Spousal Lifetime Access Trust (SLAT) Before Sunset 2025

The Spousal Lifetime Access Trust is not a new planning technique. Estate attorneys have used SLATs for decades. What is new is the urgency. The TCJA doubled the federal estate and gift tax exemption in 2018, and the doubling expires after December 31, 2025. A married couple can currently shelter $27.22 million from estate tax. Starting in 2026, that number drops to approximately $14 million. For couples with estates between $14 million and $27 million, the SLAT is the most direct way to lock in the higher exemption — and the IRS has explicitly confirmed that transfers made under the higher exemption will not be retroactively taxed.

This is a decision-stage article. If you are a married couple with a combined estate above $7 million, the SLAT is on your estate planner's shortlist. The question is not whether to consider it — the question is whether the trade-offs make sense for your specific situation.

How a SLAT works: mechanics and tax treatment

A SLAT is an irrevocable trust. One spouse (the grantor) creates the trust and transfers assets into it. The other spouse (the beneficiary) can receive distributions from the trust during their lifetime. The couple's children or other descendants are typically remainder beneficiaries. The transfer is a completed gift under IRC §2501, using the grantor's lifetime gift tax exemption.

Because the trust is irrevocable and the grantor retains no interest in the trust assets, the transferred assets are removed from the grantor's taxable estate. The beneficiary spouse's interest in the trust does not cause inclusion in the beneficiary's estate, provided the trust is properly drafted — the beneficiary holds only a limited interest, not a general power of appointment under IRC §2041.

Most SLATs are structured as grantor trusts for income tax purposes. This means the grantor continues to pay income tax on trust income, effectively making additional tax-free gifts to the trust (the income tax payments are not treated as gifts under IRC §2511). The trust assets grow income-tax-free inside the trust, and the grantor's estate is further depleted by the tax payments — a double benefit.

The anti-clawback rule: why 2025 gifts are permanently protected

The concern that prompted the IRS to issue Treasury Regulation §20.2010-1(c) was straightforward: if you use $13.61 million of exemption in 2025 and the exemption drops to $7 million in 2026, will the IRS recapture the $6.61 million difference at your death? The answer is no. The regulation provides a special rule: when computing the estate tax, the IRS will credit the higher exemption amount to the extent it was used for lifetime gifts. The estate tax calculation at death will not penalize you for having used exemption that no longer exists.

This is the regulatory foundation for the entire pre-sunset SLAT strategy. Without it, the risk of clawback would make large 2025 gifts impractical. With it, a couple can confidently transfer up to $27.22 million out of their estates in 2025, knowing that even after the exemption drops, those transfers are locked in.

A worked example: $20 million couple, dual SLATs

David and Karen, both age 60, live in a state with no state estate tax. Their combined estate consists of:

• Primary residence: $2,000,000
• Taxable brokerage accounts: $8,000,000 (cost basis $3,200,000)
• Combined traditional IRAs: $4,000,000
• Combined Roth IRAs: $1,500,000
• Rental real estate (two properties): $3,000,000 (cost basis $1,800,000)
• Cash and other assets: $1,500,000
• Total combined estate: $20,000,000

Scenario A: no SLAT — death in 2030 with $7 million exemption

Assume the TCJA sunsets, the exemption settles at $7 million per person ($14 million for the couple with portability), and the estate grows at 5% annually to approximately $25.5 million by 2030. After the $14 million combined exemption, the taxable estate is $11.5 million. At the 40% federal estate tax rate, the estate owes approximately $4,600,000 in federal estate tax.

Scenario B: dual SLATs funded in 2025

In 2025, David creates a SLAT for Karen's benefit and transfers $10 million of brokerage assets and one rental property ($1.5 million) — a total of $11.5 million, within his $13.61 million exemption. Three months later, Karen creates a separate SLAT for David's benefit and transfers $8 million in brokerage assets and the second rental property ($1.5 million) — a total of $9.5 million, within her $13.61 million exemption. The two SLATs are intentionally different: different trustees, different distribution standards, different asset mixes, and created months apart to avoid reciprocal trust doctrine challenges.

Total transferred to SLATs: $21 million. Remaining in the couple's estates: the $2 million residence, $4 million in traditional IRAs, $1.5 million in Roth IRAs, and $1.5 million in cash — approximately $9 million. The $21 million in the SLATs grows to approximately $26.8 million by 2030 at 5% annually — all outside the taxable estate. The $9 million retained estate grows to approximately $11.5 million.

