Spousal Lifetime Access Trust (SLAT)

Pennsylvania Spousal Lifetime Access Trust Lawyer

A spousal lifetime access trust (SLAT) can be an effective estate planning tool for a married couple who wishes to reduce estate taxes, to protect their assets from creditors, or both. A properly drafted SLAT can protect assets from estate taxes and creditor exposure.

A note on federal gift and estate taxes:

The federal government currently imposes a gift tax on lifetime gifts and an estate tax on transfers at death. A properly-structured estate plan can reduce these taxes by taking full advantage of the available tax exemptions, specifically the gift and estate tax “unified credit.” The unified credit permits every individual to transfer a specified amount of assets (an exemption) tax-free either during their lifetime or at death. The federal estate and gift tax exemption is $15,000,000 for 2026 and is indexed annually for inflation. This means that for gifts made on or after January 1, 2026, the gift tax exemption will shield from gift tax up to $15,000,000 of taxable gifts made during a donor's lifetime that do not qualify for the annual exclusion. For decedents who die in 2026, the estate tax exemption is $15,000,000, reduced by any gift tax exemption used during lifetime. The gift and estate tax rate is 40%.

What is a Spousal Lifetime Access Trust (SLAT)?

A SLAT is an irrevocable trust that one spouse (the Settlor) establishes during their lifetime for the benefit of the other spouse. If properly structured, the assets in a SLAT are not taxable in either spouse’s estate and are not available to either spouse’s creditors. Thus, SLAT assets are not considered part of the federal estates of either spouse, and, therefore, are not subject to federal estate tax upon their deaths. At the same time, the beneficiary-spouse may receive distributions of income and/or principal from the SLAT and thus will benefit from the gifted assets.

The SLAT will be a grantor trust for federal income tax purposes during the joint lifetimes of the spouses, so all trust income will be taxed to the Settlor during his/her lifetime. This enables the trust assets to grow for the benefit of the beneficiaries without paying federal income tax. The Settlor is effectively making a tax-free gift to the trust. On the death of both spouses, all SLAT assets will be held in separate trusts for the lifetimes of the spouses’ children and/or descendants (or other beneficiaries), if so directed by the SLAT terms.

How Does a SLAT Work? An Example

Suppose that a married couple (Husband and Wife in this example) owns and runs a family business. The business has been doing very well, and Husband and Wife anticipate that the value of the business will appreciate substantially over time. Husband and Wife want to minimize the impact of estate taxes and implement a tax-efficient strategy to pass wealth to their children and grandchildren. The couple also wants to ensure that their assets are protected from their creditors and their children’s creditors. At the same time, the life expectancy of both Husband and Wife is at least 20 to 30 years. The couple wishes to maintain some control over and access to their assets for themselves, and they want to ensure that they will have enough income to live comfortably for the remainder of their lives.

For simplicity’s sake, assume the following:

• Husband and Wife each own one-half of the family business in their individual names.
• Husband is likely to die before Wife.
• The value of the family business will appreciate substantially over time, so the value of the business today is significantly less than the value of the business at Husband’s death and at Wife’s death.

If Husband retains ownership of his one-half of the family business, and does nothing to transfer the business while alive, he will certainly maintain access to the asset and its income, as well as control over the business. However, Husband’s one-half interest in the family business is vulnerable to attack by his creditors (or Husband and Wife’s joint creditors). In addition, upon Husband’s death, one-half of the value of the family business on his date of death will be included in his estate and potentially exposed to estate taxes. If Husband’s one-half of the family business passes to Wife, it will not be subject to estate taxes at Husband’s death due to the marital deduction, but it will be included in Wife’s estate and subject to estate taxes at the time of Wife's death. There will be fewer assets left at the end of the day for their children and grandchildren.

Suppose, instead, that while both spouses are alive, Husband transfers his one-half interest in the family business to a trust for Wife’s benefit and thus creates a Spousal Lifetime Access Trust. Note that whether it is an interest in a family business or a different asset, any asset transferred by Husband (here, the Settlor) to the SLAT must be Husband’s separate property. In other words, the asset must be in Husband’s (Settlor’s) name alone.

The transfer of Husband’s one-half interest in the family business removes that asset from both Husband’s estate and Wife’s estate and therefore shields the asset from estate taxes. The business can grow over the years without exposure to any additional estate or gift taxes on that growth. In addition, if the SLAT is drafted properly, the asset should be protected from both Husband and Wife’s creditors, as well as the creditors of their descendants. At the same time, the structure of the SLAT allows Wife to benefit from the wealth of the family business and to maintain some level of control over the trust assets. 

Other SLAT Considerations

• There should be no express or implied agreement between the spouses that Wife will use distributions for the benefit of Husband (here, the Settlor), or that Wife will appoint assets back to Husband (Settlor) at her death.
• Other types of assets may be transferred to a SLAT. However, a SLAT is most effective for assets with substantial growth potential over the donor’s lifetime.
• If the SLAT assets can be used to satisfy Husband’s (Settlor’s) creditors or relieve Husband of his support obligations, the assets may be included in Husband’s estate. The same would be true for Wife. A properly drafted SLAT will include provisions prohibiting the use of SLAT assets for these purposes.
• Husband (Settlor) should not retain a power of appointment over the SLAT assets or the power to appoint himself as Trustee.
• Only Husband’s (Settlor’s) assets should be used to fund the SLAT.
• The Reciprocal Trust Doctrine must be avoided, thus the SLAT cannot be duplicated for the other spouse.

