For those whose estates are on the larger side, the federal estate tax can be a looming threat. That’s because the tax rates start at 18 percent and rise rapidly from there to top out (currently) at 40 percent. That represents a big, fat check for your estate to write to Uncle Sam.

As we look ahead to 2025, there are significant changes coming – it appears – to the rules governing the federal estate tax. (We wrote about this topic last week in this Blog article.)  Perhaps the biggest change of all is the looming cut in the amount of your estate exempt from this particular federal tax. In 2024, the first $13.6 million of your assets have been free from federal estate tax. But one year from now, the 2017 law that established that high exemption amount will sunset.

What might that mean? As we explained last week, unless a closely-divided Congress extends the higher exemption with updated regulations, high-net-worth households will find themselves on the hook for heftier estate taxes as the exemption amount reverts to the previous 2017 level of $5 million, adjusted to $6.6 million to account for inflation. Anything over that will be on the receiving end of a potential 40 percent haircut.

The Spousal Lifetime Access Trust: a Key Planning Tool

One of the tools savvy financial planners and tax attorneys recommend goes by the unglamorous name “SLAT” – the spousal lifetime access trust. To explore what a SLAT does and whether it might be right for you, we took a look at several articles, including this one from US News, first published in 2022 and written by reporter Debbie Carlson. We also updated some of her 2022 statistics to reflect 2024 reality.

Carlson’s gist: a SLAT remains a key estate planning tool to protect assets from the prospect of a change in the federal estate-tax exemption. Still, like any such tool, it comes with pros and cons.

“Spousal lifetime access trusts, also known as SLATs, were a popular vehicle during the past two years,” Carlson wrote in 2022.  Financial advisors were suggesting SLATs as a means for wealthy clients to “get ahead of potentially lower federal exemption levels on estate and gift taxes.”  Now that the date for the change in the exemption level is two years closer, “it may be a mistake for advisors to ignore” the looming deadline.

With a SLAT, Assets are Protected from Federal Estate Tax

“As the name implies,” Carlson explains, “a SLAT is an estate-planning strategy in which one spouse gifts assets in an irrevocable trust that benefits the other spouse, removing the assets from their joint estate.”

Carlson spoke with wealth advisor Dean Borland, who emphasized that, with a SLAT, “the donor spouse can still indirectly retain access to those assets” in the trust through the beneficiary spouse. As explained in this report from Northwestern Mutual, “One key advantage of a SLAT, in addition to reducing an estate’s assets, is that it permits the non-donor spouse to request distributions of income or principal, if needed, to maintain the couple’s normal standard of living.”

This type of trust can also eventually benefit the couple’s children or grandchildren if the beneficiary spouse dies while the donor spouse is still living.

The IRS Will Reject a Poorly-Executed SLAT

As with any estate planning tool, good professional advice is essential, says Carlson. “When creating a SLAT, couples need to not only work with their advisor, but also with an attorney who is familiar with tax law and this type of planning, to make sure the trust follows the rules,” she writes. That’s because a SLAT that is set up poorly can be rejected by the Internal Revenue Service.

“Make sure you’ve got really experienced counsel and you understand the fundamental concept of why you’re doing this, for what purpose and for whose benefit,” financial advisor Andy Hart told Carlson. “You can design these to be a completed gift for future generations. But at the same time, it’s a current potential benefit for your spouse.”

Some Reasons Why a SLAT Could Be Right for You

In our research, we found this helpful article from Commerce Trust Company that includes a succinct set of reasons why a SLAT might be the right tool for you. It was prepared for the site by attorney Richard English. He includes three advantages of a SLAT.

Estate tax planning: “In recent years,” says English, “the SLAT has become a popular option for those who want to use up their lifetime estate and gift tax exemption with a gift that includes the spouse as a beneficiary. With the potential sunset of the increased exemption amount in 2026, SLATs are likely to receive even more attention as a means of achieving these goals.”  Assuming that the grantor’s lifetime exemption exceeds the amount in the SLAT, no estate tax would be owed.

