Maximize Estate Tax Savings with a Spousal Lifetime Access Trust Before the Tax Cuts & Jobs Act Expires in 2025

By: Kevin Todd, CPA, EA, USTCP, Senior Manager

Overview of the Tax Cuts and Jobs Act (TCJA) Expiration

Many of the legislative tax rules we have come to know under the Tax Cuts and Jobs Act (TCJA) will expire after December 31, 2025. Therefore, it is essential to understand what legislative changes are on the horizon. For those impacted by the change in the federal estate and gift tax exemption, proper planning could significantly minimize one’s future estate tax liability while ensuring that loved ones remain financially secure.

Understanding the Federal Estate and Gift Tax Exemption for 2024

In 2024, an individual’s federal estate and gift tax exemption is $13.61 million. However, this exemption is expected to drop to approximately $7 million on January 1, 2026, when the TCJA expires. This means if a single individual were to pass away in 2024 with an estate worth $13M, the individual’s estate would not be subject to the 40% estate tax. However, if that same individual were to pass away in 2026, their estate would pay approximately $2.4M to the IRS in estate tax.

Because this historically high federal estate tax exemption does face potential reduction, planning tools, such as the Spousal Lifetime Access Trust, are gaining more attention and popularity.

What is a Spousal Lifetime Access Trust (SLAT)? 

A Spousal Lifetime Access Trust is an irrevocable trust one spouse creates to benefit the other spouse. The spouse creating the trust is the grantor, and the other spouse is the beneficiary.

A SLAT allows the grantor to irrevocably transfer assets out of their estate while still providing the beneficiary spouse with current and future access to the trust funds, should the beneficiary spouse ever need additional sources of cash during their lifetime.

Why Consider a SLAT for Your Estate Planning?

Estate Tax Benefits of a SLAT

When a grantor transfers assets into a SLAT, they are removed from the grantor’s estate. The assets transferred can be in the form of cash, investments, real estate, etc. Assets expected to appreciate significantly are the best potential candidates for transfer. Once the assets have been gifted into the SLAT, any future appreciation of those assets is also outside the grantor’s estate and not subject to estate tax upon the grantor’s death.

Spousal Financial Security Through a SLAT

A SLAT is created to ensure that a spouse has direct access to financial resources and stability, should they need it during their lifetime.

While the grantor spouse cannot withdraw assets from their own SLAT, they can indirectly benefit from the assets through their spouse while their spouse is alive.  However, if the beneficiary spouse passes away before the grantor spouse, the grantor will lose indirect access to the trust’s funds.

After the beneficiary spouse’s death, the trust can either terminate and distribute the funds to children or grandchildren, or the trust can continue to exist for the benefit of heirs.

If the grantor and beneficiary spouse were to divorce, the ex-spouse would remain the beneficiary of the funds and would continue to benefit from the trust. However, including provisions within the trust document may be possible to mitigate this risk.

Nonetheless, since the grantor’s lifetime exemption was utilized in funding the SLAT, we recommend that assets within this type of trust be the last bucket of assets a spouse would access for their needs.

Managing Access and Control with a SLAT

When a completed gift is made to a SLAT, the grantor gives up direct control of the assets. While the grantor’s influence over the trust will carry on through the provisions of the trust document, the grantor will not have any say in when or to what extent distributions are made to beneficiaries so long as the distributions are within the terms of the trust. This is because the grantor spouse cannot serve as acting trustee of the trust.

Asset Protection via SLATs

As with any irrevocable trust, assets held in a SLAT are shielded from creditors of both the grantor and beneficiary. This can help protect family wealth from any potential or unforeseen liabilities.

The Irrevocable Nature of a SLAT

It is vital to understand that an irrevocable trust is just that. Once a completed gift is made and assets are transferred into the trust, they are outside the grantor’s control. The grantor cannot change their mind, remove the assets from the trust, or change the terms of the trust. Therefore, the use and terms of the trust must align with the grantor’s long-term goals.

Navigating Tax Implications of a SLAT

When the SLAT is initially funded, a gift tax return must be prepared and filed with the IRS to report and value the gifted property properly. A tax professional should complete this return to ensure the gift is disclosed correctly so that the statute of limitations will begin to run on the transaction.

The SLAT is a separate legal entity, which may require a separate income tax return. However, this trust is typically structured as a grantor trust. This means that the grantor spouse continues to be the income tax owner of the assets – even though they are no longer the legal owner of the assets. Therefore, any taxable income generated by the SLAT will be reported on the grantor’s personal income tax return and taxed at the grantor’s personal income tax rate. While paying tax on an asset you no longer own sounds foolish, paying the annual income tax on behalf of the SLAT each year allows the SLAT to continue to grow income tax-free overtime.

Assets held within a SLAT do not receive a step-up in basis. When the assets are transferred into the trust, they receive carry-over basis. The trust has the same basis in the asset as the grantor did before it was transferred. If the asset appreciates and is sold in the future, a long-term gain will be generated, and capital gains tax will be due in the year of sale.

How to Determine if a SLAT is Right for Your Estate

A Spousal Lifetime Access Trust is one of many tools available as an estate planning strategy. This type of trust allows a grantor to utilize a significant portion of their lifetime exemption while retaining the ability to use those funds for the long-term support of a spouse. However, A SLAT may not be the best option for every estate due to the irrevocable nature of the trust and other long-term tax considerations.

Next Steps: Consult the Estate Planning Experts at Maner Costerisan

If you are interested in learning more about a SLAT and how it could benefit your estate, please contact the experts at Maner Costerisan and Maner Wealth for assistance.

You can reach us at 517-323-7500, or schedule a complimentary consultation at maner@manercpa.com.