Spousal Lifetime Access Trust (SLAT) in New York: Advantages, Risks, and Tax Implications

By Albert Goodwin, Esq., estate planning and probate attorney admitted to practice in New York. Last updated: June 2025.

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created by one spouse (the grantor or donor spouse) for the benefit of the other spouse (the beneficiary or non-donor spouse), with the remainder typically passing to the couple's descendants upon the beneficiary spouse's death. Because the beneficiary spouse can receive distributions during life, the donor spouse retains indirect access to the gifted assets while removing those assets from both spouses' taxable estates.

For affluent New York couples, the SLAT is one of the most effective ways to use the historically high federal gift and estate tax exemption before it is scheduled to be cut, while still keeping a financial backstop within the household. This page focuses specifically on how SLATs work under New York and federal law. If you want a broader overview of high-net-worth strategies, see our page on advanced New York estate planning techniques, and for protecting assets generally, see our asset protection resources.

Why a SLAT Is Especially Attractive for New Yorkers

Married couples in New York typically use a SLAT to accomplish three goals:

1. Lock in the federal lifetime gift and estate tax exemption before the scheduled reduction (discussed below) while removing future appreciation from the estate;
2. Shield assets from future creditor and malpractice claims, a key concern for physicians, business owners, and professionals; and
3. Preserve indirect access to the transferred assets through the beneficiary spouse, so the gift does not feel like the couple has permanently parted with everything.

The Federal Exemption and the 2026 Sunset (Why Timing Matters Now)

For 2025, the federal gift and estate tax exemption is $13.99 million per individual (up from $13.61 million in 2024), or roughly $27.98 million per married couple. Under current law, this elevated exemption — created by the 2017 Tax Cuts and Jobs Act — is scheduled to drop by roughly half on January 1, 2026, falling to an inflation-adjusted figure expected to land in the neighborhood of $7 million per individual. (Whether Congress extends the higher amount remains uncertain; planning should be based on the law as it stands, not on speculation.)

The IRS confirmed in its final "anti-clawback" regulations (T.D. 9884) that gifts made while the higher exemption is in effect will not be retroactively taxed if the exemption later falls. Critically, the bonus exemption is a use-it-or-lose-it benefit: a couple cannot capture the higher amount after the sunset simply by making smaller gifts. This is why many New York couples are funding SLATs now, before 2026, to bank the larger exemption.

New York's Estate Tax "Cliff" — A Trap a SLAT Can Help Address

New York imposes its own estate tax that is entirely separate from the federal system, and it works very differently. For deaths in 2025, the New York basic exclusion amount is approximately $7.16 million (it is indexed annually). New York's rates run up to 16%.

The critical wrinkle is the New York estate tax "cliff." Under New York Tax Law § 952, if a taxable estate exceeds 105% of the exclusion amount, the estate loses the exclusion entirely — the tax is calculated on the full estate, not just the excess. An estate that goes only slightly over the threshold can face a disproportionately large tax bill on dollars that would otherwise have passed tax-free. By removing assets from the estate during life, a SLAT can help keep a New Yorker's taxable estate below the cliff.

New York Has No State Gift Tax — A Major SLAT Advantage

Here is a feature that makes SLATs particularly powerful for New York residents: New York does not impose a gift tax. (New York repealed its gift tax effective January 1, 2000.) That means lifetime gifts to a SLAT generally are not taxed at the state level when made.

There is an important caveat, however. New York's three-year "add-back" rule under Tax Law § 954 pulls certain taxable gifts made within three years of death back into the New York taxable estate. Properly timed, completed gifts to a SLAT made well before death can fall outside this add-back window — another reason not to delay if estate-tax reduction is a goal. This is a New York-specific advantage that does not exist in states like Connecticut, which has its own gift tax.

Funding the SLAT: Sequence and New York Caveats

To fund a SLAT, the donor spouse transfers individually owned assets into the irrevocable trust. If the assets are owned by the beneficiary spouse, they would first need to be transferred to the donor spouse and then to the trust — but enough time must pass between the transfers. Otherwise the IRS may invoke the step-transaction doctrine, collapsing closely spaced transfers into a single transaction and undermining the goal of keeping SLAT assets out of both spouses' estates.

New York is not a community property state, so most New York couples hold assets either individually or as tenants by the entirety (for real property) or in joint accounts. Dividing tenancy-by-the-entirety property to fund a SLAT can eliminate the strong creditor protection that the entirety form provides under New York law. A SLAT is therefore only one piece of a coordinated plan. A typical funding sequence looks like this:

1. Inventory assets and confirm clear, individual ownership of what will be gifted.
2. Re-title jointly held or entirety property as needed, with careful attention to timing and to the creditor protection being given up.
3. Execute the SLAT and transfer the individually owned assets into it.
4. File a federal gift tax return (Form 709) to report the gift and use exemption — no federal tax is due to the extent exemption remains, and no New York gift tax applies.
5. Coordinate the SLAT with the rest of the estate plan, including wills, beneficiary designations, and any revocable trust. See our overview of the benefits of a living trust for the revocable side of planning.

Income Tax on a SLAT

A SLAT is generally treated as a grantor trust under Internal Revenue Code § 677 because its income may be distributed to the grantor's spouse. As a grantor trust, the donor spouse pays the income tax on trust income even though the trust is irrevocable. Paying that tax is often a feature, not a bug — it allows the trust to grow income-tax-free for beneficiaries while further reducing the donor's taxable estate.

