SLAT Trust Taxation: How a Spousal Lifetime Access Trust Is Taxed in California and Washington

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

A SLAT (spousal lifetime access trust) is taxed in three separate ways. Funding it is a completed gift that uses the donor spouse’s lifetime exclusion ($15,000,000 per person for 2026). The trust’s income is usually taxed to the donor spouse as a grantor trust, even though the money now belongs to the trust. And at death the trust sits outside both spouses’ estates, so it avoids estate tax but gets no step-up in basis.

Those three rules decide whether a SLAT is worth it for a California or Washington family earning $750,000 to $3 million. For many California families the honest answer today is “not yet”. For Washington families, whose state estate tax starts at about $3,000,000, it often is.

What a SLAT is, in one paragraph

One spouse (the donor) gives assets to an irrevocable trust. The trustee may make distributions to the other spouse (the beneficiary spouse) and usually to the children. When the beneficiary spouse dies, what is left typically stays in trust for the kids. The household keeps indirect access to the money through the beneficiary spouse, while the assets and all their future growth leave the donor’s taxable estate. The donor gives up direct ownership for good. That trade is the whole idea.

How the money moves, step by step:

1. Donor spouse transfers separate-property assets (cash, a brokerage account, company shares) to the trust and files a gift tax return.
2. An independent trustee invests the assets. The donor pays the income tax on the trust’s earnings.
3. The trustee may distribute to the beneficiary spouse for needs the trust allows (often health, education, maintenance and support).
4. At the beneficiary spouse’s death, the remainder continues in trust for the children, outside both parents’ estates.

SLAT gift tax: how funding the trust is taxed

A transfer to a SLAT is a taxable gift by the donor spouse. It does not qualify for the unlimited marital deduction, because the spouse is not receiving the property outright. Instead it uses part of the donor’s federal basic exclusion, which is $15,000,000 per person for 2026 under P.L. 119-21 and indexed for inflation from 2027. No gift tax is owed until that exclusion is used up.

The donor reports the gift on Form 709, generally due April 15 of the year after the gift. A gift to a trust is often a gift of a future interest, which cannot use the $19,000 annual exclusion (2026), and the Form 709 instructions require a return for those gifts even when they are under $19,000. Gift splitting with the other spouse is generally not available for a SLAT gift, because the consenting spouse is also a beneficiary. Plan on the gift coming out of one spouse’s exclusion only.

One correction to older articles on this topic, including an earlier version of this page: the exclusion did not drop to about $7 million after 2025. The 2026 figure is $15,000,000 per person, made permanent by P.L. 119-21. The “use it before it disappears” argument that drove many 2024 and 2025 SLATs no longer applies.

SLAT income tax: why the donor keeps paying

A SLAT is almost always a grantor trust for income tax purposes. Under IRC §677(a), the grantor is taxed on trust income that may be paid to the grantor’s spouse without the consent of an adverse party. So dividends, interest and capital gains inside the trust land on the donor’s own Form 1040.

For a high-income family this is usually a feature. The IRS ruled in Rev. Rul. 2004-64 that the grantor’s payment of that income tax is not a gift to the trust beneficiaries. In effect, every dollar of tax the donor pays shifts more wealth to the trust without using any exclusion.

What this means by state:

• California. Trust income is taxed to the donor at ordinary California rates, up to 13.3% under the 2025 rate schedules (2026 schedules are not yet published). California has no lower rate for capital gains, so a gain inside the SLAT costs the donor the same state tax as salary.
• Washington. Washington has no individual income tax in 2026, so the grantor-trust cost is mainly federal. Two caveats for this income level: the state’s 7% capital gains tax (9.9% on taxable gains above $1,000,000) and a new 9.9% income tax on AGI over $1,000,000 starting in 2028. How DOR will treat grantor-trust income under both has not been fully spelled out, so confirm with your CPA before large sales inside the trust.

Many SLATs let an independent party “turn off” grantor status later, so the trust starts paying its own tax. That is a drafting choice best made at the start, because adding it later is harder and may not be possible.

SLAT estate tax and the step-up you give up

Properly drafted, the SLAT is not in the donor’s estate and not in the beneficiary spouse’s estate. Everything it grows to passes to the children free of federal estate tax, which tops out at 40% under IRC §2001(c).

The cost: because the assets are not in anyone’s estate, they get no new basis at death. The IRS confirmed this in Rev. Rul. 2023-2, which holds that assets of an irrevocable grantor trust that are not included in the grantor’s gross estate are not adjusted to fair market value at the grantor’s death under IRC §1014. For California couples this matters twice, because community property kept in the estate can get a full basis step-up at the first spouse’s death.

The usual fixes are to fund the SLAT with high-basis assets (cash, recently bought funds) rather than low-basis founder or RSU shares, and to include a power to swap assets of equal value back out of the trust, which also keeps grantor status under IRC §675(4)(C). Late in life the donor can swap cash in and pull low-basis shares back into the estate, where they can be stepped up.

Worked example 1: a California family where a SLAT can backfire

Assumptions (illustrative): a Palo Alto couple, one a Genentech scientist and one an Apple engineering director, household income $1.6 million, net worth $18,000,000. They consider moving $5,000,000 of long-held company stock with a $1,000,000 basis into a SLAT. Assume it grows to $10,000,000 by the second spouse’s death and their total estate never exceeds the combined $30,000,000 exclusion (2 x $15,000,000, before 2027 indexing). Using both exclusions assumes the executor elects portability of the first spouse’s unused exclusion on a timely filed estate tax return.

