How trusts can help wealthy couples fund their lifestyles and save big on taxes

Rich married taxpayers can use SLATs to take advantage of Trump-era tax cuts without parting ways with their assets.

Parents never really let go; they simply adjust their grip.

Wealthy Americans can save big on estate taxes by taking advantage of Trump-era tax cuts that expire in about two years. The clock is ticking, and some parents aren’t ready to give their riches to their kids. It’s a common complaint from clients, according to Dan Griffith, the director of wealth strategy at Huntington Bank, whether they’re worried about losing their cash flow or handing over control of their assets.

Luckily, wealthy parents can have their cake and eat it too. By using a spousal lifetime-access trust, also known as a “SLAT,” married taxpayers can stash their fortunes in trusts that pay distributions to their spouses rather than giving assets to their kids. There are a few parameters, but the beneficiary spouse can use this cash flow to fund the couple’s lifestyle. After this spouse dies, the trust passes to new beneficiaries, typically the couple’s children.

This can translate to millions in tax savings. Under current law, you can put as much as $13.61 million in a SLAT without incurring the federal estate tax of 40%. The kids are also off the hook, even if the trust’s value has been appreciated by millions when they become the beneficiaries.

“Technically, from a legal perspective, you don’t have access to those dollars anymore,” Griffith said. “But as long as you’re nice to your spouse, you may benefit little from the trust.”

There are benefits other than tax savings

The federal estate-tax exemption will be cut to $5 million per individual — adjusted for inflation from 2018 — unless Congress acts before the end of 2025.

But even if Congress extends the higher exemption, Griffith said setting up a SLAT now is a good move. A properly designed SLAT contains a spendthrift clause, which prevents heirs from using trust assets or future distributions as collateral. This protects the assets from creditors’ or divorcing spouses’ claims. In certain jurisdictions, this protection does not apply to the spouse who is the initial beneficiary of the SLAT, only other beneficiaries.

SLATs are also helpful for high-net-worth individuals who want to pass on their wealth but worry about their cash flow. Sometimes this need is more emotional than pragmatic, Robert Strauss, a partner at the law firm Weinstock Manion, said. One client with a net worth of $300 million chose a SLAT rather than gift assets to his children because he worried about losing access to his assets and funding his lifestyle.

“What I have found is this has nothing to do with objectivity,” Strauss told B-17.

The spouse that funds the trust — the trust maker — does not have direct control over the SLAT and these trusts are irrevocable, meaning the trust maker cannot withdraw assets. But lawyers can put in guardrails to exert some control. The trust maker can appoint a third-party trustee who can decide whether assets within the trust are sold and can overrule beneficiaries. This is particularly important since many trust makers put privately held businesses into SLATs. Griffith has seen this more often with second marriages to appease adult children from the trust maker’s first marriage.

“For any trust that’s going to live a long time, we want to create a level of flexibility,” Griffith said. “Some people say, ‘Well, I know my kids, I’m comfortable with them, but what about my grandchildren?'”

Here’s how SLATs lead to millions in tax savings

Without setting up a SLAT, the married couple is on the hook for a 40% federal estate tax on any assets in excess of the exemption.

Griffith gave an example of how that can lead to a steep tax bill.

Consider a married couple, both 61, who have a net worth of $40 million and will pass away in 25 years.
Assume the couple does not make any estate plans. At their time of death, their net worth had appreciated to $72.86 million.
If the estate-tax exemption sunsets in 2026 and adjusts with inflation, the exemption would reach an estimated $10 million per person or $20 million per married couple by 2048 when the couple dies. The amount in excess of the exemption is subject to an estate tax of $21.14 million.

If this same couple had used a SLAT, they could have saved about $12 million in estate taxes and saved their heirs millions in future taxes.

Instead, they choose to fund a SLAT with $12.92 million in 2023, fully utilizing the individual exemption for that year. Business assets that appreciate to $37.3 million by the time the couple dies fund the SLAT. The gains are not taxed. The assets outside the trust appreciate to $32.52 million. After using the beneficiary spouse’s $10 million exemption, the estate-tax bill is $9.01 million.
On top of saving approximately $12 million in estate taxes, the couple’s heirs save millions in future taxes. The heirs pay income tax on income from the trust, but no estate tax is incurred when the trust passes to the next generation.

There are a few caveats

The trust maker’s spouse loses their de-facto access to the assets if the beneficiary spouse dies first. After the beneficiary spouse’s passing, the SLAT exists for the benefit of the children.

Another condition is that spouses can set up SLATs for each other, but the trusts cannot be identical. If the married couple can comfortably fund two SLATs with more than $13.61 million, it can be worthwhile to do so. But Strauss said if the SLATs are identical, they violate IRS rules and are subject to estate tax.

Users should also be careful about putting certain types of assets in SLATs. Griffith said the IRS frowns upon putting jointly owned assets such as family homes into SLATs.

The biggest pitfall of SLATs is that if the couple gets divorced, it’s possible the beneficiary can keep the assets.

Several courts have ruled against the argument that trust assets are marital property and should be divided. In Dayal v. Lakshmipathy, an Ohio appeals court decided that the beneficiary spouse’s interest in the trust was a gift and was not subject to division.

“When you get divorced, you have to be careful about how you define marital property,” he said. “Be ready for those dollars to disappear.”