Why a SLAT Might Be the Most Romantic (and Tax-Smart) Thing You’ll Ever Do
Imagine this: You’ve just gotten home after back-to-back surgeries, or patient consultations that wouldn’t stop. You finally sit down for a quiet evening, and your spouse casually drops, “Hey, the twins are thinking about Yale. Or Stanford. Or, I don’t know, maybe a school with tuition that looks like a mortgage.” You smile, but inside you’re panicking about those tuition payments. Deep breaths, though, and you remember that you’ve been planning and saving for this kind of thing (you still reserve the right to groan about the cost, though).
If that sounds even remotely familiar, then welcome—you’re the kind of person who should know about a SLAT. Why?
Well, before your eyes glaze over, let’s break it down: SLAT stands for Spousal Lifetime Access Trust. And while that name might sound like a filing cabinet you’d ignore forever, it’s actually one of the most powerful tools around for preserving your wealth and keeping your family financially supported—even if the IRS comes knocking or your malpractice premiums skyrocket or you finally sell the business that you’ve been working so hard to build.
What Is a SLAT (Spousal Lifetime Access Trust), Really?
A SLAT is a trust you create for your spouse (and kids, probably). You move assets into it—stocks, cash, your stake in the business—so those assets aren’t considered part of your estate anymore. That’s good news when it comes to the estate tax. Great news, actually. The current federal estate and gift tax exemption is over $13 million per person, but the clock is ticking. Plus, all that growth outside of your estate is kind of like free money! On top of that, states like Washington and Oregon have a much less generous estate tax exemption. Funding a SLAT today is a bit like freezing your exemption in place while the Federal exemption is still generous.
When setting up a SLAT, it’s important to evaluate whether you are better off saving on estate taxes or capital gains taxes. Although some disagree, the current consensus is that assets in a typical SLAT do not receive a step-up in basis at death. If you prefer to get a step-up in basis at your death, a SLAT can be designed to do that, keeping the assets within your taxable estate. And your advisors can help you to make this determination too.
Gifting Away Assets (Without Losing Access)? Yep, That’s the SLAT Magic
Here’s where it gets clever: even though you’re giving up legal ownership of the assets, your spouse can still benefit from them. That means your family keeps access to the funds for things like education (like that mortgage-payment college tuition), medical expenses, and general support. It’s like sending your assets off to private boarding school—they’re out of your house, but still on your payroll.
Why a SLAT Might Be the Most Underrated Estate Planning Tool
But let’s address the big hesitation: “Wait, I give away control of my money? Forever?” Pretty much, yeah. A SLAT is irrevocable, meaning you can’t take the assets back once they’re in. But that’s the very thing that makes them secure—from lawsuits, creditors, and even from estate taxes down the line. It’s not unlike buying the world’s most expensive safe, locking it up, and then giving your spouse the combination.
(Here’s a little secret, though…a SLAT can be designed so that you can be added as a beneficiary in the future. In case of emergency type of thing. This type of trust planning or addition has a special name too – the SPAT. It’s a pretty cool addition to the SLAT.)
Risks of a SLAT: Death, Divorce, and IRS Headaches
There are some “but what ifs” to consider, of course. If your spouse dies before you, or if your marriage dissolves, you lose that indirect access to the trust assets (unless you have that special SPAT language). That’s why some people create a second SLAT—one for each spouse—but do it carefully. The IRS isn’t a fan of “you scratch my back, I scratch yours” arrangements, and if your trusts are too similar, they might treat them as if you never made the gifts at all. That’s the reciprocal trust doctrine in action, and it’s a doozy.
Another point worth knowing: assets in a SLAT don’t get a step-up in basis when you die. So if your kids eventually sell them, there may be capital gains to pay. That’s not always a dealbreaker, but it’s something to consider if your assets have seen big appreciation. The SLAT does not HAVE to be set up where there is no step-up, but you are often choosing between the step-up and the growth outside of your estate. So, as mentioned previously, if you are mostly interested in the creditor protection of a SLAT, it can be set up so you receive a step-up in basis at death.
Pro Tax Nerd Bonus: Why Paying the Trust’s Taxes Might Actually Help You
Now for the cherry on top: most SLATs are grantor trusts. That means you—the person who created the trust—still pay the income taxes on the trust’s earnings. Sounds like a downside, but it’s actually a tax-savvy ninja move. Paying those taxes out of your own pocket allows the trust assets to grow untouched, while further shrinking your taxable estate. Win-win if you’re into that.
Is a SLAT Right for You?
So, is a SLAT right for you? If you’re sitting on a sizable estate, worried about future taxes, or just want to protect your hard-earned assets while keeping your spouse (and by extension, your family) financially supported—then yes, it’s probably worth a conversation. Just don’t try to DIY this thing. It takes careful drafting, good legal advice, and a clear picture of your long-term goals.
Being successful in America makes you a target for bogus lawsuits from shameless lawyers. We offer effective asset protection solutions, so you can worry less and rest assured, knowing your family’s future is protected. Get started now by scheduling a free, 30-minute call at livemorecarefree.com.
