Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Spousal Lifetime Access Trusts
Transcript
- Lucas: So there's this estate planning tool called a spousal lifetime access trust — SLAT for short — that's become a go-to for married couples who want to move assets out of their estate but still keep a backdoor to the money if they need it. Luna: Right, because once you gift something into an irrevocable trust, you normally can't touch it again. A SLAT lets you get around that — indirectly. Lucas: Exactly. The idea is simple: one spouse — let's call her the grantor — creates an irrevocable trust for the benefit of the other spouse and their descendants. The grantor gives away assets to the trust, removing them from her estate. But because her spouse is a beneficiary, the family still has access to those assets through the spouse. Luna: So the grantor can't touch it, but her husband can. And if she needs money, she can ask him. It's a legal way to have your cake and eat it too. Lucas: That's the pitch. And it gets better from a tax perspective. A SLAT is typically structured as a grantor trust, which means the grantor pays the income tax on the trust's earnings. That's actually a feature, not a bug — paying the tax reduces her estate further without it counting as a gift. Luna: So she's effectively making an additional tax-free gift to the trust every year just by covering the tax bill. That can compound significantly. Lucas: Let's put numbers on it. Say a married couple has a $30 million estate. The federal estate tax exemption in 2026 is about $13.6 million per person, so together they can shield $27.2 million. That leaves $2.8 million exposed to estate tax at 40 percent — roughly $1.1 million in tax. If they fund a SLAT with, say, $10 million in growth assets, they move that $10 million out of the estate, plus all future appreciation. The remaining $20 million is well under the combined exemption. Estate tax goes to zero. Luna: That's a $1.1 million saving, but if the $10 million doubles over time, the saving is much larger — more like $6 million or more. Lucas: Exactly. And because the grantor pays the tax, the trust assets grow unencumbered by income tax. It's a powerful estate freeze technique. Luna: But there's a catch I've heard about — the reciprocal trust doctrine. If both spouses set up SLATs for each other, the IRS might collapse them and treat them as if each grantor retained an interest in their own trust. Lucas: That's the trap. If you have two identical SLATs created at the same time with similar terms, the IRS can argue they're reciprocal and unwind the estate tax benefit. The fix is to make them different — different funding dates, different assets, different trustees, maybe slightly different distribution standards. One could be discretionary, the other an annuity-style unitrust. Luna: So the planning has to be thoughtful. You can't just cookie-cutter two trusts. Lucas: Right. And another trade-off: when you gift assets into a SLAT, you lose the step-up in basis at death. If the grantor dies holding the asset, her heirs get a step-up to fair market value. In the trust, the assets retain their original cost basis, so when the trust sells them, there's a bigger capital gains tax bill. Luna: That's the classic tension between estate tax savings and income tax cost. For most ultra-wealthy families, estate tax is the bigger concern, but it's worth modeling. Lucas: And a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a small thing that makes a real difference for us to keep doing deep dives like this. Lucas: So back to the SLAT mechanics. One nuance people miss is that the grantor can also be a discretionary beneficiary of the trust — not directly, but if the trust allows distributions to the grantor's spouse, the grantor can benefit indirectly. But the IRS has a doctrine called the 'relation back' doctrine that could cause inclusion if the grantor retains too much control. Luna: So the grantor shouldn't be a trustee or have the power to remove the trustee. That would be a problem. Lucas: Exactly. The trust should have an independent trustee — a bank, a trust company, or a trusted advisor. And distributions should be in the trustee's discretion, not mandatory. Luna: What about the portability election? If one spouse dies, the surviving spouse can use their unused exemption. Doesn't that make SLATs less necessary? Lucas: Portability is helpful, but it only preserves the exemption — it doesn't remove future appreciation from the estate. A SLAT removes both the asset and its growth. Plus, portability doesn't apply to state estate taxes in most states that have them. In Massachusetts or Oregon, a SLAT can save state estate tax too. Luna: So for a couple with a $15 million estate in a state with a $1 million exemption, a SLAT could be critical. Lucas: Right. And there's a valuation angle: if you fund a SLAT with hard to value assets like a family business stake or real estate, you can get a valuation discount for lack of marketability or lack of control, which lets you transfer more value inside the exemption. Luna: That's a form of leverage. You gift a $2 million interest that's worth $1.5 million for gift tax purposes, effectively transferring $2 million of value with only $1.5 million of exemption used. Lucas: Exactly. So SLATs are especially popular for business owners who expect their company to appreciate significantly. They can freeze the value at today's lower valuation, and all future growth goes to the trust free of estate tax. Luna: What about the downside if the grantor and spouse divorce? That can get messy. Lucas: It can. The trust is typically for the spouse's benefit, so if they divorce, the spouse may still be a beneficiary. Some trusts include a provision that upon divorce, the spouse's interest terminates, but that can create a taxable gift. It's a risk that needs to be discussed upfront. Luna: So it's not for everyone. You need a stable marriage and enough assets to justify the legal costs. Lucas: Right. Legal fees for a properly drafted SLAT can run $5,000 to $15,000, plus ongoing trust administration. But for a family with $20 million or more, the estate tax savings dwarf those costs. Luna: And with the exemption set to sunset after 2025 — back to roughly $7 million per person — SLATs are having a moment. We're seeing a lot of families rush to lock in the current exemption. Lucas: That's the big picture. If you can gift up to $13.6 million in 2026 without using your exemption, and you do it through a SLAT, you preserve access through your spouse while removing the asset permanently. It's one of the few planning techniques that gives you both tax savings and liquidity optionality. Luna: I'd love to see some data on how many SLATs have been created in the last two years. I bet it's spiked. Lucas: The trust companies I talk to say they're seeing a 30 to 40 percent increase in SLAT formations compared to a few years ago. It's definitely become a standard tool in the estate planner's toolkit. Luna: So if you're a high-net-worth couple with a growing business, a SLAT is worth exploring — but you need a good lawyer who understands the nuances. Lucas: Absolutely. And the thing to keep in mind is that a SLAT isn't just about tax — it's about control. It lets you give away wealth while keeping a safety net. That peace of mind is often worth the complexity. Luna: Looking ahead, if exemptions are cut in half, I wonder if we'll see more creative variations — like SLATs that convert to grantor retained annuity trusts halfway through. Lucas: It's possible. Estate planners are already combining SLATs with other techniques like installment sales to defective grantor trusts. The innovation never stops. Luna: Well, I think we've given our listeners a solid framework to start the conversation with their advisor. Lucas: That's the goal. A SLAT isn't a do it yourself project, but knowing the basics helps you ask better questions.