Estate
planning can feel overwhelming, especially with changing tax laws. One tool
that’s gaining popularity among high-net-worth couples is the Spousal Lifetime
Access Trust (SLAT). If you’re looking to preserve your wealth and minimize
estate taxes, understanding SLATs is crucial. Here’s a breakdown of what they
are, how they work, and why you should consider setting one up before January
1, 2026.

What’s
a SLAT?

A SLAT is
an irrevocable trust that one spouse creates for the benefit of the other. The
goal? To transfer assets out of your estate while still providing financial
security for your spouse. This strategy can help you use the current high
federal estate tax exemption before it potentially drops.

Current
and Future Tax Exemptions

Right now,
each person can transfer up to $13.61 million without incurring federal estate
taxes. For married couples, that means you can shield up to $27.22 million. But
here’s the kicker: On January 1, 2026, this exemption is set to decrease to
approximately $7 million per person ($14 million per couple). Essentially, it’s
a “use it or lose it” situation.

How
SLATs Work

1. Set
Up the Trusts:
Each spouse creates a SLAT, naming the other as the primary beneficiary.

2. Fund
the Trusts:
Transfer assets into the trust. These transfers are considered gifts and use up
your gift tax exemption of $13.61 million in 2024.

3. Benefits
for Your Spouse:
The beneficiary spouse can receive distributions from the trust, ensuring
financial security.

4. Tax
Savings: When you
establish a SLAT for your spouse’s benefit, you can gift assets up to your
lifetime gift exemption— currently $13.61 million per individual — without incurring federal estate taxes.

Here is
an example:

Let’s look
at John and Jane Smith, a couple with a $30 million estate. They want to make
the most of the current $13.61 million exemption per person.

– John’s
SLAT for Jane: John transfers $13.61 million into a trust for Jane. These
assets are no longer part of his taxable estate.

– Jane’s
SLAT for John: Jane uses her exemption to do the same for John.

This way,
they effectively transfer $27.22 million out of their estates, potentially
saving millions in future estate taxes. The exemption will go down to $7 million
in 2026, but this wouldn’t impact Smiths because they preserved their exemption
of $13.61 million by using it via gifting to their SLAT.

Advantages
of SLATs

– Reduce
Your Taxable Estate: Assets
in the trust are removed from your estate, lowering estate tax liability.

– Provide
for Your Spouse:
Your spouse can access the trust’s assets if needed, ensuring they have
financial security.

– Flexibility
with Trustees: You
can remove and replace trustees, giving you some control over the trust’s
administration.

– Indirect
Access to Funds:
While you can’t access your own SLAT, your spouse can, indirectly benefiting
you.

Potential
Drawbacks

– Loss
of Control: Once
you place assets in a SLAT, you give up direct control and access. However, there
are smart ways to pick and choose the assets that are being transferred to a
SLAT to minimize the lack of control.

– Divorce
Complications: SLATs
aren’t for everyone. If you anticipate friction in your marriage, this option
might not be suitable. In the event of a divorce, you would lose indirect
access to the SLAT funds.

– Spousal
Death: If your
spouse dies before you, you lose indirect access to the trust. Provisions can
be made to redirect funds to you, but this requires careful planning.

The
Bottom Line

Setting up
a SLAT can be a game-changer for estate planning, especially with the looming
reduction in the estate tax exemption. It’s a great way to ensure your wealth
benefits your loved ones rather than going to taxes.

If you
have significant assets, now is the time to act. Remember, with the exemption
decreasing in 2026, it’s truly a “use it or lose it” opportunity.
Don’t wait—plan today to protect your tomorrow.