A spousal lifetime access trust (“SLAT”) is an irrevocable trust created by one spouse (the grantor spouse) for the primary benefit of the other spouse (the beneficiary spouse), often with descendants as additional beneficiaries. Properly structured, a SLAT allows the grantor spouse to make a completed gift using federal gift and generation‑skipping transfer (GST) tax exemptions, thereby removing the contributed assets (and their future appreciation) from both spouses’ taxable estates, while preserving indirect access to those assets through distributions to the beneficiary spouse.

A reciprocal SLAT arrangement involves each spouse creating a SLAT for the other. If not carefully designed, this structure can trigger the reciprocal trust doctrine, under which the IRS or a court may “uncross” the trusts and treat each spouse as having effectively created a trust for their own benefit, causing estate inclusion under I.R.C. §§ 2036 and 2038. United States v. Estate of Grace, 395 U.S. 316 (1969), remains the leading authority.

SLAT Overview

A typical SLAT uses an irrevocable trust with a discretionary HEMS standard (health, education, maintenance, and support) to benefit the grantor’s spouse. The SLAT is a grantor trust for federal tax purposes, so the grantor spouse (not the trust) pays the income tax on trust earnings. Spendthrift provisions are often included for creditor protection. At the death of the beneficiary spouse, the trust remainder typically continues for descendants in one or more generation‑skipping “dynasty” trusts.

Federal Tax Law

The current federal estate and gift tax basic exclusion amount (“BEA”) is $13.99 million per individual ($27.98 million per married couple) in 2025, scheduled under current law to increase to $15 million / $30 million in 2026, as adjusted by recent federal tax legislation sometimes referred to as the “One Big Beautiful Bill Act”. A large gift to a SLAT uses the grantor’s BEA and removes subsequent appreciation from both spouses’ estates, potentially saving 40% federal estate tax on those future growth amounts. Congress has repeatedly modified the BEA and it’s impossible to predict what the BEA will be at your death. Treasury’s anti‑clawback regulations provide that if a donor makes completed taxable gifts using today’s higher BEA and later dies when the BEA is lower, the estate’s credit is computed using the higher of (i) the BEA at death, or (ii) the BEA previously used for lifetime gifts. With this in mind, using a SLAT to lock in today’s high BEA can permanently shelter transferred assets.

The trust can embed governance rules (e.g., staged distributions, incentives, spendthrift limiting beneficiary control) for children and grandchildren, and can continue for multiple generations as a GST‑exempt dynasty trust. Properly drafted, SLAT assets are generally protected from creditors of both spouses and from claims of a beneficiary’s spouse, subject to fraudulent transfer law and state‑law variations. Because the spouse is a beneficiary, the couple can indirectly access trust assets through discretionary distributions to the beneficiary spouse, preserving a “safety net” that is often psychologically critical when large gifts are contemplated. As a grantor trust, the SLAT’s income, deductions, and credits are reported by the grantor under I.R.C. §§ 671–679 and Treas. Reg. § 1.671‑1; the trust itself generally does not pay income tax. This allows the grantor to effectively make an extra tax‑free transfer to the SLAT beneficiaries.

A transfer to a SLAT is generally treated as a completed gift by the grantor under I.R.C. § 2511. Because the beneficiary spouse does not have a qualifying income/right meeting the marital deduction rules (e.g., no general power or QTIP structure), gifts to a SLAT do not qualify for the gift‑tax marital deduction. The gift therefore uses lifetime BEA and, where applicable, GST exemption, but no marital deduction.

To keep SLAT assets out of the grantor spouse’s estate, planning must avoid retained rights or powers that trigger I.R.C. §§ 2036, 2038, or 2042 (if life insurance is involved). Therefore, the grantor spouse should not be a beneficiary or serve as trustee with with broad discretion to benefit themselves or hold powers tantamount to a retained life estate or right to alter, amend, or revoke the trust.

Grantor Trust Status

A typical grantor power used to ensure grantor‑trust status is the power of substitution under I.R.C. § 675(4)(C) (the “swap power”). Revenue Ruling 2008‑22 concludes that a nonfiduciary substitution power over an irrevocable trust will not, by itself, cause estate inclusion under §§ 2036 or 2038, provided the trustee has a fiduciary duty to ensure equivalent value and the power cannot be used to shift benefits among beneficiaries. Where the trust holds life insurance, Revenue Ruling 2011‑28 similarly concludes that such a substitution power is not an incident of ownership under § 2042 if appropriate fiduciary safeguards are present.

