What Tax Pros Need to Know About SLATsby
High-net-worth clients, especially those with closely held businesses, often face the issue of how to continue to receive income from their assets while minimizing the size of their estates. Here, estate planning-focused attorney Travis Neal explains SLATs for the benefit of this client set and the tax pros that work with them.
The Spousal Lifetime Access Trust (SLAT) is one estate planning tool that accountants and financial planners can use to address the issue for their high-net-worth clients.
A SLAT is an irrevocable trust created during a married settlor’s lifetime. The SLAT allows a married settlor to remove assets from her estate, such as a closely held business or entity, while still benefiting from trust income indirectly through her spouse. Transfers of appreciating assets to SLATs allows the settlor to lock-in gifts of amounts up to the current gift and estate tax exclusion ($12.06 million in 2022) and avoid estate tax on the gifted assets’ appreciation, while enjoying the lifetime benefits from the trust payable to the beneficiary spouse.
The settlor can still maintain managerial control of the business. The SLAT’s beneficiaries’ ability to exercise control over the interest held in the SLAT will be subject to the settlor’s limitations provided in the trust.
With a SLAT, the “settlor-spouse” establishes an irrevocable trust for the “beneficiary-spouse” and if desired, the spouses’ children or grandchildren. The settlor-spouse must fund the SLAT with her separate property assets. This transfer reduces the settlor-spouse’s estate. At the beneficiary-spouse’s death, the SLAT’s assets may be distributed to the spouses’ children or grandchildren outright or in trust.
The beneficiary-spouse may be the SLAT’s sole or co-trustee. The SLAT directs the trustee to distribute income and/or principal to the beneficiary-spouse for his health, education, maintenance, or support (HEMS).
If the settlor-spouse wants the trustee to distribute trust assets above what is needed for the beneficiary-spouse’s HEMS, she must appoint someone other than the beneficiary-spouse to be trustee or co-trustee. Otherwise, the trust assets may become subject to the beneficiary-spouse’s creditors and make the SLAT’s assets includable in the beneficiary-spouse’s estate.
SLAT Tax Implications
A SLAT can provide tax benefits to the settlor-spouse. The transfer to the SLAT will use the settlor-spouse’s available estate and gift tax exclusion. This is important for clients wishing to take advantage of the higher exclusion amount that is set to drop in 2026.
During the beneficiary-spouse’s lifetime, the SLAT is taxed as a grantor trust, meaning the settlor-spouse is responsible for paying tax on the trust’s income, because the SLAT is held for the beneficiary-spouse’s benefit. The settlor-spouse can pay the income taxes on income earned by the SLAT, thereby making a tax-free gift to the SLAT’s remainder beneficiaries equal to the tax.
All income and deductions of the SLAT must be reported on the settlor-spouse’s tax return. The SLAT’s trustee should file a blank Fiduciary Income Tax Return, Form 1041, for the SLAT. The Form 1041 will have a statement indicating that the SLAT has been established and that all income and deductions will be reported on settlor-spouse’s tax return.
The SLAT should have a separate checking or brokerage account and be considered a separate fiscal entity. The value of the SLAT’s assets, including any appreciation since the SLAT’s creation, are excluded from both the settlor-spouse’s and the beneficiary-spouse’s estate. The property received by the children will avoid wealth transfer tax.
Assets gifted or transferred to the SLAT do not receive an adjustment in income tax basis at the settlor-spouse’s death because they are not included in the taxable estate. Gifted assets instead retain the settlor-spouse’s carryover basis, resulting in potential capital gains realization upon the subsequent sale of any appreciated assets within the SLAT.
This issue can be addressed by allowing the settlor-spouse to swap or exchange SLAT assets for non-trust assets of an equivalent value. This power means the SLAT will be disregarded for income tax purposes, and the assets swapped out of the SLAT will qualify for an income tax basis step-up at the settlor-spouse’s death.
The most obvious disadvantage to a SLAT arises if the marriage dissolves. The beneficiary-spouse will continue to receive the benefits from the trust property after the dissolution. However, the SLAT may be written with a “floating spouse” provision defining the “settlor’s spouse” as the individual to whom the settlor is married at any given time. The validity of such a provision has not been tested in court.
Additionally, the settlor-spouse must be careful to transfer only her separate property (e.g., an inherited interest in a family business). To address this concern, the SLAT may provide that any contribution considered as having been made by the beneficiary-spouse will go into a separate sub-trust. However, the IRS has not ruled on whether this provision will suffice.
A SLAT allows a spouse to use the increase in the estate and gift tax exclusion while continuing to indirectly receive income from the assets transferred to the SLAT. If a spouse gifts an interest in a closely held business to the SLAT, the spouse can continue to maintain control of the business while removing that asset from the spouse’s estate. For accountants and financial advisors with high-net-worth clients with significant separate property wealth, SLATs might be worth a closer look.
Travis Neal is an associate attorney with Hartog, Baer, Zabronsky & Verriere in Orinda, California. He works in the firm’s estate planning, probate, and trust administration group. He has focused on trusts and estates law for over a decade, working with several Bay Area firms serving a diverse group of clients.