The estate tax exemption is set to drop significantly in 2026 and Washington Estate Tax is not going away, but a SLAT (Spousal Lifetime Access Trusts) could help.
In today’s world the only thing for certain appears to be the uncertainty and potential for change in the future. This potential for uncertainty underscores the need for flexibility in the seemingly black-and-white world of estate planning and the tax-efficient transfer of wealth.
That said, current federal law provides a robust lifetime estate tax exemption in the amount of $13.61 million per person ($27.22 million for a married couple). Current law also provides that this exemption will fall to $5 million per person ($10 million per married couple) on Jan. 1, 2026. The 2026 estate tax exemption is adjusted for inflation and is estimated to be $6.08 million per person ($12.16 million for married couple) for 2026. Current state law provides a less than robust estate tax exemption in the amount of $2.193 million per person ($4.386 million for a married couple).
For those with net estates of more than $2.193 million per person ($4.386 million per married couple), planning should be considered to avoid the Washington estate tax and the possibly the 40% estate federal tax on amounts in excess of the estate tax exemptions.
However, the fear of economic uncertainty increases the need for flexibility in any such plan. Many clients do not wish to move significant wealth to the next generation if all possibility of access is lost in the event that their needs change or a loss is suffered.
From an asset protection perspective, if you are directly named as a trust beneficiary and the trust provides for outright distribution of trust assets, then state law will typically permit creditors to access those assets. For this reason, outright distributions for beneficiaries of even simple trusts should include some protective provisions to protect from third-party attacks such as those from divorce, lawsuits, creditors and even bankruptcy trustees. A simple provision would be to retain the funds in trust empowering the trustee to make “discretionary distributions of principal and income.”
This type of tax planning typically provides better or enhanced asset protection for both you and your family or loved ones. This is increasingly important in today’s uncertain and litigious world.
Enter a SLAT, or Spousal Lifetime Access Trust.
SLATs allow each spouse to be a beneficiary of a trust formed by the other spouse. Because Washington is a community property states, the use of a post-marital agreement is recommended to transmute assets, income and debt from community property to separate is recommended.
How does it work?
Each spouse creates and funds a trust for the benefit of the other spouse. This can remove that property from one spouse’s estate. Care must be taken to not trigger the reciprocal trust doctrine, which is triggered if the two trusts are: (1) interrelated and (2) an arrangement that to the extent of mutual value leaves the spouses in the same position as they would have been in had they created themselves as life beneficiaries. This typically occurs if the trust provisions are too similar.
In order to avoid the reciprocal trust doctrine, care should be taken to build in differences between the two trusts. Different trustees, governing law, timing of gifts, designated beneficiaries, distribution standards, withdrawal rights and powers of appointment should all be considered.
The most important consideration is whether your estate and asset protection planning satisfies your long-term goals without regard to the tax savings and asset protection benefit. Too often, people quickly select a popular acronym to use for asset protection or tax planning with little consideration of their long-term goals. Only after your long-term goals are clearly identified should you search for the most tax efficient tools, one of them being a SLAT, to use.