Investing Assets In A Spousal Lifetime Access Trust (SLAT)

Originally posted to Forbes.com

Introduction

Spousal Lifetime Access Trusts (known by the acronym “SLAT”) are a very common estate planning, income tax planning and asset protection tool. But how should you invest assets held in your SLAT? Let’s assume you have an overall asset allocation for your family unit as a whole. Should you mirror that overall allocation in your SLAT too? Or are there ways to fine tune your SLAT investment strategies to enhance your outcome? This is a similar concept as to how, even if you may have an overall asset allocation, you fine tune which asset classes are held in qualified plan accounts and which asset classes are held in non-qualified accounts. What about your SLATs?

What is a SLAT?

Why are SLATs are pretty ubiquitous in estate planning? A simple explanation might make the discussion following clearer. A SLAT, as the name implies, is a trust created to benefit your spouse. Pretty simple. But that is way to narrow and basic to explain the myriad of variations and uses of this technique. Old style life insurance trusts were perhaps the most common SLATs, although they weren’t generally called by that name.

Example: Husband wants life insurance to protect his wife and children. But years ago, when the exemption was only $1 million he did not want those funds to be subject to estate tax when the last of he and his wife died. The common answer was to have the life insurance purchased by an Irrevocable Life Insurance Trust (typically referred to by the Acronym “ILIT”). What’s the difference between a SLAT and an ILIT? Nothing really. Both are trusts that benefit as spouse.

Indirect Benefit

So, you implemented spousal lifetime access trusts as part of an advanced estate planning strategy, and those trusts now represent a meaningful portion of your overall balance sheet. At the time the trusts were created, the primary objective may have been to shift appreciating assets outside of your taxable estate while retaining indirect access through a spousal beneficiary.

Example: Husband created a SLAT for wife and contributed investment assets. Husband is not a beneficiary of the SLAT, Wife is. If the SLAT buys a vacation home Wife as a beneficiary of the trust owning the vacation home can use it. Wife can let the Husband, because of the spousal relationship, use the vacation home as well. That is an indirect benefit. There is not much clearly defined law delineating how far the spouse setting up the SLAT (referred to as the settlor, trustor or donor) can “indirectly” benefit from the SLAT through the spousal beneficiary before creditors or the IRS can attack the plan and perhaps pierce the trust. So, caution is in order. What does this have to do with investment planning? If forecasts are done it may not be wise to document in the projections a benefit to the Husband as that might become evidence used to defeat the plan.

SLAT Variations, Goals and Benefits and Affect SLAT Investment Decisions

SLAT goals and the various structures or approaches that can be used for SLATs are critical to understand if you want to devise a better investment allocation for your SLAT plan. SLATs come in a wide variety of shapes and sizes and you need to understand the nature of the SLAT you are dealing with to determine an appropriate asset location decision for SLAT assets.  Over time, family and SLAT circumstances often evolve, and the planning focus may shift from wealth transfer efficiency alone to the more complex challenge of balancing cash flow needs, tax cost, asset protection, and long-term flexibility.

Estate Tax: SLATs were often created, and still are, to avoid estate taxes. The changes in the estate tax exemption amount alone may have altered or even obviated this intended benefit. Many taxpayers set up SLATs in 2012 when the exemption was $5 million but scheduled to decline to only $1 million. Those SLATs may have been funded with $1-5 million of assets. Now the exemption is at a lofty $15 million permanent and inflation adjusted level. So, many of the SLATs created in the past will have no estate tax benefit, which may have been the primary catalyst for the plan.  But “permanent” in Washington-Speak only means permanent until the law is again changed. So, whatever the original motivation for a SLAT, the rules and objectives may change again in the future. When a SLAT is important to grow assets outside your estate maximizing the growth inside the SLATs may influence asset location decisions (e.g. growth assets rather than bonds).

