Martin Shenkman, CPA, JD
Martin M. Shenkman, CPA, JD, estate and tax-planning attorney based in New York City. He is coauthor of The Business Owner’s Guide to the Corporate Transparency Act. ShenkmanLaw.com
People often assume that Spousal Lifetime Access Trusts (SLATs) aren’t for them. After all, with the federal estate-tax exemption at nearly $13 million in 2023, few families face federal estate taxes. But that amount is set to be cut in half in 2026. And SLATs—where each spouse funds a trust that names the other spouse among its beneficiaries—can be useful for married couples who have as “little” as a million or two…
SLATs may let couples position assets outside creditors’ reach. Assets placed in a properly constructed SLAT may remain safe even if you’re sued or go bankrupt…but because your spouse is a beneficiary, he/she still can receive distributions by the trustee of these funds.
SLATs may deliver capital gains tax savings. If you grant an older relative a “general power of appointment” over the SLAT, the assets will receive a step up in basis when this relative dies. This means that the tax basis (what you paid for an asset, less depreciation on real estate or equipment) is increased to the fair market value of the asset on the date of the holder’s death. That can eliminate any capital gains tax on appreciation up to that date.
You don’t have to worry about future estate-tax exemption reductions. The exemption is nearly $13 million in 2023, but it is slated to fall to about $7 million in 2026…and could be slashed further. Creating SLATs now essentially locks in today’s high exemption amount.
An attorney should be able to create a simple SLAT for around $5,000. Ongoing costs are modest—a tax preparer shouldn’t charge much to file Form 1041, US Income Tax Return for Estates and Trusts, each year…and many families complete this form themselves. An attorney should review your SLATs every few years to confirm that the trustee is operating it properly. Naming a trusted relative or friend as trustee avoids the expense of institutional trustees, which can charge $3,000 to $5,000 or more per year for administration. When you work with an attorney to set
up your SLATs…
Do not put retirement plan assets in your SLATs. That creates additional taxes rather than tax savings.
Do not put assets in SLATs that will be needed for everyday expenses. When couples pull money out of SLATs regularly to pay bills, courts can rule that the couple never gave up control of the assets.
Consider taking life insurance on both spouses. With SLATs, each spouse creates a trust that names the other spouse among its beneficiaries. If one spouse dies, the survivor loses access to the assets remaining in the deceased spouse’s SLAT—those assets will benefit that SLAT’s other named beneficiaries. Potential solution: Take out insurance policies on each spouse—the death benefit can essentially replace the no-longer-accessible SLAT assets.
Ask your attorney about appointing a “trust protector”—a third party (not you, your spouse or a beneficiary) who may have fiduciary duties similar to those of a trustee, or in other cases may be (or must be because of the powers given) a non-fiduciary. In this context, this is someone given powers to remove and replace a trustee, change the location of trust administration and state law, etc. What a trust protector might do can vary depending on state law and the trust document. Select a reliable person for this role—perhaps a non-beneficiary brother, attorney, longtime CPA, etc.—and grant him/her the power to move your SLAT to a different jurisdiction and name a new trustee. If your risk from creditors later increases, you can ask this trust protector to move your SLAT to a trust-friendly state such as Alaska, Nevada, South Dakota or Delaware.
Your SLAT should not be a carbon copy of your spouse’s SLAT. Due to a legal principle known as “reciprocal trust doctrine,” both spouses’ SLATs can be ruled invalid if those SLATs are too similar to one another.