The SLAT saved nothing and cost up to about $3.3 million in income tax. The 37.1% assumes the top federal long-term gain rate, the 3.8% net investment income tax and California’s top 2025 rate; the children’s actual rates may be lower. Federal estate tax only enters the picture if the couple’s estate is likely to grow beyond $30,000,000, which can happen with a concentrated stock position or pre-IPO equity. For a family like this, a revocable living trust plus guardianship and trusts for minors is often the more useful first step.

Worked example 2: a Washington family where a SLAT pays off

Assumptions (illustrative): a Seattle couple, one an Amazon executive, household income $1.4 million, net worth $10,000,000. Federal estate tax is not an issue at this size. Washington estate tax is: for deaths on or after July 1, 2026, the Washington exclusion is $3,000,000, with rates from 10% to 20% on the taxable estate above it (for deaths January 1 to June 30, 2026 it was $3,076,000). The example uses those current figures for the second death; both can change.

• The executive gives $3,000,000 of a diversified, high-basis portfolio to a SLAT for the spouse and kids. That uses $3,000,000 of a $15,000,000 federal exclusion. No federal gift tax is due.
• Per the Washington DOR estate tax FAQ, “Generally, outright gifts given prior to the date of death are not taxable for Washington estate tax purposes.” A properly drafted SLAT, where the donor keeps no interest, is designed to stay outside the Washington estate on the same principle.
• Washington’s rates rise from 10% on the first $1,000,000 of taxable estate to 20% above $9,000,000, so each $1,000,000 kept out avoids $100,000 to $200,000 of state estate tax, depending on the size of the estate.
• Assume the $3,000,000 doubles to $6,000,000 by the second death and the rest of the estate is $7,000,000. Without the SLAT, the estate is $13,000,000 and the Washington taxable estate is $10,000,000 after the exclusion: tax of $1,690,000 under DOR’s table ($1,490,000 plus 20% of the $1,000,000 over $9,000,000). With the SLAT, the taxable estate is $4,000,000: tax of $550,000. That is about $1,140,000 of state tax avoided, before other deductions.
• Because the assets went in with a high basis, the lost step-up costs little.

Disadvantages of a spousal lifetime access trust

• Divorce. The trust stays for the ex-spouse’s benefit. Worse, the donor can keep paying income tax on its earnings: the old rule that shifted that tax to the ex-spouse (IRC §682) was repealed for divorce instruments executed after 2018.
• Death of the beneficiary spouse. The household’s indirect access ends. The donor cannot be added as a beneficiary.
• No step-up at death, as the California example shows.
• Two SLATs that mirror each other can be collapsed by the IRS under the reciprocal trust doctrine, putting both back in the estates. Spouses who each create one need genuinely different terms, timing and assets.
• Community property. In California, the donor must fund the trust with separate property. Converting community property first requires a written transmutation that meets Cal. Family Code §852, and the beneficiary spouse must not contribute anything.
• Cost and paperwork. Legal fees, an independent trustee, a gift tax return, and annual trust accounting.

Life insurance and LLCs inside a SLAT

A SLAT can own a policy on the donor’s life, so the death benefit lands outside both estates. Buying a new policy inside the trust is cleaner than moving an existing one: under IRC §2035, a policy transferred within three years of death is pulled back into the estate. Some families have the SLAT hold an LLC that owns the policy or investments, to centralize management. Whether that adds a tax benefit depends on how it is drafted and valued, so treat it as a question for your estate attorney, not a default. Our notes on private placement life insurance cover the policy side.

How a SLAT is set up

1. Decide whether you need one: project the estate at the second death, not today, and check Washington exposure.
2. Choose the assets: high-basis, separate property, nothing the donor needs to live on.
3. Have an estate attorney draft the trust with distribution standards, a swap power, a grantor-status toggle, and successor trustees. Our list of questions to ask an estate attorney helps here.
4. Get a tax ID for the trust and retitle the assets. See whether trusts need their own tax ID.
5. File Form 709 for the year of the gift.
6. Review every few years and after any divorce, death, move between states or liquidity event.

What to write down for your children

A SLAT will usually outlive both parents and pay for things the kids cannot picture yet. The trust document says what the trustee may do. It does not say why you did it. A one-page letter of wishes, filed with the trust, can explain what the money is for, what you hope it is not used for, and how you made the choice. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Common questions about SLAT taxation

Does a SLAT file its own tax return?

Often not in the usual sense. While it is a grantor trust, its income is reported on the donor’s Form 1040. The trustee may use one of the optional reporting methods in the Form 1041 instructions for grantor-type trusts, or file a Form 1041 that shows no tax and passes the income to the donor. Once grantor status is turned off, the trust files and pays its own tax.

Is a SLAT worth it for a California family under $30 million?

Usually not for federal estate tax alone, since a married couple can have $30,000,000 of combined exclusion in 2026 (the second $15,000,000 depends on electing portability at the first death). It can still make sense if a concentrated or pre-IPO position could push the estate past that, or for creditor protection. Run a projection to the second death before you decide.

Can both spouses create a SLAT for each other?

Yes, but the trusts must differ in real ways (different terms, timing, assets and beneficiaries’ rights). Trusts that mirror each other risk being unwound under the reciprocal trust doctrine, which brings both back into the estates.

The next step

Project your estate to the second spouse’s death, separately for federal and, if you live in Washington, state estate tax. If neither number is large, a SLAT is probably premature. If one is, bring that projection to your estate attorney, and to our estate planning and tax management teams if you want a second view.

This is general education, and the right move depends on the family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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