In 2021, the federal gift and estate tax exemption is $11.7 million per person. Thus, today, a married couple can transfer a total of $23.4 million to heirs during their lifetime or at death (without taking into account other exclusions, such as the annual gift tax exclusion or direct gifts for tuition or payments to medical providers).
In accordance with the provisions of the Tax Cuts and Jobs Act of 2017, on January 1, 2026, the current federal gift and estate exemption amount is set to revert to pre-2018 levels (indexed for inflation), which is approximately $6 million per person. However, new tax legislation under the Biden administration could accelerate the sunset date of these provisions and possibly even lower the gift and estate exemption amount.
In November 2019, the Treasury Department issued regulations confirming that if the gift and estate tax exemption reverted to pre-2018 levels, taxpayers who made gifts during the increased exemption period over the exemption amount available at their death would not have those gifts “clawed back” into their estates. In other words, the estate would retain the benefit of the higher exclusion amount.
Given the 2026 sunset of the higher exemption as well as the increased likelihood of a rollback of the gift and estate exemption amount during the Biden administration, some taxpayers are looking for ways to use the increased exemption amount before it is lost. However, some married couples are concerned about gifting strategies that involve the loss of control of assets during their lifetime and may be unsure about whether they will need the gifted assets in the future. For those with such concerns, a spousal lifetime access trust (SLAT) may be a good technique to consider.
Characteristics of SLATs
A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse. The grantor spouse uses their gift exemption to make a gift to the SLAT and the other spouse is the beneficiary of the SLAT. Some SLATs also allow children to be beneficiaries along with the spouse.
The following further explains the key characteristics of SLATs:
Irrevocable: A SLAT is an irrevocable trust, and the grantor spouse cannot retain any beneficial interest in the trust. The assets in the SLAT generally will not be includible in that spouse’s estate for estate tax purposes.
Trustee: The grantor spouse cannot be the trustee of the SLAT. If the other spouse is the trustee, distributions to the beneficiary spouse should be restricted to an ascertainable standard for expenses related to health, education, support, and maintenance. An independent trustee can be used to make additional discretionary distributions.
Beneficiaries: The primary beneficiary is typically the spouse. Children or more remote descendants may also be named as current or remainder beneficiaries.
Assets: A SLAT must be funded with the grantor’s separate property and not assets owned jointly with the spouse.
To Give or Not to Give?
Steve and Alison have a joint estate of $20 million. They have been married for 50 years and have two adult children. Under current tax law, the total of their assets are below the gift and estate exemption amount of $23.4 million. Steve and Alison understand that if they both die with the high gift and estate exemption in place, their children will not owe any estate tax upon the second spouse’s death. However, they are concerned that the estate and gift exemption amount will be lowered in 2026 or sooner and that estate taxes may be owed when the second of them dies.
Steve and Alison are looking for a strategy to use the higher exemption while in place but are not comfortable with making a large gift of the majority of their assets to lock in the benefit of the higher exemption. They know that life brings uncertainties and that they may need their wealth to maintain their lifestyle or to cover other expenses in the years to come.
After a complete review of their finances with their financial advisor, Steve and Alison are willing to make a $10 million gift, securing a portion of the higher temporary exemption and Alison remaining the beneficiary of the gifted assets. They decide to use the SLAT strategy to accomplish this goal.
The SLAT Strategy in Action
Steve and Alison enter into a written agreement that divides their $20 million of joint assets in half, giving them each $10 million of separate property assets. Steve creates a SLAT for the benefit of Alison and his two children and transfers his $10 million to the SLAT. Alison can use the distributions from the SLAT for the joint benefit of Steve and herself or may use the unlimited marital deduction to make gifts from the SLAT distributions to Steve free of gift tax.
If the gift and estate exemption drops to $6 million in 2026, Steve will have used his $10 million exemption during his lifetime so he will have no exemption left. Alison will have $6 million of exemption. So, with Steve’s $10 million and Allison’s $6 million, they will have preserved $16 million of exemption. If Alison dies before Steve, Steve should be fine financially because he will still be the beneficiary of Alison’s $10 million in separate assets. As discussed below, additional exemption could be preserved if each spouse creates a SLAT for the other.