What are the Pros and Cons of Spousal Lifetime Access Trusts? 

There are several pros and cons of using Spousal Lifetime Access Trusts (SLATS).

Pros of Spousal Lifetime Access Trusts:

• SLATs are relatively easy to create.
• SLATs are relatively easy to understand, as they are similar to testamentary Family Trusts or Bypass Trusts, with which the client may already be familiar.
• Cost of implementing SLATs is reasonable.
• The Settlor’s spouse may have access to all SLAT assets for the spouse’s health, education, maintenance and support during the Settlor’s spouse’s lifetime.
• No SLAT assets, including any appreciation in SLAT assets, will be subject to estate tax in the Settlor’s or the Settlor’s spouse's estate (if properly drafted).
• The Settlor’s spouse may serve as an individual Trustee of the SLAT.
• SLAT assets held in trust for a spouse may be protected from both spouses’ creditors and SLAT assets held in trust for children (and more remote descendents) are likely to be protected from their creditors, including in a divorce.
• All SLAT income is taxed to the Settlor so potentially more SLAT assets will pass to children.
• Gifts to the SLAT can be leveraged through the purchase of life insurance, and valuation discounts can be obtained (e.g. 25-40% discount) by forming LLCs and partnerships.
• There is no gift tax to pay when the SLAT is created if the value of the gift to the SLAT by the Settlor is less than their remaining federal gift tax exemption amount.
• The SLAT could last for the future generations (e.g. grandchildren, etc.) and avoid estate tax.

Cons (or rather, “Considerations”) of Spousal Lifetime Access Trusts:

• SLATs are irrevocable trusts, so neither the Settlor nor anyone else can change their terms.
• To work, the SLAT requires a gift of cash or other property by the Settlor.
• A gift tax return must be filed by the Settlor when the SLAT is funded.
• An Independent Trustee may be required for certain discretionary SLAT distributions to beneficiaries.
• The Settlor is not a beneficiary of the SLAT, so upon divorce or upon the Settlor’s spouse’s (premature) death, the predeceased or divorced spouse’s income is not available to support their family. However, it may be possible to give the spouse/SLAT beneficiary a limited testamentary power of appointment (in trust) in favor of the Settlor.
• Crummey notices must be sent to SLAT beneficiaries if annual exclusion gifts are made to the SLAT.
• A husband and wife cannot create SLATs that are identical, or that are created at the same time, i.e., the Reciprocal Trust Doctrine. More about this can be found in Code Section 2036 or midway through our SLAT publication).
• Valuation of discounted assets (e.g., LLC interests) is subject to higher IRS scrutiny.
• Assets transferred to a SLAT will have a carry-over basis from the Settlor for capital gains tax purposes. Since the assets will not be included in either the Settlor’s estate or the Settlor’s spouse’s estate, the assets will not receive a step-up in basis at either death.
• Only the Settlor’s assets should be used to fund the SLAT. None of the Settlor’s spouse’s property should be transferred to the SLAT.
• If the Settlor receives any benefits from the SLAT, the Settlor risks estate tax and creditor exposure. Therefore, all distributions from the SLAT should be made to a separate account in the Settlor’s spouse’s name. There should be no implied agreement that the Settlor’s spouse will use distributions for the Settlor’s benefit. The SLAT should provide that no distributions may be made during the Settlor’s lifetime or the Settlor’s spouse’s lifetime that would satisfy their legal obligation to support the beneficiaries of the SLAT.
• The SLAT’s asset-protection barrier is not bulletproof. Creditor rights are governed by state law, and some states may allow certain groups of creditors to reach the trust assets regardless of the trust’s protective provisions, including the spendthrift provision. 

Although the SLAT may not provide complete protection against all creditors in all circumstances, it remains an extremely effective asset-protection tool offering a substantial barrier against creditors.

Who Should Include a SLAT in Their Estate Plan? 

Spousal Lifetime Access Trusts (SLATs) work well for married couples with significant wealth, including those with assets exceeding the federal exemption, who are interested in reducing estate taxes and enhancing asset protection. Ideally, the couple would have assets outside what goes into the SLAT, to maintain a comfortable lifestyle. Anyone interested in SLATs is encouraged to speak with a qualified estate planning attorney to learn more.

How Our Estate Planning Attorneys Can Help You Set Up a Spousal Lifetime Access Trust

This overview of Spousal Lifetime Access Trusts (SLATs) offers a glimpse of the benefits and implications. Careful consideration must be taken to draft and administer each SLAT appropriately, given each client’s unique circumstances and in accordance with all laws and regulations. 

Our estate planning team has experience with the proper drafting and administration of Spousal Lifetime Access Trusts, from start to finish, and can offer sound counsel for those considering implementing SLATs as part of their comprehensive estate plan. 

Looking to Set up a Spousal Lifetime Access Trust? 

Spousal Lifetime Access Trusts (SLATs) should be carefully considered and drafted by experienced estate planning attorneys. Contact us today to learn more and explore your options.

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