High Net Worth Couples Rush to Use SLATs Before Exemption Halves

Wealthy couples often face an estate tax: Here’s their favorite legal maneuver to get around it. High net worth couples have a variety of tools and strategies at their disposal to lower their tax obligations and pass on their wealth. One particularly favorable arrangement that has gained popularity in recent years is the spousal lifetime access trust, or SLAT. SLATs are irrevocable trusts that allow spouses to maintain access to their assets while keeping them out of their taxable estate. This strategy enables couples to take advantage of high estate and gift tax exemptions, potentially leading to significant tax savings over a lifetime.

Here’s how a SLAT works: One spouse, known as the grantor, transfers their individually-owned assets into the SLAT for the benefit of their spouse, the beneficiary. Once the assets are removed from the grantor’s estate, the future appreciation of those assets is also excluded from taxation. This means that any gains on the assets will not be subject to estate taxes upon the grantor’s death. For example, if a grantor moves $5 million into the SLAT and it grows to $15 million, the $10 million appreciation is not subject to estate taxes. Additionally, establishing a SLAT can safeguard assets from creditors or claims against either spouse.

However, it is important to note that SLATs are primarily an estate tax strategy and not necessarily an income tax strategy. SLATs are typically structured as grantor trusts, meaning the grantor continues to pay income taxes on the trust earnings. This arrangement is particularly beneficial for couples because many irrevocable trusts do not allow beneficiaries to take distributions until after the death of the grantor. With a SLAT, beneficiaries can withdraw income or principal to maintain the couple’s standard of living.

Despite the benefits, there are also drawbacks to consider. The main drawback is that any gift made to the SLAT is irrevocable—the grantor gives up all rights to the funds. This can become problematic in the event of a divorce or if one of the spouses passes away. Additionally, jointly-owned assets cannot be transferred into the SLAT. Grantors should be sure they can continue to live their lifestyle if they lose access to those funds in the future. If the beneficiary spouse dies before the grantor, the remaining assets will pass to that spouse’s beneficiaries, typically children, without estate taxes.

SLATs have become increasingly popular due to the impending sunset of the 2017 Tax Cuts and Jobs Act, which doubled the estate tax exemption. This exemption allows individuals and couples to give their beneficiaries a certain amount during their lifetime and as part of their estate without paying federal gift or estate taxes. The current exemption stands at $13.99 million for individuals—and double for married couples—but could be halved come January, depending on what Congress is able to pass as part of its ongoing tax bill negotiations. This has created a sense of urgency for some high-net-worth families to take advantage of the current exemption before it potentially decreases.

By making a gift now, couples can use the full $13.99 million exemption, versus waiting until 2026 and only having the ability to gift around $7 million without gift tax consequences. However, couples should be cautious. The expanded exemption could easily be extended, and then they may have unnecessarily limited their access to funds. Financial planners advise that couples should carefully consider their options and consult with a professional before making any decisions regarding SLATs or other estate planning strategies.