Slow down on that SLAT. Here are some of the risks

A rush to transfer assets into spousal lifetime access trusts in order to avoid estate taxes in the future may bring its own risks apart from the high payments to Uncle Sam.

The ability to set aside up to $13.61 million per individual in 2024 (or $13.99 million next year) tax-free into a SLAT carries a lot of appeal for wealthy households in which one spouse is removing the assets from the estate while maintaining some indirect use of them. However, the concerns of unexpected deaths, divorces or cash-flow problems represent significant dangers in the long term, according to Martin Shenkman, founder of Shenkman Law.

"You can actually do modeling as the financial advisor and help the lawyer figure out which extra access points or techniques to add to the plan based on the modeling. That just doesn't happen very often, and it should happen all the time," he said in an interview. "The role of the financial advisor should help lead the decisions on how the SLAT or another type of planning is done. The role of the financial advisor is essential, and, too often, the clients work out these decisions with their attorneys without their financial advisors involved. That's not prudent."

READ MORE: Divorce, death and taxes: 3 risks connected with SLATs

SLATs began receiving a lot more attention in recent years amid concerns about potential changes to taxes under President Joe Biden's administration and the possible expiration of the Tax Cuts and Jobs Act of 2017 at the end of 2025. With former President Donald Trump set to return to the White House next year and his Republican party in control of Congress, the gift and estate exemptions look increasingly likely to remain at their high levels — even if planners and their clients won't know the exact details for several months or the entire year in 2025. The trusts combine tax advantages with a degree of wiggle room.

"Once the assets are out of the grantor's estate, any appreciation of assets in the trust also occurs outside of the grantor's taxable estate, which can significantly enhance the long-term financial legacy for the grantor's heirs," George Reilly, a partner with the Dunlap Bennett & Ludwig law firm, wrote in a guide to SLATs in September. "Since a SLAT is an irrevocable trust, assets in SLATs are also generally protected from the grantor's creditors. This protection can be valuable for individuals in professions or situations where they may be at higher risk of legal claims. Finally, SLATs afford grantors greater flexibility. While a grantor cannot directly access the assets in the trust, the beneficiary spouse can receive distributions from the trust, so the couple still has access to the assets."

Those benefits prove less beneficial without adequate analysis of whether the leftover assets are enough to support the same spending budgets and address needs such as long-term care or other healthcare expenses connected with aging, Shenkman pointed out. Insurance or domestic asset protection trusts could deliver some of the same advantages without posing the fundamental challenge of whether the clients truly have enough money at their disposal.

"A lot of people are talking about SLATs like they're the ultimate planning tool, and, like any tool, it's useful. But it's got to be used properly and in the right circumstances," Shenkman said. "How do you know that a SLAT gives you enough access to the money? The answer is, you really need to do financial modeling and see what access you might need."

READ MORE: 3 types of trusts that could help wealthy clients' estate plans

Unexpected deaths, divorces or disability add a layer of complexity to those calculations. In some circumstances, the assets could wind up no longer being available to the original grantor of the trust. Some clients may not grasp that it requires an "incredible level of wealth to be able to give it away and not have access," Shenkman said.

"Too often, people get mesmerized by the idea of saving estate taxes, and they don't think through the financial risk that could be really devastating. On one end of the spectrum, SLATs are a great tool. But you've got to make sure you have enough money," he said. "A client really should have a complete insurance analysis done when they do a SLAT or any of the other variations that are available."