For a client whose estate is likely to exceed the federal estate tax exemption, all three strategies—SLATs, GRATs, and family limited partnerships (FLPs)—can still be effective, but they solve different planning problems. In the current environment of relatively high estate and gift tax exemptions, planners often focus less on avoiding tax today and more on removing future appreciation from the taxable estate while preserving flexibility.
| Strategy | Most effective when | Key advantages | Main drawbacks |
|---|
| SLAT | Married clients with significant unused exemption | Removes assets (and future appreciation) from estate while allowing indirect access through spouse | Irrevocable; divorce or spouse's death can reduce access; reciprocal trust doctrine must be avoided |
| GRAT | Assets expected to appreciate rapidly | Transfers appreciation with little or no gift tax exemption usage | Little benefit if assets underperform IRS hurdle rate or grantor dies during term |
| FLP | Closely held businesses, real estate, family investment portfolios | Centralized management plus potential valuation discounts on transferred interests | Heavy IRS scrutiny; requires legitimate business purpose and careful administration |
1. Spousal Lifetime Access Trust (SLAT)
Effectiveness: High for married clients who can comfortably part with assets.
A SLAT allows one spouse to make an irrevocable gift to a trust benefiting the other spouse (and often descendants). Because the assets are removed from the donor spouse's taxable estate, all future appreciation can also escape estate taxation.
Strengths include:
- Uses lifetime gift exemption efficiently.
- Maintains indirect access to assets through distributions to the beneficiary spouse.
- Can be especially attractive for clients expecting substantial asset appreciation.
Potential issues include:
- Assets generally lose the opportunity for a step-up in basis at the donor's death.
- Divorce or the beneficiary spouse's death may eliminate indirect access.
- Reciprocal SLATs require careful drafting to avoid IRS collapse under the reciprocal trust doctrine.
2. Grantor Retained Annuity Trust (GRAT)
Effectiveness: Excellent for concentrated, high-growth assets.
A GRAT is particularly valuable when:
- the client owns stock expected to appreciate significantly,
- a business interest may increase rapidly in value,
- interest rates and IRS Section 7520 assumptions create favorable economics.
The grantor transfers assets into the trust but retains an annuity payment for a specified term. Any appreciation above the IRS assumed rate passes to beneficiaries with little or no taxable gift.
Advantages:
- Often requires minimal lifetime exemption.
- Can be repeated ("rolling GRATs").
- Particularly useful after liquidity events or before anticipated appreciation.
Limitations:
- If the grantor dies during the GRAT term, much or all of the benefit may be lost.
- Poor-performing assets produce little tax benefit.
- Works best with appreciating, relatively volatile assets rather than conservative investments.
3. Family Limited Partnership (FLP)
Effectiveness: Strong when there is a legitimate non-tax business purpose.
An FLP contributes family assets—often real estate or closely held businesses—to a partnership. Parents retain management while transferring limited partnership interests to heirs.
Potential benefits:
- Centralized investment and business management.
- Creditor protection in some jurisdictions.
- Valuation discounts for minority interests and lack of marketability, reducing gift and estate tax values.
However, FLPs receive significant IRS attention.
The IRS frequently challenges:
- excessive valuation discounts,
- partnerships formed solely for tax savings,
- retained control under IRC §2036,
- failure to observe partnership formalities.
Consequently, modern FLPs are generally strongest when there is a genuine operating or investment purpose beyond tax reduction.
How planners often combine these strategies
For estates well above the exemption amount, these tools are often complementary rather than competing:
- SLAT: Uses lifetime exemption while retaining family access.
- GRAT: Moves future appreciation with minimal exemption usage.
- FLP: Creates an efficient ownership structure that may support valuation discounts before gifts or trust transfers.
For example, a client with a closely held business might first contribute the business to an FLP, then transfer limited partnership interests to a SLAT or use those interests in a GRAT if substantial appreciation is anticipated. The exact structure depends on the client's cash-flow needs, family dynamics, asset types, and tolerance for complexity.
Bottom line
In the current tax environment:
- SLATs remain one of the strongest tools for married high-net-worth families seeking long-term estate reduction while preserving indirect access to assets.
- GRATs continue to be highly effective for transferring appreciation on high-growth assets with relatively little gift tax cost.
- FLPs can still provide meaningful estate tax savings, but they are the most vulnerable to IRS challenge if not supported by legitimate business purposes, proper governance, and defensible valuation practices.
For clients with estates in the tens of millions of dollars or more, these strategies are typically most effective when integrated into a broader estate plan that also considers generation-skipping transfer tax planning, basis management, state estate taxes, charitable planning, and liquidity needs.