At death in 2030 with a $14 million combined exemption (portability), the $11.5 million retained estate is fully sheltered. Federal estate tax: $0.

Estate tax savings: approximately $4,600,000. Plus, all future appreciation on the $21 million in trust assets is permanently excluded from the estate.

The basis step-up trade-off: the real cost of a SLAT

The $4.6 million in estate tax savings is not free. Assets transferred to a SLAT receive a carryover basis under IRC §1015, not a step-up under IRC §1014. David transferred $10 million in brokerage assets with a cost basis of approximately $4 million. If those assets had remained in his estate until death, his heirs would have received a $10 million stepped-up basis — eliminating $6 million in unrealized capital gains. At a combined 23.8% federal rate (20% LTCG + 3.8% NIIT), the lost step-up costs approximately $1,428,000 in future capital gains taxes.

The same logic applies to the rental properties. The two properties have a combined $1,200,000 in unrealized gains — a lost step-up worth approximately $285,600 in capital gains taxes.

Total lost step-up cost: approximately $1,713,600. Net benefit of the SLAT strategy: $4,600,000 − $1,713,600 = approximately $2,886,400. This is a strong net positive, but the calculation must be done asset-by-asset. For highly appreciated assets with gains representing 80% or more of fair market value, the lost step-up may approach or exceed the estate tax savings — in which case, those specific assets should remain in the taxable estate.

The swap power: mitigating the basis problem

Most SLATs include a provision granting the grantor the power to substitute assets of equivalent value in a non-fiduciary capacity under IRC §675(4)(C). This is the swap power. David can exchange high-basis assets (e.g., cash or recently purchased securities) into the trust and pull low-basis assets back into his personal estate. The low-basis assets are now back in the taxable estate, where they will receive a step-up at death. The high-basis assets in the trust carry minimal unrealized gains, so the carryover basis is not a problem.

The swap power is one of the most valuable provisions in a SLAT. It allows the couple to have it both ways: estate tax exclusion for the trust principal and growth, and a step-up in basis for the most appreciated individual holdings. The swap must be for assets of equivalent fair market value — it is not a gift, not a sale, and does not trigger gain recognition.

What cannot go into a SLAT: retirement accounts

Traditional IRAs, 401(k)s, and other qualified retirement accounts cannot be transferred to a SLAT without triggering a taxable distribution under IRC §408(d). A transfer of a $4 million traditional IRA to a SLAT would be treated as a $4 million distribution to the grantor, taxed at ordinary income rates — approximately $1,680,000 in combined federal (37%) and state income taxes, depending on the state. This defeats the purpose.

Retirement accounts remain in the taxable estate and are subject to the SECURE Act 10-year rule (IRC §401(a)(9)(H)) for non-spouse beneficiaries. The planning strategy for these accounts is separate from the SLAT: Roth conversions during life reduce the future income tax burden on heirs, and the income tax paid on conversions reduces the gross estate — but the accounts themselves stay outside the trust structure.

For David and Karen, the $4 million in traditional IRAs and $1.5 million in Roth IRAs remain in their estates. The traditional IRAs are the most tax-inefficient assets to inherit — subject to both estate tax (if the estate exceeds the exemption) and income tax under IRC §691. Roth IRAs, while included in the gross estate, distribute tax-free to heirs under IRC §408A(d)(1), making them the most efficient assets to leave in the estate.

The reciprocal trust doctrine: the structural risk

When both spouses create SLATs, the IRS can invoke the reciprocal trust doctrine (United States v. Grace, 395 U.S. 316 (1969)) to argue that the trusts are economically interchangeable — that each spouse is effectively the beneficiary of their own trust. If the doctrine applies, the trusts are collapsed for tax purposes, and the assets are included back in each grantor's estate.

The defense is structural differentiation. David's SLAT and Karen's SLAT must differ in at least several meaningful ways:

• Different trustees: David's trust uses a corporate trustee; Karen's uses a family member
• Different distribution standards: David's trust limits distributions to HEMS; Karen's grants broader discretion
• Different asset types: David's trust holds public equities; Karen's holds rental real estate
• Different timing: created at least 3-6 months apart
• Different beneficiary classes: David's trust includes nieces and nephews; Karen's does not

No single difference is dispositive — the IRS looks at the totality. The more differences, the stronger the defense. Estate attorneys typically draft dual SLATs as a matched pair with intentional asymmetries built in from inception.

