For many families, the answer is yes. A SLAT lets one spouse remove significant assets, along with all future appreciation, from a taxable estate, while still giving the couple indirect access to those assets through the non-settlor spouse. Done correctly, it can deliver estate tax deferral, mitigation, creditor protection and income tax advantages all at once.

What is a SLAT?

A SLAT is an irrevocable trust that one spouse (the settlor) creates and funds for the benefit of the other spouse, and often for descendants as well. Because the transfer is treated as a completed gift, it uses the settlor's available gift and estate tax exemption based on the fair market value of the gifted property. In exchange, the gifted property, and all appreciation thereof, are excluded from both spouses' taxable estates.

The non-settlor spouse is usually named the primary beneficiary and can even serve as sole trustee, which means the couple retains meaningful, if indirect, access to the wealth they've transferred.

Why families use SLATs

Even with a higher, permanent estate and gift tax exemption, a properly structured SLAT offers benefits that go beyond simply avoiding a future estate tax increase:

• Assets and their appreciation leave your taxable estate. Once assets move into a SLAT, they are excluded from the settlor's estate for good, even as they continue to grow in value, and they stay out regardless of what happens to the exemption down the road.
• The benefit can extend across generations. A SLAT can be structured to be fully exempt from the generation-skipping transfer (GST) tax, so future distributions to grandchildren and beyond can pass without triggering that additional 40% GST tax.
• Paying the trust's income taxes shrinks your estate even further. Because a SLAT is typically a grantor trust, the settlor pays income tax on the trust's earnings personally, which quietly reduces the settlor’s taxable estate without using any additional gift tax exemption.
• Your spouse can retain real control. The non-settlor spouse can serve as trustee and retain control over distribution timing and amounts, within certain limits.
• Assets gain meaningful protection from creditors. Assets held in the SLAT are shielded from most creditor claims, subject to state law and proper drafting.

Drawbacks of a SLAT

A SLAT isn't a decision to make lightly. Families should weigh the full range of potential drawbacks before deciding to put a SLAT in place, including:

• Control risks. Permanent loss of control and reliance on the non-settlor spouse for access.
• Tax and legal risks. Consumption of estate and gift tax exemptions, potential IRS challenges under the reciprocal trust doctrine, and changes in future tax laws.
• Personal risks. The impact of divorce or premature death of the non-settlor spouse.
• Practical risks. Administrative costs, complexity and uncertainty of actual access to SLAT assets.
• Funding challenges. A SLAT can only be funded with the assets owned solely by the settlor. This creates administrative and legal complexity for families who live in community property states, where earned assets are considered as owned jointly by both spouses regardless of title.

A related strategy: the SLANT

For some families, a Spousal Lifetime Access Non-Grantor Trust (SLANT) is worth a closer look. A SLANT works like a SLAT in that it removes assets from both spouses' taxable estates, but it's deliberately structured so the trust, not the settlor, pays its own income taxes as a separate taxpayer.

That distinction opens up two planning opportunities:

1. If the SLANT is established in a state without an income tax on trusts, it can defer, reduce or eliminate state income tax on certain income.
2. Because a SLANT is a separate taxpayer, it can multiply the exclusion available on the sale of qualified small business stock (QSBS).

Which structure is right for you

There's no single right answer between a SLAT and a SLANT. A traditional SLAT offers the most flexibility for estate tax reduction and is the more established, better tested strategy. A SLANT trades some of that flexibility for state income tax savings and the chance to stack QSBS exclusions, which matters most for families anticipating a large capital gain from a future sale of QSBS. Both strategies are irrevocable, require giving up some level of control, and deserve a close look at your specific goals, assets and family situation before moving forward.

Contact your Merrill advisor to start a discussion on whether a SLAT or SLANT strategy may fit your family's estate planning goals.