Generally, SLATs are taxed as grantor trusts for income tax purposes, meaning that the grantor bears the income tax burden on the trust’s income. This gives the trust the potential to grow income-tax-free and the payment of the taxes by the grantor is not considered an additional gift for gift tax purposes.
Because the spouse is entitled to receive trust distributions as beneficiary, the spouse can use the distributions for the joint support and maintenance of both parties. It may also be possible for an independent trustee to make loans from the SLAT assets to the grantor.
The assets in the SLAT can be sheltered from future creditors and avoid probate.
If structured properly, none of the assets of the SLAT (including appreciation from the date of the initial gift to the SLAT) are includible in the estate of the grantor and pass free of estate tax to the spouse and future beneficiaries.
Death: Upon the death of the spouse, the grantor no longer has indirect access to the trust assets. In that situation, the trust may be terminated and the assets distributed or the trust could continue for the benefit of the couple’s children.
Divorce: In the event of divorce, the spouse will continue to benefit from the trust as a beneficiary while the grantor spouse will no longer have indirect access to the trust assets. Divorce risk can be addressed by including language in the trust document that states that in the event of a divorce the spouse’s interest in the trust terminates and the children become the primary beneficiaries.
Two SLATs: It is possible for each spouse to create a SLAT for the benefit of the other spouse. However, proper planning and drafting of both trusts is needed to avoid the “reciprocal trust doctrine” — which states that if two interrelated trusts leave their grantors in approximately the same economic position as they would have been in had they created the trust for themselves as the beneficiary, each trust will be treated as if each person made the trust for the benefit of themselves.Accordingly, the two trusts must have substantial differences: they must be executed in different years, have different beneficiaries, and provide different distribution terms. Otherwise, the IRS may “undo” the trusts and include the trust assets in each spouse’s estate for estate tax purposes.
Loss of Step-Up in Basis: If the assets in a SLAT are not included in the grantor spouse’s estate, the assets do not receive a step-up in basis when the grantor dies. If the trust is drafted as a grantor trust and includes a power to substitute or “swap” assets of equal value, the grantor can remove assets with a low basis from the trust and substitute cash or assets with a higher basis. Swapping assets may provide beneficial income tax treatment when the assets are sold by the beneficiaries.
2021 Estate Planning
Since the Biden administration has yet to put forth new tax legislation, it currently remains unknown whether gift and estate exemption amounts will have a retroactive date back to January 1, 2021. Lower gift and estate exemption amounts are a real possibility and should be considered in all wealth transfers made in 2021. With that in mind, structuring an estate plan that can be unwound if the tax law results are different than anticipated should be explored with your estate planning attorney.
If you wish to learn more about SLATs, please contact a member of your Cerity Partners team or estate planning attorney to discuss how they might be used as a part of your estate plan.
Cerity Partners LLC (“Cerity Partners” is an SEC-registered investment adviser with offices in California, Colorado, Illinois, Massachusetts, Michigan, New York, Ohio and Texas. Registration of an Investment Advisor does not imply any level of skill or training. The foregoing is limited to general information about Cerity Partners’ services, which may not be suitable for everyone. You should not construe the information contained herein as personalized investment, tax, or legal advice. There is no guarantee that the views and opinions expressed in this brochure will come to pass. Before making any decision or taking any action that may affect your finances or your company’s finances, you should consult a qualified professional adviser. The information presented is subject to change without notice and is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees and services, send for our disclosure statement as set forth on Form CRS and ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
Meet the Author
Judy is a Principal based in the Silicon Valley office. She provides consulting advice for private clients and advisors on estate planning, wealth-transfer strategies, d trust and estate administration, and charitable planning. With her extensive law background, Judy works collaboratively with clients and their tax advisors and estate planning attorneys to ensure that their strategies are consistent with their overall financial and estate plans and to manage, preserve, and grow their wealth for their family and philanthropic goals.
Prior to joining Cerity Partners, Judy worked as an Estate Planning Advisor at B|O|S and served as a member of the Financial Planning Team. In this role, Judy helped clients navigate significant life changes, minimize their tax burden, and identify goals and strategies for legacy planning. Prior to joining B|O|S, she enjoyed a 35-year legal career in sophisticated gift and estate tax planning, charitable planning, and probate and trust administration.
Judy earned her Bachelor of Arts in Psychology from the University of Florida and her Juris Doctor degree from Georgetown University. She also received her Master of Laws from New York University.