How can a spousal lifetime access trust (SLAT) benefit you?

There are several ways to reduce estate taxes that can eat away at the wealth you want to transfer to your loved ones. One strategy that many high-net-worth couples find beneficial for its tax advantages and degree of flexibility is a spousal lifetime access trust (SLAT).

A SLAT is an estate planning tool and legal arrangement that allows a spouse (the grantor spouse) to transfer property to an irrevocable trust for the benefit of the other spouse (the beneficiary spouse). The property transferred to a properly drafted SLAT is then not included in the grantor's estate or their spouse's estate when they pass away, so neither spouse pays estate taxes on the transferred assets when they die.

SLATs are complex trusts that generally can't be modified after they're created, so it's critical to structure them carefully and follow the trust's rules so you get the most benefit from them.

• Irrevocability. It's important to understand that SLATs are irrevocable. This means that once you transfer assets into the trust, you cannot modify or revoke the transfer, and the assets cannot be returned to you. This permanence is a key feature of SLATs, as it allows the assets to be excluded from your taxable estate.
• Trustee management. A trustee is responsible for managing the assets held in a SLAT. The trustee can be your spouse, another individual or multiple co-trustees. Their role is to ensure that the assets are used according to the terms of the trust and in the best interests of your spouse.
• Beneficiary distribution. Your spouse, as the beneficiary, will receive income from the SLAT during their lifetime. This can provide ongoing financial support for the beneficiary spouse. While the grantor spouse does give up control of the assets they contribute to the SLAT, since the beneficiary spouse can receive distributions from the trust for certain purposes, the grantor spouse can indirectly benefit from the transferred assets during the marriage. After the beneficiary spouse passes away, the remaining assets in the SLAT will be distributed to your designated beneficiaries, such as your children, grandchildren or charities, without being subject to estate taxes.

You can fund a SLAT with many kinds of assets, including cash, securities, life insurance, business interests and real estate. Since transferred assets cannot be jointly owned by both spouses, residents in community property states must take the extra legal step of converting community property into separate property.

Notably, assets transferred to a SLAT do not receive a step-up in cost basis when the grantor spouse dies. A step-up is an adjustment to an inherited asset's cost basis, making the new cost basis the asset's fair market value on the date of death. With no reset, beneficiaries may face a greater capital gains tax liability when they sell assets that have appreciated.

Beneficiary spouses can withdraw funds, but these are generally limited to certain categories of need: for their health, education, maintenance and support.

Typically, the grantor spouse, while they are living, pays taxes on income the trust earns through means like interest, dividends and capital gains. The tax payments aren't considered as additional gifts to the trust and offer the added benefit of reducing the size of a grantor's taxable estate and allowing more assets to remain in the SLAT for additional growth.

The SLAT typically begins to pay taxes on its income at the trust tax rate after the grantor spouse dies.

Developing a comprehensive financial plan that includes a SLAT often involves working with a team of experts, such as a financial advisor, estate planning attorney and tax professional.

• A financial advisor can help you devise a customized strategy, working through things like whether you want to use its distributions initially for your spouse's benefit or if you intend to only pass them down to your descendants.
• An attorney can help you set up this legal entity and craft its terms and provisions.
• A tax professional can assist with reporting your large transfer of assets on a federal gift tax return.

You will need to designate a trustee to safeguard the assets in the trust, file tax returns and handle other trust-related issues. While your spousal beneficiary can serve as a trustee, some couples choose to designate an independent trustee.

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When used strategically, a well-managed SLAT offers advantages for you and your spouse now while also helping to secure your financial legacy. Here are some reasons to consider these trusts:

• Minimize estate taxes with SLAT tax planning. The assets you transfer into a SLAT aren't included in your estate or your spouse's estate, and neither is their future growth.
• Grantor trust status. Since the grantor typically pays tax on the trust's income, the SLAT's property can appreciate more quickly, creating more value that can be passed on to beneficiaries.
• Asset protection. SLATs can provide a level of asset protection by shielding assets from potential creditors or lawsuits.
• Ensure spousal financial security. If necessary, the beneficiary spouse can access lifetime distributions from the SLAT for certain needs.

SLATs have a "too good to be true" quality about them, and there are some situations and features that can make couples think twice about them. These include:

• If the grantor gives up direct control and access: Swapping ownership rights of assets for a substantial estate tax advantage can be a difficult tradeoff.
• If the couple divorces: The grantor could lose indirect access to assets while an ex-spouse continues to benefit. Those nervous about the issue could include a special provision, like one specifying that only a current spouse can be a beneficiary.
• If the beneficiary spouse dies: The trust would terminate or, according to its structure, continue for other beneficiaries. Either way, the grantor typically loses indirect access to assets. Trusts could potentially have instructions that would allow grantors to receive the assets back, which would come with tax consequences.
• There's an income tax obligation: Grantors who are concerned about future cash flow issues may be able to include a provision that enables the trust to infrequently reimburse them for tax payments.
• There's no step-up in cost basis: Beneficiaries could face higher capital gains taxes when they sell appreciated assets than they would if they inherited the assets directly. As a workaround, SLATs can include a provision allowing a grantor to replace a low-basis property with a high-basis one or cash before their death.

There are a number of factors to consider when deciding whether a SLAT is a good fit for your legacy planning needs. These include:

• Your estate's size. If the total value of your cash, investments, real estate and other assets is not large enough to trigger an estate tax, a SLAT may be unnecessary.
• Your lifestyle. Even if you do have a large estate, evaluate whether you can still maintain your standard of living if you fence off a huge chunk of assets, especially if your current financial situation changes.
• Your age. If you're relatively young, the number of financial unknowns that lie ahead may make it riskier to lock up so much money in an irrevocable trust just to lock in a favorable exemption. Also, it's possible the exclusion amount will change again in your lifetime in a way that makes a SLAT even more worthwhile.
• Your financial goals. SLATs should accomplish the objectives you have for your assets in the near-term and after you've passed away.

You shouldn't count on your spouse taking frequent distributions. Withdrawals shrink the size of the trust and reduce its ability to grow. This can have ramifications for other trust beneficiaries or those who become beneficiaries after the non-donor spouse passes away.

Funding a SLAT solely with cash isn't a good idea either. It's more advantageous to include assets that could increase mightily in value without being subject to estate tax.

In addition, creating dual SLATs for each spouse that are identical or too similar can cause big problems. The trusts must be substantially different to avoid violating what's known as the reciprocal trust doctrine, which could eliminate the benefits of setting up a SLAT in the first place.

A SLAT isn't necessarily the best move for everyone. Weighing the pros and cons will help you determine if it's a good fit. You have plenty of other options if you find that a SLAT isn't the right option.

For example, if your goal is to support charities while gaining tax benefits, consider a charitable trust as part of your overall financial strategy.

Financial strategies that operate completely differently are also worth considering. For example, if you meet the annual income limits, contributing to a spousal Roth IRA can help you create financial security for your spouse and leverage tax efficiency in retirement.

You also could take advantage of your annual gift tax exclusion, which allows you to give up to a certain amount per year ($19,000 individually for 2025; $38,000 for married couples) to any number of recipients without filing a gift tax return or reducing your lifetime exclusion.

Spousal lifetime access trusts are worth considering if you're seeking a way to reduce the size of your taxable estate, support your loved ones with assets that could appreciate, and potentially receive indirect access to property in the trust.

Connect with a local Thrivent financial advisor who can work with you and your attorney to determine if setting up a SLAT could help you meet your financial goals.