How Anti-Clawback Regulations Impact a SLAT

The 2019 anti‑clawback regulations (Treas. Reg. § 20.2010‑1(c)) allow an estate to compute its estate tax credit using the greater of (a) the BEA at death or (b) the BEA previously used for lifetime gifts. However, 2022 proposed and subsequent regulations introduce an exception for certain “includible gifts”—completed transfers that are nonetheless treated as testamentary transfers because the property (or a related interest) remains in the donor’s taxable estate (e.g., retained life estates, § 2702 interests, enforceable promises). For SLATs, this reinforces the need to avoid retained rights that would cause inclusion under §§ 2035–2038 or 2042; otherwise, a large 2025 SLAT gift could be treated as an includible gift and lose the benefit of anti‑clawback protection if future law reduces the BEA.

Annual Exclusion Gifts

If the grantor intends to make smaller, ongoing contributions to the SLAT, those transfers may qualify for the annual exclusion under I.R.C. § 2503(b) if beneficiaries have present‑interest withdrawal rights (Crummey powers). In Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), the court held that a beneficiary’s immediate right to withdraw contributions from a trust makes the transfer a present‑interest gift eligible for the annual exclusion, even where withdrawal rights are rarely exercised.

In practice, trustees or administrators must give beneficiaries timely written notice of withdrawal rights and document their lapse, even though some precedent suggests formal written notice is not technically required.

Generation Skipping Transfer (GST) Tax

If descendants and later generations are beneficiaries, the SLAT can be drafted as a GST‑exempt dynasty trust by allocating the grantor’s GST exemption under I.R.C. § 2631. The trustee must track the trust’s inclusion ratio and any taxable distributions or terminations, reporting GST tax on Forms 709 or 706‑GS(D)/706‑GS(T) as appropriate.

Risk of Divorce

Divorce is one of the most significant non‑tax risks. If the SLAT defines the beneficiary as the current spouse identified by name and the couple divorces, the beneficiary spouse may continue as a beneficiary, and the grantor loses indirect access. To mitigate this, many SLATs use a “floating spouse” definition (e.g., “the person to whom the grantor is married from time to time”), often terminating spousal rights at the filing of a divorce action; a new spouse can later become the beneficiary. The trade-off is that a floating spouse clause may improve divorce protection but increase uncertainty if the grantor never remarries (loss of access on beneficiary’s death or divorce). Post‑divorce, the grantor may still be taxed on trust income if spousal powers are attributed under § 672(e) based on marital status at the time of creation, and Code § 682 (which previously shifted the taxation of trust income to the recipient ex‑spouse) was repealed for post‑2018 divorces.

Death of Beneficiary Spouse

If the beneficiary spouse dies before the grantor, indirect access terminates, and SLAT assets typically continue for descendants. Some jurisdictions now have “back‑end SLAT” statutes that protect a contingent beneficial interest of the grantor spouse after the beneficiary spouse’s death, but these rules vary widely. Some practitioners prefer to establish SLATs in jurisdictions with favorable domestic asset protection laws that would allow the grantor spouse to become a discretionary beneficiary. But this planning is subject to complex rules and analysis.

Administrative Costs Associated with a SLAT

SLATs and reciprocal SLATs involve ongoing legal, accounting, valuation, and compliance costs. While SLATs can be powerful, they are not “set‑and‑forget” devices and must be monitored as tax law and family circumstances evolve.

While SLATs can provide robust creditor protection, transfers remain subject to fraudulent transfer statutes (e.g., state versions of the Uniform Fraudulent Transfer Act or Uniform Voidable Transactions Act and the Bankruptcy Code): transfers made with intent to hinder, delay, or defraud creditors, or that leave the transferor insolvent, may be unwound. The trust should not be used as a last‑minute shelter from known or reasonably foreseeable creditor claims.

Where to Set Up a SLAT

While New Jersey is legally capable of supporting a perpetual dynasty-style SLAT, it is often not the best choice of jurisdiction if you’re able to pick a jurisdiction from scratch. Common SLAT jurisdictions with favorable tax and trust law are South Dakota, Nevada, and Delaware. But many other states such as Alaska and Wyoming, and increasingly Florida and Texas, offer favorable situs that should be considered. New Jersey has a resident‑trust income tax, it lacks robust DAPT law, and it lacks the legal framework many practitioners look to when selecting a jurisdiction.

Conclusion

A SLAT or a pair of SLATs can be a powerful estate planning tool if used correctly. Contact us for more information on how to include theses trusts in your estate plan.