Using a Spousal Lifetime Access Trust (SLAT) to Shield Exit Proceeds from Estate Tax

Imagine the day the wire finally hits your account. You have spent a decade or more building your company, grinding through late nights, navigating making payroll, and eventually executing a successful exit. You are likely prepared for the immediate capital gains tax hit. But while you are celebrating the liquidity event, the IRS is waiting for a second cut.

Without smart planning, capital gains, estate taxes, and income taxes can swallow 30–50% of your business sale. Most founders are so focused on the income tax from the sale that they completely miss the estate tax. If your net worth suddenly spikes past the federal exemption limit, up to 40% of your life's work could eventually go to the government instead of your family.  

This is where a Spousal Lifetime Access Trust (SLAT) becomes one of the most effective strategies for high-growth entrepreneurs. By transferring ownership before you sign a Letter of Intent (LOI), you can shield your exit proceeds from estate taxes while maintaining indirect access to the capital. For a deeper understanding of how to prepare your wealth for an acquisition, review our Moment Guide to Business Exit Planning.

What is a Spousal Lifetime Access Trust (SLAT)

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust where one spouse gifts assets to benefit the other. For entrepreneurs, transferring privately held business shares into a SLAT before a liquidity event removes the future appreciation and exit proceeds from their taxable estate. This avoids the 40% federal estate tax while still allowing the business owner indirect access to the cash through their spouse.

The Estate Tax Threat on a Liquidity Event

When you sell your business, your balance sheet shifts overnight from illiquid equity to highly liquid cash. If that cash sits in your personal name, it becomes part of your taxable estate.

Currently, the federal estate tax exemption is historically high. If your estate exceeds the exemption limit of $15,000,000 when you pass away, the IRS levies a 40% tax on every dollar over the threshold. For a founder exiting for $30 million or $50 million, that translates to an eight-figure tax bill that your heirs must pay in cash.

How a SLAT Works for Business Owners

A SLAT allows you to move assets out of your taxable estate without completely giving up the ability to benefit from the money. Here is the mechanical breakdown of how entrepreneurs execute this strategy:

• Establish the Trust: You (the Grantor) create an irrevocable trust naming your spouse as the primary beneficiary.

• Transfer the Shares: You gift a portion of your company stock into the SLAT.

• The Exit Happens: When the company is acquired, the shares inside the SLAT are sold. The cash proceeds are deposited directly into the trust's bank account, not your personal account.

• Accessing the Capital: Because your spouse is the beneficiary, they can request distributions from the trust to fund your shared lifestyle, buy real estate, or make investments.

  
  

For a visual breakdown of how trust structures can protect your wealth from the IRS, watch this resource: How Estate Taxes Impact Business Owners on YouTube.

Why Timing is Everything: Funding Before You Sell

The biggest mistake business owners make is waiting until after the exit to start estate planning. If you wait until you have $20 million in cash to fund a trust, you use up $20 million of your lifetime exemption.

If you fund the SLAT before the transaction, the math works heavily in your favor:

1. Lower Valuation: Pre-exit, your company shares can often be valued lower through a formal appraisal, especially if you apply minority interest or lack of marketability discounts.

2. Tax-Free Growth: You might transfer shares valued at $3 million into the SLAT today. A year later, those shares sell for $15 million in the acquisition. That entire $12 million of appreciation happens outside of your taxable estate.

3. Preserved Exemption: Because the IRS only saw a $3 million gift, you still have the vast majority of your lifetime exemption intact to shield other assets.

   
   

The "Grantor Trust" Tax Advantage

SLATs are typically structured as "Grantor Trusts" for income tax purposes. This means that while the assets are outside of your estate, you still pay the income taxes on the trust's earnings (like dividends or capital gains) out of your personal pocket.

While paying taxes sounds like a negative, it is actually a massive wealth-transfer feature. By paying the trust's tax bill with your personal cash, you allow the assets inside the SLAT to grow 100% tax-free. You are essentially making an additional, tax-free gift to your heirs every time you pay the IRS on the trust's behalf.

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Frequently Asked Questions

Here are some answers to questions I received frequently about this topic.

Frequently Asked Questions

Can I be a beneficiary of my own SLAT? No. If you are a beneficiary of the trust you create, the IRS will include the assets in your taxable estate, defeating the entire purpose. You access the funds indirectly because your spouse is the beneficiary.

What happens to the SLAT if we get a divorce? Because the trust is irrevocable and your spouse is the beneficiary, they typically retain access to the assets after a divorce. To protect against this, many SLATs are drafted with a "floating spouse" provision, meaning the beneficiary is defined as the person you are currently married to, rather than a specific individual by name.

When is the exact right time to transfer shares into the SLAT? The transfer must happen before there is a binding agreement to sell the company. If you wait until the Letter of Intent (LOI) is signed or the deal is certain, the IRS may apply the "assignment of income" doctrine, taxing the proceeds as if you still owned the shares personally.

Does a SLAT help me qualify for the QSBS (Section 1202) tax exemption? Yes, it can. If the trust is structured correctly (typically as a non-grantor trust for income tax purposes, which requires different drafting than a standard SLAT), the trust itself can claim its own $10 million (or 10x basis) QSBS exemption. This is a strategy known as "stacking," which can multiply your total tax-free exit proceeds.

Can both my spouse and I set up a SLAT for each other? Yes, but you must be incredibly careful to avoid the IRS's "Reciprocal Trust Doctrine." If you create identical trusts for each other at the same time, the IRS will unwind them. The trusts must be drafted at different times, with different terms, and ideally with different assets to ensure they are respected as separate legal entities.

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*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.