If the couple prefers the trust to bear its own income tax, options include adding other current beneficiaries (such as children) whose interest changes the grantor-trust analysis. New York taxes resident trust income, so locating or sourcing matters; New York does provide an exception for certain trusts with no New York trustees, no New York property, and no New York-source income (the so-called "exempt resident trust" rule). A drafter can also give an independent trustee discretionary (never mandatory) authority to reimburse the grantor for income taxes paid.

Divorce and Death of the Beneficiary Spouse

Because a SLAT is irrevocable, a poorly drafted trust can leave the donor spouse funding the lifestyle of a former spouse. New York drafters commonly address this by defining "spouse" as the person to whom the grantor is married at the time of distribution, or by terminating the beneficiary spouse's interest upon divorce.

If the beneficiary spouse dies first, indirect access disappears. To guard against this, the SLAT can grant the beneficiary spouse a limited testamentary power of appointment, exercisable in a will, allowing the assets to be redirected (for example, to a continuing trust for the surviving donor spouse) rather than passing immediately to the children.

Keeping Indirect Access in an Emergency — and the Reciprocal Trust Doctrine

A common concern is losing access to the trust assets in a true emergency. Drafting solutions include giving an independent third party the non-fiduciary power to loan trust assets to the donor spouse (with interest, on arm's-length terms), or naming the beneficiary spouse as trustee limited to an ascertainable standard of health, education, maintenance, or support so that estate inclusion and creditor exposure are avoided.

Couples sometimes create SLATs for each other so both spouses retain access. This must be done carefully to avoid the reciprocal trust doctrine, articulated by the U.S. Supreme Court in United States v. Estate of Grace, 395 U.S. 316 (1969). Under that doctrine, when spouses create substantially identical, interrelated trusts that leave them in approximately the same economic position as if each had created a trust for themselves, the trusts can be "uncrossed" and pulled back into each spouse's estate — defeating both the tax and creditor-protection goals. To reduce this risk, the two trusts should differ meaningfully: different funding dates, different assets and amounts, different trustees, and different dispositive terms.

Who Should — and Should Not — Consider a SLAT in New York

A SLAT may be a strong fit if you are a married New York couple with a combined estate approaching or exceeding the federal exemption, or above the New York exclusion/cliff threshold, and you want to use the elevated federal exemption before 2026. It is also worth considering for professionals seeking creditor protection.

A SLAT may be a poor fit if your marriage is unstable, if you may need direct access to the gifted assets, if your estate is comfortably below the New York exclusion, or if both spouses cannot afford to part with assets even on an indirect-access basis. Because the trust is irrevocable, the decision should not be made under time pressure without legal counsel.

A Simplified New York Worked Example

Suppose a New York couple has a combined estate of $20 million in 2025. Without planning, the entire estate could exceed New York's roughly $7.16 million exclusion, triggering the cliff and exposing the full estate to New York estate tax (up to 16%). One spouse transfers, for example, $10 million of individually owned assets into a SLAT, using a portion of the $13.99 million federal exemption. No New York gift tax applies, and properly timed the gift can fall outside the three-year add-back. Going forward, that $10 million — and all future appreciation — sits outside both spouses' New York and federal taxable estates, while the beneficiary spouse retains indirect access. The numbers in any real plan must be run with current figures and your specific assets.

Common Drafting Mistakes

• Funding two near-identical SLATs and triggering the reciprocal trust doctrine.
• Defining "spouse" rigidly, so a later divorce locks assets in for an ex-spouse.
• Transferring assets too quickly in sequence and inviting the step-transaction doctrine.
• Dividing tenancy-by-the-entirety property without accounting for the lost creditor protection under New York law.
• Giving the beneficiary-trustee broad distribution powers that cause estate inclusion instead of limiting them to an ascertainable standard.
• Ignoring New York's three-year add-back and the income-tax consequences of New York resident trust status.

Frequently Asked Questions

Does New York have a gift tax on transfers to a SLAT?
No. New York repealed its gift tax in 2000. However, taxable gifts made within three years of death may be added back to the New York taxable estate under Tax Law § 954.

What is the New York estate tax cliff?
If a New York taxable estate exceeds 105% of the state exclusion amount, the exclusion is lost entirely and tax is computed on the whole estate — making it valuable to keep the estate below the threshold.

What happens to a SLAT if we divorce?
It depends on the drafting. A well-drafted SLAT typically ends the spouse's beneficial interest on divorce or defines "spouse" as the current spouse, so a former spouse does not continue to benefit.

Can both spouses create SLATs?
Yes, but the trusts must be meaningfully different to avoid the reciprocal trust doctrine under U.S. v. Estate of Grace.

Who pays the income tax?
Usually the donor spouse, because a SLAT is typically a grantor trust under IRC § 677 — which can be advantageous because it lets the trust grow tax-free while shrinking the donor's estate.

Talk With a New York SLAT Attorney

A SLAT is a powerful but irrevocable tool, and the difference between a plan that protects your family and one that backfires is in the drafting and the timing — especially with the 2026 federal sunset approaching and New York's unique estate tax cliff and add-back rules in play. The Law Offices of Albert Goodwin help New York couples evaluate whether a SLAT fits their goals and coordinate it with the rest of their estate plan. We have offices in New York City, Brooklyn, and Queens. Call us at 212-233-1233 or email [email protected] to discuss your situation.

This page is for general information about New York and federal law and is not legal or tax advice. Exemption and exclusion figures are indexed annually and change; confirm current amounts before acting.