The divorce risk: the elephant in the room

A SLAT is irrevocable. If David and Karen divorce after funding their SLATs, David's trust still names Karen as the beneficiary. David cannot unwind the trust or remove Karen as beneficiary. Karen retains access to David's trust assets, and David retains access to Karen's trust assets — but the couple no longer has any incentive to share.

This is the single biggest non-tax risk of a SLAT. Some estate planners mitigate it by including a provision that converts the beneficiary spouse's interest to a discretionary interest upon divorce, with distributions controlled by an independent trustee. Others use trust protector provisions to allow modification in changed circumstances. But no provision can fully eliminate the risk — the transfer is irrevocable, and courts in some jurisdictions may include SLAT assets in the marital estate for equitable distribution purposes.

Couples considering dual SLATs should have a candid conversation about marital stability. If the marriage is not solid, a SLAT may not be the right vehicle — other irrevocable trust structures that do not depend on the marital relationship (such as dynasty trusts or GRATs) may be more appropriate.

State estate tax interaction

A SLAT funded under the federal gift tax exemption also removes assets from state estate tax exposure in the 12 states (plus DC) that impose state estate taxes. Massachusetts, for example, taxes estates above $2 million with no portability. A Massachusetts couple who funds a SLAT with $10 million of assets removes that $10 million from the Massachusetts estate tax base as well — saving up to $940,800 in Massachusetts estate tax on a $10 million reduction (depending on the total estate size and the graduated rate table).

States that impose estate taxes generally follow the federal gift tax rules: a completed gift that is not included in the federal gross estate is also not included in the state gross estate. However, some states (Connecticut, for instance) impose their own gift tax. In these states, the SLAT transfer may trigger state gift tax even if the federal gift tax is fully sheltered by the exemption. Check your state's gift tax rules before funding a SLAT.

Timeline for action: what needs to happen before December 31, 2025

Creating and funding a SLAT is not a weekend project. The typical timeline from decision to funded trust is 3-6 months:

• Month 1: Engage an estate planning attorney. Review asset inventory, identify which assets to transfer (prioritize low-basis assets where the estate tax savings exceeds the lost step-up, or high-basis assets where carryover basis is not a problem).
• Month 2: Draft the trust document. If both spouses are creating SLATs, draft both with intentional structural differences. Select trustees. Prepare gift tax returns (Form 709).
• Month 3-4: Execute the trust and transfer assets. Re-title brokerage accounts. Record deed transfers for real estate. Transfer limited partnership or LLC interests if applicable. File Form 709 for the year of the gift (due April 15 of the following year, but the gift must be completed by December 31, 2025).
• Month 5-6 (if dual SLATs): Create and fund the second SLAT. The delay between the two trusts supports the reciprocal trust doctrine defense.

Couples who have not started this process by mid-2025 are running out of time. The trust must be fully executed and funded — not just drafted — before midnight on December 31, 2025. A signed but unfunded trust does not use the exemption.

Key takeaways

• The TCJA estate tax exemption ($13.61 million per person in 2025) sunsets after December 31, 2025. The projected post-sunset exemption is approximately $7 million per person. Couples with combined estates above $14 million face significant new estate tax exposure.
• A SLAT allows one spouse to gift assets to an irrevocable trust for the benefit of the other spouse, removing those assets (and all future growth) from the taxable estate while retaining indirect access through the beneficiary spouse.
• The IRS anti-clawback rule (Treasury Regulation §20.2010-1(c)) confirms that gifts made under the higher 2025 exemption will not be retroactively taxed after the exemption drops. This is the regulatory foundation for the pre-sunset SLAT strategy.
• The primary trade-off is the loss of basis step-up under IRC §1014. Assets in a SLAT carry over the donor's basis under IRC §1015. The swap power under IRC §675(4)(C) mitigates this by allowing the grantor to exchange high-basis assets into the trust for low-basis assets that will receive a step-up at death.
• Dual SLATs (both spouses creating trusts) can shelter up to $27.22 million but must be structurally different to avoid the reciprocal trust doctrine. Different trustees, distribution standards, asset types, beneficiaries, and timing are all defenses.
• Retirement accounts (IRAs, 401(k)s) cannot be transferred to a SLAT without triggering immediate income recognition. These accounts remain in the taxable estate and are subject to the SECURE Act 10-year rule for non-spouse beneficiaries.
• Divorce is the biggest non-tax risk. The trust is irrevocable — the beneficiary spouse retains their interest even after divorce. Couples should evaluate marital stability before committing.
• The timeline from decision to funded trust is 3-6 months. Couples who have not started by mid-2025 are at risk of missing the window.