Grantor SLATs: Most SLATs are structured to be taxed for income tax purposes as grantor trusts. That means all trust income is taxed to you as the person who created the trust. While that can be a positive wealth transfer mechanism because the SLAT assets grow without diminution for income tax, and your assets are reduced each year by the income tax due on trust income, so fewer assets remain in your estate for estate tax purposes or within the reach of your creditors. That can be good, but as with all good things it may reach the point where it is “too good.” At some point the reduction in your estate resulting from paying income tax on trust income can become painful and worrisome. What does that have to do with asset location decisions? If your SLAT is invested in growth stocks that it will hold long term, current income can be reduced to a much more modest amount. That may provide the relief you want from that tax burden (sometimes referred to as “tax burn”). So, your feelings about that tax burden can affect SLAT investment decisions.

Non-Grantor SLATs and Federal Income Tax: SLATs can be created to be non-grantor trusts that pay their own income tax. These are also called “complex” trusts in tax jargon. This status might facilitate the trust shifting income to lower bracket family members, taking advantage of state and local tax (SALT) deductions, enhancing charitable contribution deductions that you may have not qualified for on your personal return, and much more. If you are shifting, for example, charitable contributions to your non-grantor SLAT then you may want assets that generate the income to fund contributions. Also, non-grantor trusts get their charitable contribution deduction under a different tax Code provision then people do, so their requirements are different. For example, you individually can transfer an appreciated stock to a charity and may qualify to deduct the fair value of that stock. A non-grantor SLAT cannot do that and instead must sell the appreciated stock, realize the gain, then donate the proceeds. That will affect how your SLAT investments are planned for.

Non-Grantor SLATs and State Income Tax: If you live in a high tax state you may be able to create non-grantor SLATs in no tax states and avoid state income taxes in your home estate. If your SLAT is a non-grantor trust intended to avoid state income tax in your home state that can influence investment decisions. For example, you should avoid investing in partnerships that have any income sourced to your home state as that might taint all trust income as taxable in your home state contrary to your plan.

Asset Protection: The risks of assets being lost to malpractice claims, or other litigation are significant. SLATs can both help protect assets and within reason give you access to those assets should you need in the future. The stronger your asset protection motives the more tax burn (see above) you want, and the more growth inside the SLATs you want. Those factors can have a material impact on SLAT investment decisions.

Evolving SLAT Goals and Evolving Investment Planning

Decisions regarding how SLAT assets are invested and accessed can materially affect each of these objectives.

When significant and ongoing family expenses arise, particularly medical or care-related costs, the question is no longer whether SLATs were an appropriate planning tool, but how they should be integrated into a comprehensive financial and legal strategy. The way SLAT assets are invested, the timing and character of distributions, and the coordination between trust assets and personal assets all require careful analysis. A narrow focus on the SLATs themselves may lead to suboptimal outcomes, while a forecasting-driven, household-level approach may provide greater clarity and resilience. But be careful in what you forecast. A history of forecasted regular distributions to the spousal beneficiary may confirm that there was an implied agreement with the trustee to make those distributions. That could adversely affect asset protection and estate exclusion goals. Any forecast reflecting benefits to the settlor spouse who created the trust but is not a beneficiary may undermine the SLAT plan as well.

Planning Context And Evolving Objectives

SLATs are frequently implemented during periods of high exemption amounts or heightened estate tax concern. At that stage, the emphasis is often on moving assets out of the taxable estate while preserving flexibility through spousal access. As years pass, however, clients may face new realities, including health challenges, caregiving obligations, changes in income, or shifts in family structure. These developments can introduce liquidity demands that were not fully anticipated at the time of trust formation.

In this context, you may find that the core planning question is no longer limited to estate tax minimization. Instead, you may need to evaluate whether existing personal assets are sufficient to support projected living expenses and care costs, and if not, how SLAT assets may be accessed without undermining the very benefits the trusts were designed to achieve. This requires a nuanced understanding of both the trust terms and the broader financial picture.

