Spousal Lifetime Access Trusts and the 2026 Estate Tax Sunset

The federal estate and gift tax exemption — approximately $13.6 million per taxpayer in 2025 — is scheduled to revert to roughly half that amount at the end of 2025 under the sunset provisions of the 2017 Tax Cuts and Jobs Act. For Rhode Island and Massachusetts families in the $8 million to $25 million net-worth band, the difference between using the exemption now and waiting is, in many cases, several million dollars of eventual estate tax. For clients who wish to transfer wealth now but retain practical access to it, the spousal lifetime access trust (SLAT) has returned as the workhorse vehicle of the current planning cycle.

A SLAT is an irrevocable trust funded by one spouse — the donor — for the benefit of the other spouse and typically the couple's descendants. The transferring spouse uses lifetime gift exemption to fund the trust; the trust assets are removed from both spouses' estates; and the non-donor spouse retains discretionary access to distributions during their life. If drafted properly, the non-donor spouse's access effectively preserves the family's collective ability to draw on the assets if circumstances change, while the tax benefit of removal is locked in.

The reciprocal-trust doctrine is the primary technical obstacle when both spouses wish to create SLATs for each other — a common desire, since a single SLAT leaves one spouse structurally dependent on the other for access. If the two trusts are substantially identical in terms, trustees, beneficiaries, and economic effect, the doctrine will "uncross" them and cause each trust to be treated as though the donor had retained a benefit, defeating the estate-tax objective. The guardrails we draft around include: meaningfully different trust terms (distribution standards, remainder-beneficiary powers, trustee-removal rights); time-separated funding; and different trustees. None of these alone is sufficient; the pattern has to be genuinely distinct in substance, not merely in language.

Source of funds matters. We strongly prefer to fund SLATs with non-marital property where identifiable — a premarital asset, an inheritance, or the proceeds of a pre-marriage business interest. Where all funding is marital, the donor spouse should retain documentation showing that the funding transfer was intended as a gift from the donor's marital share, not as a transfer of jointly-titled property, because a joint-tenancy source creates retained-interest risk on audit.

Divorce is the most frequently raised concern and is rarely the most difficult to solve. Standard SLAT drafting ties beneficiary status to marital status — the non-donor spouse ceases to be a beneficiary on divorce — which protects the donor spouse's continuing wishes for the funds. The consequence is that after a divorce, the donor spouse loses the indirect access that was the reason for the structure in the first place. Clients who find that unacceptable should understand they are really looking for a different vehicle, not a different SLAT.

Funding mechanics in 2026 are meaningfully more complex than they were in the 2021 planning cycle. Appreciated low-basis assets should generally be held, not transferred, because the SLAT does not receive a step-up at the donor's death. Business-interest transfers require contemporaneous appraisals and, in many cases, a formula clause to guard against IRS valuation challenges. Life insurance policies, cash, and publicly-traded securities are the cleanest funding sources; operating-business interests and real estate require substantially more drafting and diligence.

For clients who are above the projected post-sunset exemption but not confident they need to use the full current exemption, a partial-funding approach — transferring, say, six million dollars now and reserving the balance — captures a meaningful share of the benefit while preserving flexibility. We are actively working with clients on this calibration and are happy to model specific scenarios.