Keeps appreciation outside the taxable estate: “Transferring assets to a SLAT locks in their value for estate tax purposes,” English writes. “Many estate planners believe that it can be more effective to make a gift today, at present value, than it is to make a transfer at death, at a value that may be substantially appreciated.”

Creditor protection for spouse: “Depending on the structure of the SLAT and any applicable state laws, a SLAT may offer a degree of asset protection from the beneficiary spouse’s creditors,” English adds. Assets in an irrevocable trust are generally outside the reach of creditors.

Before Utilizing a SLAT, Be Aware of the Downsides

But there’s another side to the SLAT coin. Writing for Commerce Trust Company, attorney Richard English offers these reasons why a SLAT might not be right for you – or at least, why you need to approach one with good advice and careful research.

A SLAT is irrevocable: “Since a SLAT is an irrevocable trust,” English warns, “the grantor cannot take back the assets he or she contributes to a SLAT.” This can give some spouses reasons to hesitate. “Accordingly,” English adds, “using a SLAT will not appeal to everyone; the grantor will have to be comfortable with forfeiting control over the assets.”

No adjustment to basis at death: This is an important factor when taking future capital gains taxes into consideration. “Under current estate tax law,” English states, “assets that are included in a decedent’s taxable estate will receive an adjustment to cost basis to their fair market value at the time of death.” But, he adds, with a SLAT, “the grantor will lose that benefit, because the assets in the SLAT are not includible in the grantor’s estate at death.”

Divorce: “A divorce can complicate the use of a SLAT, so family dynamics should be considered when evaluating the appropriateness of utilizing one,” English suggests. (We wrote about the rising rate of “gray divorce” last summer here on the Blog.)

Tax liability: As far as the IRS in concerned, says English, a SLAT is considered a grantor trust for income tax purposes. That means “the grantor spouse is responsible for paying any income taxes associated with the trust assets.”  English offers a sardonic explanation of how this drawback might play out. “While this can be very helpful from an overall estate planning perspective,” he writes, “some people will grow weary of paying income taxes for a trust from which they receive no direct benefit.”

Be Very Careful When Considering His-and-Hers SLATs

If a SLAT is such a powerful tool, why not go ahead and set up two at the same time – one for each spouse? The articles we consulted warn that this might sound like common sense, but the IRS will take a dim view if this is done unwisely.

Writing for US News, reporter Debbie Carlson explains it this way. “For married couples with large estates who may not need access to all of their wealth, it may make sense for each spouse to set up a separate SLAT for the other,” she writes. “But advisors and their attorneys must be aware of the reciprocal trust doctrine” that generally prohibits couples from funding two mirror-image trusts at the same time with identical assets.

English echoes this warning. “When creating two SLATs, each for the benefit of the other spouse, a married couple may risk breaching the reciprocal trust doctrine, which could jeopardize the benefits sought from establishing a SLAT.”

The solution comes down to timing. “It may be necessary to create the SLATs at different times and structure them differently, so that they are not ‘mirror images’ of each other,” English recommends. US News offers similar advice: “Couples may have to do one SLAT this year and another next year, funded with different assets, to make sure they’re not running afoul of the IRS.”

When Choosing a SLAT, Proceed with Care

The articles we consulted offer a similar conclusion. As Carlson writes for US News, make sure you don’t rush the process. “Because SLATs require coordination between advisors and tax experts, couples considering the strategy should act now, so that their tax attorney has plenty of time to take the family’s full estate planning situation into account,” she states.

As with any trust, the choice of a trustee is critically important, especially with a SLAT. Experts cited by US News emphasize that the trustee for a SLAT has to be someone who’s not the recipient and not related or subordinate to the recipient.

The professional, experienced team at Life Point Law stand ready to consult with you regarding the whole range of tax and estate planning strategies, including the spousal lifetime access trust. Please contact us – it will be our pleasure to serve you.

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(originally reported at https://money.usnews.com)