What if your SLAT has income producing assets and the tax burden you bear has become too burdensome? Perhaps the trustee can swap the SLA’s income producing assets for raw land or growth stocks you hold personally. That way the income the SLAT was earning and on which you were paying income tax with no commensurate cash flow would instead be received by you, solving the tax burn problem. You have to be certain that the trust document permits this (many if not most do) and that the trustee adheres to any requirements in the trust document. This will include confirmation that the assets you swap into the trust are equivalent in value to the assets you swap out. Note that this transaction may have no impact on your overall family (inclusive of trust) asset allocation, but it is a material change of the asset location decision for your SLAT.

Importance Of Understanding SLAT Governing Provisions

Meaningful analysis of SLAT investment and distribution strategy cannot occur without a detailed review of each of your SLAT’s instrument’s governing provisions. You should understand who qualifies as a beneficiary, whether distributions are limited by health, education, maintenance, and support (HEMS) standards, and whether the trust includes loan provisions, tax reimbursement clauses, or powers of substitution. The identity and independence of the trustee, as well as any distribution committees, also play a critical role in determining how flexible and defensible the trust structure may be.

The trust provisions directly affect your practical ability to access trust assets and influence how third parties, including taxing authorities and potential creditors, may view the arrangement. Regular or predictable distributions, particularly when combined with related-party trusteeship, may weaken asset protection arguments or invite scrutiny. Conversely, discretionary administration by an independent trustee may enhance defensibility, even if it limits immediate access.

Example: If your SLAT includes a discretionary right for the trustee to reimburse you for income taxes, you might forgo the swap or substitution transaction described above and instead leave the asset location decisions unchanged. You might request that the trustee reimburse you for the income taxes you paid on SLAT assets. If the trustee is your spouse and you do this yearly, that might suggest that you and your spouse had an implied agreement to reimburse you. If that can be demonstrated the SLAT assets might end up being included in your estate or reachable by your creditors. On the opposite end of the continuum, if your trustee is an independent institutional trustee and you only requested a tax reimbursement on rare occasion when your SLAT sold a valuable asset at a large gain, the SLAT plan may be less susceptible to challenge.

The above example illustrates how your tax and financial position, the tax posture of the SLAT you create, who is serving as trustee (and their relationship to you), the language in the trust document, can all affect you might operate the SLAT and how investment decisions might be affected. In many cases a broader more sophisticated view of the plan might lead to better results from the several perspectives that effect your plan. If you hear that there is a standard answer for how to invest SLAT assets, be wary. It’s like the classic lawyer answer to every question: “It depends.”

Bucket-Based Asset Location And Withdrawal Planning

Rather than evaluating SLAT assets, and the SLAT asset allocation, in isolation, you may find it helpful to adopt a bucket-based framework that considers all assets classes or buckets and how they might interact collectively. Qualified retirement accounts, taxable investment accounts, Roth IRA accounts, real estate, and trust assets each have distinct income tax and asset protection characteristics. Decisions regarding which assets to draw upon first can have significant implications for both short-term cash flow and long-term planning outcomes. What order might be best for you will depend on several factors and the nature of the different asset buckets you have:

Required Minimum Distributions: If you have a retirement account and are required to take certain minimum distributions or face penalties, that may be the first amount of funds you withdraw. If the qualified plan assets are protected from claimants that may suggest that you don’t withdraw from these accounts unless and until you have to do so. That distribution pattern and when it must begin may impact investment decisions and your overall asset location. Age, needs, and other factors might also influence the decision.

Non-qualified assets: Non-qualified personal investment accounts may have no protection from claimants and no tax penalty for use, so these may be favored over other assets.

SLATs Generally: SLATs should generally provide protection from your future claimants or creditors. Thus, for SLATs you might want to defer distributions as long as possible to keep the assets in the SLAT growing at the fastest rate possible outside the reach of your potential creditors.

Non-Grantor SLAT: If your SLAT is structured as a non-grantor trust that pays its own income tax your distribution decisions may be different then for other SLATs. Non-grantor trusts reach the highest marginal tax rate at about $16,500 of income so distributions, especially to beneficiaries in lower income tax brackets, might be advantageous.

