The SLAT Strategy

The Exemption Sunset Creates a Planning Urgency

The federal estate tax exemption is currently $13.99 million per person for 2026, allowing a married couple to pass $27.98 million to their heirs free of federal estate tax. This exemption, enacted as part of the Tax Cuts and Jobs Act of 2017, is scheduled to sunset on December 31, 2025. Starting in 2026, the exemption is expected to drop to approximately $7 million per person (adjusted for inflation).

For a married couple with a combined net worth exceeding $27.98 million, this sunset creates a planning opportunity and a deadline. Between now and the sunset, you can use the higher exemption to move substantial wealth to the next generation or into trusts free of estate tax and gift tax. After the sunset, the same transfers would incur federal estate tax at rates approaching 40 percent or would reduce each spouse's exemption dollar by dollar.

The Spousal Lifetime Access Trust, or SLAT, is one of the most effective strategies for married couples to utilize the higher exemption while maintaining some family access to the transferred assets.

How a SLAT Works: The Basic Structure

A SLAT is an irrevocable trust created by one spouse (the grantor) for the benefit of the other spouse (the beneficiary). Here is how it works:

Spouse A creates an irrevocable trust and funds it with assets up to their available estate tax exemption amount (for 2026, as much as $13.99 million). Spouse A names Spouse B as the primary beneficiary of the trust. The trust language allows the trustee to make distributions to Spouse B during Spouse B's lifetime. The assets are now out of Spouse A's taxable estate - Spouse A has made a completed gift using their exemption.

Because Spouse B is a beneficiary of the trust, Spouse B has access to the trust's income and principal through the trustee's discretion. If the trustee is instructed to distribute funds to Spouse B, Spouse B receives the money. This indirect access - the ability to receive distributions through the trust - is why the strategy is called "Spousal Lifetime Access" Trust.

The assets inside the SLAT grow tax-free. If the SLAT is structured as a grantor trust (which it typically is), the income tax on investment returns inside the trust is paid by Spouse A, not by the trust. This tax payment by Spouse A is not considered a gift to the trust - it is just Spouse A paying taxes on their own trust's income. The effect is that Spouse A is funding the trust's growth without using additional exemption.

Why SLATs Are Popular Before the Exemption Sunset

The SLAT is attractive now for several reasons:

Reason 1: The Exemption Is High and Expiring. The $13.99 million per person exemption is the highest in recent history. Using it now is economically rational - the exemption is going away. A couple with $25 million in assets is spending $13.99 million of their exemption (per person) to remove growth from the taxable estate. When the exemption drops to $7 million, moving the same $13.99 million would be impossible without incurring gift tax.

Reason 2: Appreciation After the Gift Is Never Taxed. If Spouse A funds a SLAT with $10 million of appreciating assets in 2026, and those assets grow to $20 million by 2035, the $10 million gain is completely tax-free. The SLAT only removes the $10 million contribution from Spouse A's estate - all future growth is outside the taxable estate. For a couple with significant assets expected to appreciate substantially, this can result in tens of millions of dollars of estate tax avoidance.

Reason 3: Spouse B Maintains Access. Unlike an irrevocable gift to a child or a complete gift away from the family, a SLAT allows Spouse B to access the trust assets. If circumstances change - if one spouse becomes ill, if cash flow is needed, if a family emergency arises - the trustee can distribute from the trust. This is not access by the grantor (Spouse A), but it is access by the beneficiary spouse.

The Reciprocal Trust Doctrine: The Major Limitation

The IRS watches for married couples creating identical or near-identical SLATs for each other. If Spouse A creates a SLAT for Spouse B and Spouse B simultaneously creates an identical SLAT for Spouse A, the IRS can invoke the "Reciprocal Trust Doctrine" and collapse both trusts, treating the assets as if they had never left the grantor spouses' estates. This would eliminate the exemption savings entirely.

To avoid this, the two SLATs must be meaningfully different. This is achieved through:

Different Trustees. If Spouse A's SLAT uses an independent trustee while Spouse B's SLAT uses a family member as trustee, this is a meaningful difference.

