What Is a SLAT and How Does It Work?

In a typical SLAT arrangement, one spouse transfers assets into an irrevocable trust for the benefit of the other spouse. The gifting spouse cannot be a trustee or beneficiary, but the non gifting spouse often can serve as trustee and receive distributions. During the beneficiary spouse’s lifetime, the trust can be used for their needs. After that spouse dies, the remaining assets usually pass to children or other beneficiaries, often in further trust.

Because the trust is irrevocable, the assets are no longer owned by the person who made the gift. This is what creates the tax benefits, but it also requires careful planning and comfort with giving up direct control.

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Why Families Use SLATs

The primary motivation for creating a SLAT is estate tax planning. When assets are transferred into the trust, all future appreciation on those assets is removed from the couple’s combined taxable estate. This can result in significant tax savings for families with estates that may exceed federal or state estate tax thresholds.

SLATs can also be useful for Minnesota estate tax planning. Minnesota has a three year look back period. If the gifting spouse survives more than three years after making the gift, the transferred assets are excluded from Minnesota estate tax calculations. This forgiveness rule can make lifetime gifting strategies especially attractive.

There may also be asset protection benefits. Because the assets are held in trust rather than owned outright, they may be better insulated from certain creditor risks, depending on how the trust is drafted and administered.

Choosing the Right Assets to Gift

One of the most important planning decisions is which assets should be transferred into a SLAT. While there are estate tax benefits, there can be income tax tradeoffs. Assets given away during life do not receive a step up in basis at death. This means beneficiaries inherit the original cost basis, which can result in higher capital gains taxes later.

Because of this, SLATs are often funded with assets that have a relatively high basis today but strong potential for future growth. Examples may include business interests, investment accounts positioned for appreciation, or property expected to increase significantly in value.

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Risks and Limitations to Consider

SLATs are not without risk. Because access to the assets flows through the beneficiary spouse, the strategy depends heavily on the health and longevity of that spouse. If the beneficiary spouse dies early, the assets typically pass to the children, and the gifting spouse loses indirect access.

Marital stability is another key factor. In most conservative SLAT designs, the beneficiary spouse continues to benefit from the trust even after divorce. This means the gifting spouse generally does not regain access if the marriage ends. For this reason, SLATs are usually not recommended if the marriage is unstable.

There are also strict rules around control and reciprocity. Each spouse must avoid creating mirror image trusts for one another, as this can undermine the tax benefits if done incorrectly.

Frequently Asked Questions

Does a SLAT allow the gifting spouse to access the trust assets?
Not directly. The gifting spouse can only benefit indirectly through the beneficiary spouse, and that access ends if the beneficiary spouse dies.

Are SLATs reversible if circumstances change?
No. SLATs are irrevocable. Once assets are transferred, they generally cannot be pulled back into the gifting spouse’s ownership.

Are SLATs only for very wealthy families?
They are most commonly used by families concerned about federal or state estate taxes, but suitability depends on overall assets, goals, and comfort with long term planning.

Author

Claire creates wills and trusts which provide security and peace of mind. She compassionately listens to her clients’ dreams, goals, and fears and then fashions plans that best meet their needs. It is important to Claire that her clients understand different options and make decisions that are right for them. She loves to educate clients by drawing out complicated concepts.

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