Completed Gift SLATs: Most but not all SLATs are structured as completed gift trusts. Meaning that the assets ion the SLAT are outside your estate. For these types of SLATs, you might want to defer distributions as long as possible to keep the assets in the SLAT growing at the fastest rate possible outside your estate.

In many cases, preserving trust assets while spending down non-qualified personal assets may align more closely with estate tax and asset protection objectives. However, this approach should not be assumed without analysis. A comprehensive cash flow forecast that incorporates anticipated living expenses, medical costs, and potential variability over time may help determine whether personal assets can sustain projected needs for a meaningful period before SLAT distributions become necessary. That analysis should also consider the concept discussed above that regular distributions (e.g., a monthly payment to your spouse), especially if your spouse is the trustee, may undermine your planning goals.

Estate Tax Considerations And Long-Term Retention Of Trust Assets

If your net worth already exceeds applicable estate tax thresholds, retaining assets within SLATs for as long as practicable may allow continued growth outside of your taxable estate. Premature distributions from SLATs may erode this benefit by shifting assets back into your personal balance sheet (unless people other than your spouse are also named as beneficiaries and the distributions are made to them). Forecasting can help assess whether SLAT assets are truly required in the near term or whether alternative funding sources may suffice.

You should also consider the interaction between trust retention and future legislative uncertainty. While exemption amounts may change, the structural benefits of having assets held in trust outside of the estate may remain valuable. This consideration may argue in favor of conservative distribution practices, even in the face of current liquidity pressures.

Income Tax Implications Of SLAT Investment And Distribution Decisions

Most SLATs are structured as grantor trusts, meaning you personally bear the income tax liability on trust earnings. This grantor trust status can be beneficial, as it allows the trust to grow without income tax erosion. However, increased distributions, particularly those requiring the sale of appreciated assets, may accelerate income tax costs at the personal level.

While some SLATs include tax reimbursement provisions, frequent reliance on such provisions may weaken asset protection and raise concerns about implied agreements between the grantor and trustee. Before implementing a pattern of regular distributions, you should model the income tax impact, including capital gain recognition and the ongoing grantor tax burn, to determine whether the benefits outweigh the costs.

Trust Segmentation And Non-Grantor Planning Strategies

In certain circumstances, it may be feasible to divide an existing SLAT into separate trusts through decanting or other modification techniques. One potential outcome of such segmentation is then taking actions so that the tax character of a portion of the former single SLAT can be changed. This could include the creation of a non-grantor trust for the benefit of descendants. Distributions from a non-grantor trust may shift taxable income to beneficiaries in lower tax brackets, potentially reducing the overall income tax burden.

This approach may also allow you to preserve core trust assets within the original SLAT while selectively funding family needs through a segmented structure. Whether such a strategy is permissible and advisable depends on the governing law, the trust terms, and your tolerance for complexity and risk. Legal analysis should be closely coordinated with financial modeling before pursuing segmentation.

Example: You created a SLAT that was a grantor trust. The SLAT investments have grown to $10 million. You’ve done well financially and feel comfortable shifting some of those funds to your children but are not comfortable bearing the tax cost on income that is distributed to them. The trustee divides the SLAT into two trusts under the powers given to the trustee under the SLAT document: (1) $8 million grantor SLAT; and (2) a $2 million SLAT. You are able to renounce the right to a tax reimbursement. The trustee then decants the trust into a new non-grantor SLAT that requires that distributions to your spouse have to be approved by an adverse party (e.g., a child beneficiary). If those two changes are achievable they would transform the smaller SLAT into a non-grantor trust. If the trustee makes distributions to your children the income will flow to them and be taxed in their presumably lower income tax brackets. The investment location decisions, distribution decisions and other aspects of the new SLAT may change.

Asset Protection Considerations

Asset protection remains a relevant consideration even for those who do not perceive themselves as high-risk. Professional endeavors, wealth itself, renting property, serving on charitable boards, having a child-driver, and so much more can attract claims. SLATs may provide meaningful protection if they are respected as independent discretionary trusts.

