The Estate Tax in Flux
In 2026, under current law, the historically generous Federal Estate Tax exemption amount (the “exemption amount”) that taxpayers enjoy today will be taken away. This reduction in the exemption amount is commonly referred to as the “Sunset” by estate tax planners.
More specifically, on December 31, 2025, a wealthy individual may be able to give away (at life or death) up to $14M without incurring Federal Estate or Gift Taxes. But, the very next day after the Sunset becomes effective on January 1, 2026, that same taxpayer will only be able to give away approximately $7M.
With the top Federal Estate Tax rate currently at 40%, failing to lock-in the benefit of the current exemption amount before Sunset could result in additional estimated estate taxes of $2.8M for an individual (or $5.6M for a married couple).
Planning for the Sunset with Spousal Lifetime Access Trusts
Engaging in substantial wealth transfer planning prior to the Sunset is one way to benefit from the currently high exemption amount.
Therein lies the rub: gaining this advantage requires substantial lifetime gifting. In fact, maximizing the current exemption amount prior to Sunset requires giving $14M per person, or $28M for a married couple. Even very wealthy families may balk at parting with assets at this level during life.
This is exactly where the Spousal Lifetime Access Trust (or “SLAT”) comes into focus.
Put simply, a SLAT gives spouses the ability to make gifts to each other with the effect of both locking-in the current exemption amount while retaining control and access to gifted assets.
A SLAT is really nothing more than an irrevocable gift trust – but formulated especially for married couples. The SLAT is designed to receive a completed gift from the trust settlor for the benefit of others, including the settlor’s spouse. A SLAT may appoint the spousal beneficiary as one of many or perhaps the one and only lifetime beneficiary.
The well-drafted SLAT can benefit from a wide array of planning techniques. Though a detailed discussion of all of these techniques is beyond the scope of this article, suffice it to say that each client’s desire for control, access, and flexibility in trust drafting can be addressed by the capable estate planning attorney.
SLATs are normally treated for income tax purposes as “intentionally defective” or “grantor” trusts which means that the settlor spouse remains liable for the income tax burden of the SLAT assets. It is possible, though, for a SLAT to be a non-grantor trust where the tax burden remains with the trust itself or carried out to the beneficiaries who receive income distributions.
The SLAT Trap: Reciprocal Trust Doctrine
When wealthy clients embrace the SLAT, a new potential problem arises: application of the Reciprocal Trust Doctrine (the “RTD”). This occurs most frequently in the SLAT setting where both spouses desire to lock-in their exemption amounts and plan to create SLATs for each other.
The RTD is a judicial creation[i] which the Courts and IRS have adopted to attack and set aside these dual-SLAT structures.
The RTD is most concerned with “interrelated” SLATs which leave both spouses essentially in the same “economic position” both before and after the SLATs are created. Where the RTD applies, the IRS could collapse a dual-SLAT structure and take the position that each spousal beneficiary simply created his or her own SLAT. This would eliminate all contemplated estate tax benefit of the SLAT structure and therefore must be avoided to the extent possible.
Careful planners will take great pains to avoid the RTD in situations where both spouses create SLATs for each other. Unfortunately, there are no “safe harbors” in this context. Insulating a dual-SLAT structure from the RTD might include planning for the following.
- Good Timing: Separating the timing of the creation and funding of multiple SLATs might be helpful to establish that their creation was not interrelated. One way to accomplish this is to separate the creation and funding of multiple SLATs in different tax years.
- Beneficial Access: Varying the beneficiaries of SLATs might also be helpful to avoid putting the spouses in the same economic position. For example, one SLAT might be for the sole lifetime benefit of the spousal beneficiary while the other may include adult children or grandchildren as current beneficiaries alongside the spousal beneficiary.
- Financial Considerations: The economic position of spousal SLAT beneficiaries might be quite different based on the assets contributed to each. Consider for this purpose the differing economic effects of a SLAT funded with non-dividend paying growth stocks or private investments while the other is funded with highly liquid, income producing real estate.
- Distribution Engineering: A “distribution standard” gives the trustee of a trust direction on how the trust property should be distributed to or for the trust beneficiaries. The economic position of spousal SLAT beneficiaries can be made very different based on the distribution standard. For example, one spouse might be entitled to mandatory income and principal based on “best interests” or “any purpose” while another may only be eligible for limited distributions, perhaps for “healthcare” or certain defined emergencies.
Various other ways to create differentiation will likely exist in any given individual circumstance.
What is a SLAT?
- Irrevocable gift trust funded with a gift from one spouse for the benefit of the other during life.
- Utilizes and “locks in” the use of the exemption amount of the settlor spouse.
- Trust terms may include spouse as a current beneficiary alone or alongside children or others.
- SLAT can be “grantor” trust or “non-grantor” for income tax purposes depending on trust terms
- Trust assets and their appreciation are removed from the grantor’s estate and not included in the spousal beneficiary’s estate.
- Spousal beneficiary retains access to SLAT assets if needed and can choose to provide “indirect” access to settlor spouse if desired.
- Settlor can retain some indirect control over trust assets and/or grant control of trust assets to beneficiary spouse.
- SLAT can be designed to maximize creditor protection of both settlor and beneficiary spouse.
- A trust may be established as a grantor trust, allowing the grantor to continue to pay the income tax on trust assets, further reducing their taxable estate if desired.
- Divorce can complicate the situation for both spouses and the possibility of divorce should be discussed in the drafting stage.
- Unexpected death of the spousal beneficiary can cut-off settlor spouse’s indirect access to the SLAT assets.
- Avoidance of the Reciprocal Trust Doctrine is critical when both spouses wish to create SLATs for each other.
- Ongoing, careful administration of SLATs is necessary to avoid estate inclusion for both spouses and to maximize desired estate tax planning benefits.
i Of course, the law could be changed by Congress prior to 1/1/26.
ii 26 USC 2010(c)(3)(C)
iii Estimated 2025 Federal Estate and Gift Tax Exemption Amount
iv Estimated 2026 Federal Estate and Gift Tax Exemption Amount
v 26 USC 2001(c)
vi Assuming the Federal Estate Tax rate is 40% and an additional estate inclusion of $7M.