Different Distribution Standards. If Spouse A's SLAT uses "sole discretion" (trustee can make any distribution the trustee desires) while Spouse B's SLAT uses "ascertainable standard" (trustee can distribute for health, education, maintenance, and support), this is a meaningful difference.

Different Timing. Creating the SLATs in different years (e.g., one in 2026, the other in 2027) demonstrates lack of simultaneity and planning together.

Different Funding Assets. If one SLAT is funded with real estate and the other with stocks, this is a meaningful difference.

The more differences between the SLATs, the stronger the defense against IRS challenge. A couple planning SLATs should work with their estate planning attorney to ensure the structures are sufficiently different.

Divorce Risk and Trust Permanence

Because a SLAT is irrevocable, Spouse A cannot change the trust terms after creation. If Spouse A and Spouse B later divorce, the trust terms remain the same - Spouse B is still the beneficiary of the trust created by Spouse A. The trust assets do not revert to Spouse A or become subject to divorce division.

This is both a feature and a risk. The permanence of the SLAT is part of what makes it effective for estate planning - you commit to removing assets from your estate permanently. But it also means you cannot take back the gift if your marriage ends.

Some married couples address this risk by not creating SLATs early in the marriage, or by modifying the distribution terms to limit Spouse B's access if the marriage ends. Others accept the risk as the cost of estate tax planning.

Allocating GST Exemption: The Dynasty Opportunity

In addition to the federal estate tax exemption, there is a separate Generation Skipping Transfer (GST) exemption of $13.99 million per person in 2026. The GST exemption allows you to transfer wealth not just to your children but to your grandchildren and further descendants without GST tax.

When creating a SLAT, you should explicitly allocate your GST exemption to the trust. This converts the SLAT into a "dynasty trust" - assets can pass from Spouse A to Spouse B to your children to your grandchildren, all within the trust, all with GST exemption applied. The trust can last for generations without incurring transfer taxes.

This requires proper drafting and an election on your tax return (Form 709, the gift tax return). Work with your estate planning attorney to ensure your SLAT is drafted as a GST-exempt dynasty trust if that is your intent.

What Assets Should Fund a SLAT?

A SLAT should be funded with appreciating assets, not income-producing assets. The reason is that the goal is to remove future appreciation from your taxable estate. If you fund a SLAT with a dividend-paying stock that you expect to appreciate significantly, the trust receives all future dividends and appreciation.

Good SLAT funding assets include: commercial real estate expected to appreciate, operating business interests, cryptocurrency or other volatile assets expected to appreciate, concentrated stock positions you believe will grow, and growth-oriented investments.

Poor SLAT funding assets include: bonds, Treasury securities, or other low-growth fixed-income investments (these should be held personally or in a revocable trust to preserve flexibility), and assets you think may decline in value.

The Anti-Clawback Rule and the 2026 Deadline

Under Treasury Regulation 20.2010-1(c), gifts made in 2026 using the current high exemption will not be "clawed back" if the exemption sunsets and drops to $7 million in 2026 and beyond. This means if you gift $13.99 million to a SLAT in 2026, and the exemption drops to $7 million on January 1, 2027, your $13.99 million gift is already made and protected. The IRS will not recapture the exemption you used.

This anti-clawback rule was included specifically to encourage people to use the higher exemption before the sunset. It signals that gifts made before the sunset are protected and cannot be subject to retroactive estate tax.

This is why the 2026 deadline is so significant. A couple with $25 million in assets should execute SLAT funding in 2026 to lock in the higher exemption and benefit from the anti-clawback rule.

Implementation Timing: Act Before Year-End 2026

For a married couple considering SLAT planning, the timeline is simple: decide in spring or early summer 2026, consult with an estate planning attorney by mid-year, draft the trust documents in late summer, fund the SLAT before year-end, and file the appropriate gift tax returns by April 15, 2027.

Delaying until 2027 or later may result in the exemption drop taking effect before you have time to implement the strategy. Consult with your estate planning attorney and financial advisor now about whether SLAT planning is appropriate for your situation.