SLATs: Lock in the Current Estate Tax Exemption

The fate of the federal estate tax exemption remains uncertain, and this volatility can have significant implications for high-net-worth individuals. Given the current, historically high exemption amounts, you may want to consider taking advantage of these favorable conditions to transfer assets out of your estate. One popular strategy involves setting up a spousal lifetime access trust (SLAT), which allows you to use the current large exemption to benefit your spouse (and potentially other beneficiaries) while also reducing the size of your taxable estate.

Wait, What’s Happening to the Estate Tax Exemption?

Currently, the federal estate tax exemption is approximately $13.99 million for individuals and $27.98 million for couples (in 2025). In practical terms, if your estate’s value is below the exemption amount when you pass away, the estate will not owe any federal estate taxes. The lifetime gift tax exclusion—the amount you can gift during your lifetime without triggering a gift tax—is similarly set at $13.99 million for 2023.

However, unless Congress takes action, this higher exemption will revert in 2026 to a figure closer to its pre-2018 levels (about $5.49 million, adjusted for inflation). This impending reduction is prompting many couples to consider using the existing exemption now, rather than risk losing the opportunity if the exemption decreases.

One effective way to lock in the large exemption is by transferring assets into an irrevocable trust. By making significant gifts today, you can potentially remove substantial wealth from your future taxable estate.

What Is a Trust?

A trust is a legal arrangement in which one party (the trustee) holds legal title to property for the benefit of others (the beneficiaries). The person establishing the trust is known as the grantor. Some trusts allow the grantor to retain control or serve as trustee, while others require a third party to manage the trust assets.

Trusts come in many forms. They can be revocable, giving the grantor flexibility to modify or terminate the trust, or irrevocable, meaning that once the trust is created, its terms cannot be easily changed. Different trusts are used to achieve various estate planning objectives, including tax reduction, asset protection, and controlled distributions to beneficiaries.

What Is a Spousal Lifetime Access Trust (SLAT)?

A spousal lifetime access trust (SLAT) is a type of irrevocable trust created by one spouse (the “donor spouse”) to benefit the other spouse (the “beneficiary spouse”). You can also include additional beneficiaries, such as children or grandchildren. Once the donor spouse transfers assets into the SLAT, those assets are removed from the donor’s taxable estate, and typically also from the beneficiary spouse’s estate.

Because a SLAT is irrevocable, the donor spouse cannot take back the transferred assets or change the trust terms once the trust is funded. However, the beneficiary spouse retains access to these assets, providing a form of indirect benefit to the donor spouse as long as the marital relationship remains intact and the spouse is living.

Funding the SLAT

When transferring assets into a SLAT, you typically use your federal gift tax exemption so you do not incur immediate gift taxes. Under the current rules, you can transfer up to your remaining lifetime exemption amount (often in the millions of dollars) into the trust without triggering a gift tax. This can be particularly advantageous now if you anticipate the exemption will drop significantly in 2026.

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The Pros and Cons of a SLAT

Like any estate planning vehicle, a SLAT comes with both benefits and potential drawbacks. Understanding these factors will help you decide whether a SLAT is right for your family.

SLAT Advantages

• Leverages the Current Exemption: By gifting assets into a SLAT now, you lock in today’s relatively high exemption amounts.
• Potential for Appreciation: Once assets are inside the SLAT, any future growth occurs outside your estate, further reducing potential estate tax liability.
• Indirect Access to Funds: The beneficiary spouse can withdraw assets from the trust as needed, allowing the donor spouse indirect access (through the beneficiary spouse) to the trust assets during marriage.
• Creditor Protection: Assets in an irrevocable trust can be protected from creditors, depending on state law and how the trust is structured.

SLAT Disadvantages

• Irrevocability: Once you fund a SLAT, you give up direct control of the assets, and the trust terms cannot easily be altered.
• Loss of Access Upon Spouse’s Death or Divorce: If the beneficiary spouse dies or you divorce, your indirect access to the trust assets ends.
• No Step-Up in Basis: Assets in a SLAT generally do not receive a step-up in basis upon the donor spouse’s death, which can have capital gains tax implications for heirs.
• Grantor Trust Taxation: Because a SLAT is often structured as a grantor trust, the donor spouse is responsible for income taxes on any trust earnings. This can be both an advantage (it effectively allows more wealth to accumulate in the trust) and a disadvantage (it creates an ongoing tax obligation for the donor).

Connect With an Estate Planner

Establishing a SLAT can be a powerful strategy, but it requires meticulous planning and drafting. Choosing the right trustee is a key consideration: the donor spouse cannot serve in that role, and the beneficiary spouse can only act as trustee under limited circumstances to avoid inclusion in their taxable estate.

It is also possible for each spouse to create a SLAT for the other. However, to avoid the reciprocal trust doctrine—which could negate the tax benefits—professional guidance is essential. If you and your spouse plan to create SLATs for each other, an experienced estate planning attorney will ensure the trusts are not so similar as to be deemed reciprocal.

In light of the anticipated changes of the federal estate tax exemption, a SLAT may help lock in today’s favorable gifting landscape. Consult a qualified estate planning attorney to review your family’s financial situation, determine whether a SLAT suits your goals, and guide you through the legal and tax complexities of setting one up.