With the looming sunset of the current federal estate tax exemption, many married couples are wondering if there is any planning that can be done to reduce the estate tax liability at the time of their deaths. For some, a spousal limited access trust (“SLAT”) may be the answer.

A SLAT is an irrevocable trust created by one spouse for the benefit of the other during his or her lifetime. It is a solution for married couples looking for a way to use their current gift and estates tax exemption while maintaining access to the assets placed in the trust. The 2024 exemption amount is $13.61M per person. However, for those that die after December 31, 2025, this number will reduce to approximately $7M. For married couples with assets that exceed these amounts, the SLAT should be considered.

The SLAT can provide income and principal distributions for the benefit of the spouse and other beneficiaries, which may include children. This planning is effective even though the contributing spouse does not die before the sunset of the exemption. This is one of the differences between SLATs and other types of trusts that are only established upon death. While the donor spouse makes an irrevocable gift to the trust and gives up any right to the funds, the beneficiary spouse (and other beneficiaries) can have access to the gifted funds immediately. There is also an option for the donor spouse to borrow from the trust during his or her lifetime.

Any assets transferred to a SLAT will use the value of assets when transferred and all growth in the assets will be outside of both spouse’s taxable estates. We call this “freezing” the value of the gift. The “freeze” of the value of the assets transferred will exclude any appreciation of those from the taxable estate of either spouse. This will allow you to utilize the increased federal exemption before it decreases. SLAT assets and any appreciation in value of those assets during your lifetime will be outside your taxable estate. In addition, if you transfer assets to the SLAT and survive the transfer by three years, those transfers can also escape taxation by NY State, where the exemption is $6.94M per person in 2024. Therefore, if you transfer sufficient assets to use the balance of your exemptions, you can significantly reduce or eliminate your estate taxes.

Generally speaking, the SLAT will only be a useful tool for couples with more than $14m in assets, their combined exemption amount. When a SLAT is funded, a gift tax return is filed as a placeholder against your lifetime gifting exclusion. Therefore, if you do not maximize the exemption with the SLAT, the benefit to your estate may be nonexistent. For example, if each spouse puts $7M into a SLAT, then when the exemption is reduced to $7M in 2026 they will have both used up their exemptions for a total of $14M. Instead, suppose one spouse puts $14M in a single SLAT before January 1, 2026. In that case, the spouse will have benefited from the double exemption (plus growth) when the exemption is reduced to $7M as all of those assets will be outside of the taxable estate. In this simple example, the other spouse still has a full $7M exemption, which, when added together with the $14M SLAT, totals $21M plus growth that escapes taxation at death.

Although the future of the federal estate tax is uncertain, planning now may be the best option. Reviewing your assets and plan with your accountant, financial advisor, estate planning attorney, and other competent advisors can help you maximize your legacy for the next generation.

Author: Britt Burner, Esq. is a Partner at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning and Elder Law. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton.