Using a Spousal Lifetime Access Trust for Flexible Estate Tax Planning

On January 1, 2026, the federal estate and gift tax exemption increased to $15 million per person or $30 million for married couples (indexed annually for inflation) under the One Big Beautiful Bill Act. This replaces the prior uncertainty surrounding the Tax Cuts and Jobs Act of 2017, which was scheduled to cut the exemption roughly in half starting in 2026. With this elevated and now more permanent exemption, incorporating a Spousal Lifetime Access Trust (SLAT) into your overall plan can be advantageous for married couples who may be subject to federal estate tax.

How Does a SLAT Work?  

A SLAT is an irrevocable trust established by one spouse (the grantor) for the benefit of the other spouse. The grantor makes a gift of assets to the SLAT and utilizes his or her gift tax exemption to shield the gift from gift taxes.

Typically, the SLAT terms provide that the trustee may make discretionary distributions to the grantor’s spouse and descendants. An independent party often serves as trustee. However, the grantor’s spouse may serve as trustee so long as distributions for the spouse’s benefit are subject to an “ascertainable standard” (e.g., health, education, maintenance, and support). These and other SLAT terms are designed to remove the SLAT assets from the grantor’s gross estate for estate tax purposes. Often, each spouse will create a SLAT with the other spouse as a beneficiary (subject to the “reciprocal trust doctrine” mentioned below) in order to use the gift tax exemption of each spouse.

Who Should Consider a SLAT?

A SLAT is often preferable for married couples who wish to minimize estate tax exposure while maintaining the ability to access the trust assets if necessary due to changes in their wealth or changes in the estate tax laws.

Can a SLAT Own Life Insurance?

Yes, a SLAT often holds life insurance on the grantor’s life. This removes the life insurance death proceeds from the grantor’s gross estate, but it allows the grantor’s spouse to access the policy’s cash value. Thus, a SLAT is often a preferable alternative to a traditional irrevocable life insurance trust that names only the grantor’s descendants as beneficiaries. However, due to its structure and reliance on the other spouse, incorporating survivorship life insurance policies are generally not appropriate within a SLAT.

How is a SLAT Treated for Income Tax Purposes?

A SLAT is often designed as a grantor trust. This means that all income tax consequences realized by the SLAT assets flow through to the grantor. If the SLAT was instead a separate taxpayer, it would be subject to the compressed income tax brackets applicable to trusts, often resulting in higher income taxes. Income tax payments by the grantor further reduce his or her estate while allowing the SLAT assets to grow without any reduction due to income taxes.

Assets owned by the SLAT upon the grantor’s death will not receive a basis step-up for income tax purposes. Thus, the recipients of the SLAT assets after the grantor’s death, upon selling such assets, may incur capital gains tax on appreciation that occurred before (as well as after) the grantor’s death. However, any SLAT assets distributed to the grantor’s spouse may be included in his or her gross estate, causing such assets to receive a basis step-up. The SLAT terms can also potentially incorporate certain “asset swap” powers that allow for the transfer of higher-basis assets into the trust during the grantor’s lifetime in exchange for lower-basis assets. By incorporating and utilizing these powers, a grantor can facilitate a future basis step-up for any lower-basis assets he or she receives back from the trust.

Are There Any Additional Advantages?

Assets held by the SLAT will avoid probate. Also, a SLAT may be used to protect assets from creditor claims against the grantor or the beneficiaries.

What Are Some Common Pitfalls?

If the grantor outlives his or her spouse, the grantor will typically lose indirect access to the SLAT assets upon the spouse’s death. This also applies in the event of a divorce. To address this issue, the grantor may obtain a life insurance policy on the spouse’s life.

For more information on SLAT’s and whether they make sense for your personal circumstances, contact me today!

Article provided by Robert Cleary, Senior Vice President/Investments, with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, who can be contacted at Stifel’s 3 Bryant Park office at (212) 847-6517.

Stifel does not provide legal or tax advice. You should consult with you legal and tax advisors regarding your particular situation.