’s ongoing management of the trust assets. The trustee is legally bound to administer the trust according to the trust document and fiduciary laws. This includes prudent investment of assets to grow the trust corpus while also ensuring liquidity for potential distributions.

Distributions to the beneficiary spouse are made based on the criteria specified in the trust document. These distributions can be discretionary, where the trustee has latitude to decide when and how much to distribute, or mandatory, requiring distributions based on defined standards. A common standard is the “HEMS” standard, which limits distributions to those for the beneficiary spouse’s health, education, maintenance, and support. This specific wording helps ensure the trust assets are not considered part of the beneficiary spouse’s taxable estate.

The grantor indirectly benefits from trust assets. Although the grantor has irrevocably relinquished direct control over the assets, they can still benefit from the trust through their spouse’s access to distributions. For instance, if the beneficiary spouse uses trust funds for living expenses, this indirectly frees up the grantor’s other personal assets. This indirect access, however, is limited by the trust’s terms and the trustee’s fiduciary duties.

From an income tax perspective, a SLAT is often structured as a “grantor trust.” This means that for income tax purposes, the grantor is treated as the owner of the trust assets, and therefore, the grantor pays the income taxes generated by the trust. This arrangement allows the trust assets to grow largely income-tax-free from the trust’s perspective, as the tax burden falls on the grantor’s personal income tax return. The payment of the trust’s income taxes by the grantor is not considered an additional gift to the trust, further enhancing the trust’s ability to grow wealth for the beneficiaries.

Important Spousal Lifetime Access Trust Considerations

Several factors influence a SLAT’s functionality and effectiveness, requiring careful consideration during its creation and existence. Divorce provisions within the trust document are important. If the grantor and beneficiary spouse divorce, the trust document should specify what happens to the ex-spouse’s beneficial interest. Without explicit language, the ex-spouse might retain rights to distributions, potentially undermining the grantor’s original intent. Therefore, including provisions to remove the ex-spouse as a beneficiary upon divorce is a common and prudent measure.

The “Reciprocal Trust Doctrine” is another important consideration, especially when both spouses contemplate creating SLATs for each other. This doctrine, also known as the “Cross-Trust Doctrine,” allows the Internal Revenue Service (IRS) to “uncross” trusts if they are substantially identical and created as part of a prearranged plan, treating each grantor as if they retained control over the assets they transferred. To avoid this, the trusts must be structured with meaningful differences in terms, beneficiaries, or distribution provisions to demonstrate they are not part of a reciprocal arrangement. For instance, one trust might include additional beneficiaries, or distribution standards might vary between the two trusts.

While the grantor cannot directly access SLAT assets, the indirect benefit through the spouse’s access is a central feature. This indirect access is contingent on the marriage remaining intact and the beneficiary spouse choosing to use the funds in a way that benefits the couple. The grantor must understand that they have given up direct control and reliance on the spouse’s discretion regarding distributions.

Generation-Skipping Transfer (GST) tax implications are also relevant for SLATs designed to benefit future generations. The GST tax is a separate federal tax imposed on transfers to “skip persons,” such as grandchildren, that bypass an intervening generation. A grantor can allocate their GST tax exemption, which aligns with the federal gift and estate tax exemption, to the SLAT. This allocation can protect assets from GST tax, allowing them to pass to grandchildren and beyond free of this additional transfer tax.

The concept of portability also interacts with SLATs. Portability allows a deceased spouse’s unused federal estate tax exclusion amount to be transferred to the surviving spouse, potentially increasing the surviving spouse’s exclusion. While portability offers some flexibility, a SLAT still provides distinct advantages. Assets held in a SLAT are protected from the beneficiary spouse’s future creditors and are excluded from their estate even if they remarry. This offers asset protection and ensures wealth transfer according to the grantor’s wishes, independent of future marital or financial circumstances of the surviving spouse.