Regular distributions, especially when combined with grantor influence or related-party trusteeship, may undermine the appearance of independence. Independent institutional trustees, discretionary distribution standards, and irregular distribution patterns may help preserve defensibility.

How do these considerations inform both investment strategy and distribution planning? If you or your family may have any need for the protection a SLAT may provide, that might suggest retaining assets in the SLAT as long as possible. That might suggest a longer-term holding period as compared to non-trust, non-qualified personal assets.

Insurance Planning As A Complement To SLAT Strategy

SLAT planning may create liquidity gaps upon death, disability, or long-term care events, particularly if access to trust assets depends on a spousal beneficiary who predeceases you or becomes incapacitated. Life insurance may be used to replace lost access and provide liquidity at death.

Example: Husband creates a SLAT for wife and gifts $10 million to that SLAT. Husband may, with reasonable guardrails, may indirectly benefit from the trust through the Wife. However, should Wife die prematurely, Husband’s ability to benefit indirectly through Wife will end. To address that potentiality, Wife could purchase life insurance on her life (that could be owned by her SLAT) that could fill that potential financial risk.

Similarly, disability insurance may address the loss of earned income, while long-term care coverage may provide both financial and psychological reassurance.

Thus, insurance planning should be integrated with the overall trust and investment strategy rather than considered in isolation. The goal is not necessarily to eliminate risk, but to manage it in a way that supports long-term stability and flexibility. How might these insurance decisions will affect SLAT investment decisions in that some portion of SLAT assets and cash flow may be directed to the insurance premiums and thereby affect investment planning. For example, paying annual insurance premiums will require liquidity, etc.

Special Needs And Government Benefits Considerations

When family members have significant medical or care needs, additional planning complexity arises. Trust distributions or direct payments may inadvertently jeopardize eligibility for governmental benefits if not properly structured. Supplemental needs provisions, professional trusteeship, and coordination with specialized counsel may be essential to preserve program eligibility and continuity of care.

Distribution planning in this context must consider not only tax efficiency but also regulatory compliance and long-term care coordination. The interaction between trust administration and benefit eligibility underscores the importance of careful drafting and ongoing oversight.

Basis Management And Swap Powers

If low-basis assets were transferred to SLATs, future planning may include the use of swap powers to exchange appreciated trust assets for higher-basis assets held personally. This technique may allow for basis adjustment at death while preserving trust benefits during life. Such strategies require careful liquidity planning and properly drafted powers of attorney to be effective. For example, your wealth adviser may be able to help you create a standby line of credit that you can borrow from to use to obtain cash to effectuate a swap.

Coordination Between Legal And Financial Advisors

Effective SLAT investment and distribution planning requires close coordination between legal counsel and financial advisors. Budgeting, forecasting, and scenario analysis are critical to demonstrating the sustainability of proposed strategies. Legal structure and financial modeling should inform one another to reduce unintended consequences and enhance defensibility. When your investment adviser plans for distributions (cash flow) and investments for your SLAT they need to be careful to understand the terms of the SLAT involved, and if there are two SLATs (e.g., one for each spouse) the differences between the provisions in each. SLATs, as explained above, come in a myriad of different variations. The details that make-up each SLAT could be important to these decisions. If your adviser suggests making those decisions (e.g. “I’ve invest a lot of assets that are in SLATs”) without reading the trust or getting detailed guidance from an attorney, that could be worrisome.

This collaborative approach may be particularly valuable when balancing competing objectives, such as cash flow needs, tax efficiency, asset protection, and long-term family security. Integrating these perspectives may help you navigate complex trade-offs with greater confidence.

Conclusion

SLATs can remain powerful planning tools long after they are implemented, but their effectiveness depends on thoughtful investment management and disciplined integration into a broader strategy. By focusing on forecasting, understanding the actual specific SLAT governing provisions, and coordinating legal and financial advice, you may preserve the benefits of SLAT planning while addressing evolving personal and family needs. The goal is not to achieve certainty, but to maintain flexibility and resilience in the face of changing circumstances.