Be My (Beneficiary) Valentine: Spousal Lifetime Access Trusts

A Spousal Lifetime Access Trust (also known as a “SLAT”) is an irrevocable gift trust into which one spouse transfers assets for the benefit of the other spouse. Children and grandchildren are often additional beneficiaries of these trusts. It’s a gift to your sweetheart that keeps on giving, if structured and created properly.

At various times in recent history, including the years leading up to the 2025 expected sunset of the enhanced federal estate and gift tax exemption, planners have more readily recommended irrevocable gift trusts, including trusts for a spouse. The passage of the One Big Beautiful Bill Act eliminated the scheduled sunset and increased the federal estate and gift tax exemption to $15,000,000 per person ($30 million for a married couple) starting January 1, 2026, and adjusted for inflation in future years.

Even with the record high estate and gift tax exemption in place, SLATs remain a viable tool for shifting future appreciation out of the estate while preserving spousal access in case those assets are needed by the spouse in the future. SLATs can be used to:

• Remove appreciating assets from an estate now to capture future growth estate tax free
• Provide asset protection benefits
• Create multigenerational wealth transfer structures

While SLATs can be an effective vehicle for lasting commitment to your family’s financial future, it is important to consider the big picture and properly weigh risk.

The “Access” Paradox

Although “access” is part of the name, accessing the funds in a SLAT should be a last resort. The primary purpose of a SLAT is to remove assets from your estate so future appreciation grows outside the reach of estate or gift taxes. Distributions from a SLAT to a spouse undermine the planning by “wasting” the portion of the donor spouse’s estate tax exemption that was used when the gift was made. In addition, routine or frequent distributions create the following risks:

• Frequent distributions risk IRS claims that you retained an implied right to the assets, which could pull the gifted assets back into your taxable estate.
• Pulling assets out often reduces the asset protection benefits of the trust.
• Taking routine withdrawals limits long‑term tax‑free growth because assets that should compound inside the trust are continually removed.
• Regular distributions signal that the trust may have been over‑relied upon for normal living expenses, weakening the appearance of a completed gift.
• More distributions create more administrative burden and compliance complexity, raising the likelihood of errors and unwanted scrutiny.

Ideally, spousal access should be reserved for scenarios such as a major medical emergency or unexpected financial catastrophe. Spousal access should not be relied on for regular supplemental income or lifestyle maintenance.

The Possibility of Divorce

Although most valentines don’t like to think about the possibility of divorce, this life event can devastate a SLAT strategy. Two critical provisions can make or break the outcome if a marriage ends:

• How “spouse” is defined. The trust document should reflect an intentional choice as to what happens to the beneficiary spouse’s interest upon divorce. Does the beneficiary spouse get kicked out upon divorce, eliminating their status as a beneficiary? Or is there no change, with an ex-spouse continuing to benefit from the trust? Each of these scenarios comes with important considerations, including whether an ex-spouse’s access to distributions would be desirable even after a divorce (rather than children becoming beneficiaries at that point, for example). While either approach can work, depending on the couple’s goals, ambiguity must be avoided.
• Who bears the income tax burden. SLATs are often structured as “grantor trusts” for income tax purposes, meaning the grantor (not the trust) pays tax on the trust’s income. But after divorce, this could become problematic if the grantor spouse must continue paying taxes on income that benefits their ex-spouse.

A well-drafted SLAT anticipates these scenarios and includes clear provisions that both spouses understand and agree to up front.

The Reciprocal Trust Doctrine

The reciprocal trust doctrine is an IRS principle that can cause trusts created by spouses for each other’s benefit to be “uncrossed” and treated as if each spouse created a trust for themselves. When this happens, the assets are pulled back into each spouse’s taxable estate, defeating the estate tax benefits the SLATs were supposed to achieve.

To prevent reciprocal trust problems when both spouses would like to create irrevocable gift trusts, meaningful differences between the trusts and the gifts are essential, such as funding the trusts with varied assets; naming different beneficiaries (e.g., one trust for the benefit spouse and children and the other trust for the benefit of the spouse only); setting different distribution standards and rules; retaining different powers for the grantor; creating the trusts at different times; and other differences that help ensure the trusts will not be considered reciprocal.

The Step Transaction Doctrine

The step transaction doctrine creates a related risk. This doctrine allows the IRS to collapse a series of formally separate steps into a single integrated transaction if focused on a particular result. In the SLAT context, step transaction risk typically arises when spouses create gift trusts too closely together in time, assets are used too quickly, or there is evidence of a prearranged plan.

It’s important to note that both reciprocal trust and step transaction doctrines could potentially apply to the same situation. One can successfully avoid making the trusts reciprocal by making them sufficiently different but could still face step transaction issues if the timing and documentation suggest the two trusts were part of a prearranged plan.

The Bottom Line

Individuals and families must weigh potential benefits of spousal gift trusts against the risks and loss of flexibility that come with these instruments. While establishing a SLAT may not be the most romantic Valentine’s Day gift, it can be a powerful expression of commitment to your spouse and future generations when approached thoughtfully and structured properly.

Considering the pros and cons of a SLAT? Reach out to Mari Berlin or another member of LP’s Trusts and Estates Group.