A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust used in estate planning to help married couples reduce estate and gift taxes while keeping access to wealth through the beneficiary spouse. For couples in Arkansas looking to protect significant assets, an SLAT can be a powerful estate planning tool, especially before changes to federal estate tax exemption laws.
What Is a Spousal Lifetime Access Trust (SLAT)?
A Spousal Lifetime Access Trust (SLAT) is a type of lifetime access trust created by one spouse (the donor spouse) for the benefit of the other spouse (the beneficiary spouse). The donor spouse transfers assets to the trust, removing them from their taxable estate for estate tax purposes.
The beneficiary spouse can still request distributions for limited purposes, such as health, education, maintenance, or support, allowing the couple to maintain indirect access to wealth.
How a SLAT Works in Arkansas
In Arkansas, the donor spouse should only gift assets classified as separate property or sole-owner assets.
After the beneficiary spouse’s death, remaining assets typically go to other beneficiaries, such as children or other family members, either outright or in a continuing trust. This ensures protection for future generations while maximizing available tax benefits.
Benefits of an SLAT for Arkansas Residents
1. Remove Assets from Spouse’s Taxable Estate
When assets are transferred to the SLAT, they are excluded from the spouse’s estate, helping reduce exposure to estate tax and gift tax.
2. Preserve Lifetime Gift Tax Exclusion
By acting now, families can take advantage of the current high lifetime gift tax exclusion before the Tax Cuts and Jobs Act (TCJA) sunsets at the end of 2025.
3. Provide Indirect Access Through Beneficiary Spouse
Though the donor spouse gives up direct control, they can still indirectly benefit through distributions made to the beneficiary spouse, maintaining flexibility if financial needs arise.
4. Asset Protection and Control
SLATs protect trust assets from creditors, lawsuits, and divorcing spouses. The trust agreement can be designed to include remainder beneficiaries, including family members and future generations.
Key Tax Considerations and Consequences
Income Tax and Grantor Trust Status
SLATs are typically treated as grantor trusts, meaning the donor spouse pays income tax on trust earnings. This tax burden further reduces their taxable estate, allowing for tax planning while benefiting the family.
Gift Tax and Gift Tax Returns
When funding the trust, the donor spouse may need to file a gift tax return, especially if the value of assets gifted exceeds the annual exclusion. Funding an SLAT uses a portion of the lifetime gift exemption.
Capital Gains Tax and Cost Basis
One downside: trust assets in an SLAT do not receive a step-up in cost basis at death. This could lead to capital gains tax liability for the remainder beneficiaries if they sell the inherited property.
What Happens If the Beneficiary Spouse Dies?
If the beneficiary spouse dies before the donor spouse, the donor loses indirect access to the lifetime access trust. At that point, only the remaining trust beneficiaries, like children, can benefit. This makes it important to remain married and consider the risk of the beneficiary spouse’s death when creating the trust.
Important Legal and Structural Issues to Avoid
Avoid the Reciprocal Trust Doctrine
If both spouses set up nearly identical SLATs for one another, the IRS may apply the reciprocal trust doctrine, effectively treating the arrangement as if neither spouse gave up control—nullifying the estate tax benefit.
Carefully Choose Trustees
The non-donor spouse may serve as trustee, but if they can make unrestricted distributions to themselves, the IRS could include the SLAT’s assets in the spouse’s taxable estate. It’s safer to use an independent trustee or apply the HEMS standard (Health, Education, Maintenance, Support).
Watch Community Property and Ownership Rules
In a community property state, or if property owned jointly is transferred, the IRS may challenge the trust. Only separate property or assets owned solely by the donor spouse should fund an SLAT.
Is a SLAT Right for You?
You may benefit from an SLAT if:
- You have significant assets and want to reduce estate and gift taxes
- You want to lock in the current estate tax exemption
- You want to protect wealth for other family members
- You are confident your marriage will continue
- You need to indirectly benefit from the trust through your spouse
Have you ever asked, “Can both my spouse and I benefit from an SLAT?” The answer is no, not directly. But with proper planning, both spouses can create lifetime access trusts for one another (with key differences) and still achieve their goals, without violating the reciprocal trust doctrine.
Work with an Experienced Estate Planning Attorney in Arkansas
A SLAT must be carefully structured to align with federal tax laws, avoid IRS challenges, and meet your family’s financial needs. Working with an experienced estate planning attorney ensures:
- Your trust agreement is properly drafted
- The right assets were transferred into the trust
- You understand the full tax implications and gift tax consequences
- Your spouse understands the limits of access and the impact of the beneficiary spouse’s death
At Arkansas Legacy Planning, we help clients navigate complex tools like spousal lifetime access trusts, irrevocable trusts, and other tax planning strategies. Whether you’re trying to protect your spouse’s estate, preserve wealth for your children, or stay ahead of changing tax laws, we’re here to help.
Ready to protect your wealth and provide lifetime access to your spouse?
Contact our office today for a consultation with an estate planning attorney in Arkansas.
