Spousal Lifetime Access Trust: Gifting Without Giving it All Away

When most people think of gifting assets to reduce their taxable estate, they assume those assets are gone forever – out of reach for good. But what if there were a way to remove assets from your estate while preserving some indirect access to them? That’s where a SLAT, or Spousal Lifetime Access Trust, comes into play.

A SLAT is a powerful estate planning strategy that allows married individuals to transfer wealth for the benefit of their spouse and future generations while maintaining a level of flexibility and financial security. It’s one of the few tools that blends tax efficiency, asset protection, and access in a way that makes sense for many affluent families.

What Is a SLAT?

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created by one spouse (the “grantor”) for the benefit of the other spouse (the “beneficiary spouse”), often with additional provisions for children or other family members. Once the trust is funded, the assets are generally removed from the grantor’s estate for estate tax purposes, but the beneficiary spouse can still receive distributions at the trustee’s discretion.

This setup offers a unique advantage: the couple can continue to benefit from the trust assets – indirectly – while still achieving meaningful estate tax reduction and asset protection.

How a SLAT Works

To establish a SLAT, the grantor transfers assets into an irrevocable trust, naming the other spouse as the primary beneficiary. A third-party trustee (not the grantor) manages the trust and may distribute income or principal to the beneficiary spouse, and possibly to descendants, based on the terms of the trust.

Because the trust is irrevocable and the grantor no longer owns the assets, those assets are excluded from the grantor’s estate. However, through the beneficiary spouse, the grantor may still benefit from the trust if needed—this is the core feature that distinguishes SLATs from other gifting strategies.

Some SLATs are also designed to purchase and own life insurance on the grantor, creating a long-term source of tax-free liquidity for future generations.

Key Benefits of a SLAT

A SLAT offers several strategic advantages for families looking to preserve wealth while still maintaining flexibility:

1. Access Without Ownership
Although the grantor gives up direct access to the assets, the beneficiary spouse may receive distributions if needed. This can create an important financial safety net in case the family’s circumstances change.

2. Estate Tax Reduction
Assets transferred into the SLAT are removed from the grantor’s taxable estate. This helps reduce future estate tax liability and enables multigenerational wealth transfer.

3. Creditor Protection
Assets held in the SLAT are typically protected from the creditors of both the grantor and the beneficiary spouse, assuming the trust is properly structured.

4. Multigenerational Planning
A SLAT can be structured to provide ongoing support for children, grandchildren, or even future generations, ensuring a legacy that extends well beyond the beneficiary spouse.

5. Strategic Life Insurance Ownership
When paired with a life insurance policy, a SLAT can serve as an efficient vehicle to fund liquidity for estate taxes or equalize inheritance among beneficiaries.

Avoiding the “All or Nothing” Trap

A common challenge in estate planning is the tension between reducing estate taxes and maintaining control or access. Outright gifts to children or other heirs accomplish the tax goal, but they often leave the donor without any recourse if circumstances change.

SLATs offer a solution: a way to gift without giving it all away. Because the grantor’s spouse is a permissible beneficiary, there’s potential to benefit from the trust in a roundabout way, should the need arise. This makes SLATs a much more appealing option for those who are hesitant to part permanently with significant assets.

Of course, the access is not guaranteed. The trustee has discretion, and the grantor has no legal right to compel distributions. But the possibility of access—combined with sound financial planning—offers valuable peace of mind.

Important Considerations and Risks

As with any advanced estate planning technique, SLATs come with their own set of considerations. Here are a few you should keep in mind:

1. Reciprocal Trust Doctrine
If each spouse creates a SLAT for the other, the IRS may argue the trusts are effectively the same, nullifying the estate tax benefits. To avoid this, each trust must be materially different in timing, terms, funding, and beneficiaries.

2. Divorce or Death of the Beneficiary Spouse
If the marriage ends or the beneficiary spouse dies, the grantor may lose any indirect access to the trust. For this reason, SLATs are often paired with prenuptial agreements or other safeguards in high-net-worth families.

3. Irrevocable Means Irrevocable
Once the SLAT is created and funded, the grantor cannot take it back. It’s critical to work with experienced estate planning professionals to ensure the trust terms align with your long-term goals.

4. Trustee Selection Matters
Choosing the right trustee is essential. It must be someone (or an institution) who can act independently and follow the trust’s terms. Often, families appoint a professional trustee or a trusted advisor to serve in this role.

5. Tax Reporting Requirements
Depending on how the SLAT is structured, it may require its own tax filings or reporting. Some SLATs are “grantor trusts” for income tax purposes, meaning the grantor pays income tax on trust earnings—another layer of complexity with potential planning benefits.

SLATs and Life Insurance

One of the most powerful ways to fund a SLAT is with life insurance. Here’s why:

Death Benefit Outside the Estate: The policy is owned by the trust, not the insured. So, the death benefit can pass income- and estate-tax-free to the next generation.

Liquidity for Estate Taxes: If the family’s wealth is tied up in real estate or business interests, the policy provides needed cash to pay estate taxes without forcing a sale.

Wealth Replacement: In some cases, life insurance inside a SLAT replaces the wealth that was gifted away, ensuring that heirs are treated equitably.

This approach is especially appealing for families with illiquid assets or concentrated holdings that may be difficult to divide or value at death.

A Hypothetical Example

Let’s say John and Sarah have a combined net worth of $25 million, most of which is in real estate and a closely held business. John creates a SLAT for Sarah and funds it with $5 million in LLC interests and life insurance on his life. A professional trustee oversees the trust and may make distributions to Sarah, if needed.

The trust owns the life insurance policy, which will ultimately provide $10 million in death benefit to the SLAT. Upon John’s passing, the funds stay outside of both estates and can be used to cover estate taxes or provide liquidity to maintain the family’s holdings.

Meanwhile, Sarah can receive distributions from the SLAT during her lifetime, ensuring flexibility if their financial picture changes.

This simple example shows how a well-designed SLAT can remove assets from the estate, provide potential financial support, and offer long-term benefits for the next generation.

Who Should Consider a SLAT?

SLATs are best suited for:

• Married couples with significant net worth and taxable estates
• Families with illiquid assets like real estate, business interests, or collectibles
• Individuals who want to leverage life insurance for estate tax efficiency
• Clients who are philanthropic but still value optionality and control

They’re not a one-size-fits-all solution, but in the right circumstances, they offer a rare combination of flexibility and tax advantage.

Final Thoughts

A Spousal Lifetime Access Trust is a compelling solution for families who want to shift assets out of their estate without losing all access to them. It’s a way to make impactful gifts, protect wealth, and maintain flexibility in a way that few other planning tools allow.

If you’re considering how to reduce estate taxes, protect your assets, or provide for your loved ones across generations, a SLAT may be worth exploring. Just remember – it’s critical to work with experienced estate planning and financial professionals to design a SLAT that aligns with your family’s unique situation.

Ready to explore whether a SLAT makes sense for your estate plan?

Schedule a brief Zoom call to discuss your goals and see how we can help you implement a tailored strategy that protects your wealth – and your options.

DISCLOSURE

TAX ADVICE

Any tax advice contained in this communication is not intended or written to be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

These materials are not intended to be opinions or advice on legal, tax, accounting, or investment matters. Private counsel should be consulted prior to application of this general information to specific situations.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.