Do You Still Need a SLAT After the 2026 Tax Law? (California)

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Estate size this page covers: $15 million to $100 million and up. Below $15 million for one person, or about $30 million for a married couple, there is usually no federal estate tax to save, and a SLAT mostly costs the step-up in basis your heirs would otherwise get.

Figures verified against IRC § 2010(c) and the 2026 federal exemption ($15,000,000/person, permanent, under P.L. 119-21), 2026. This is general information, not legal advice for your situation.

What a $10 million SLAT saves a couple, and what it costs

Take a California couple with a $40 million estate. In 2026 the husband gives $10 million of his separate property to a SLAT for his wife. If everything grows 6% a year, the trust is worth $32.1 million after 20 years, generally outside the spouses’ taxable estates, and the federal estate tax at the second death is about $8.8 million lower. The catch is that SLAT assets get no stepped-up basis at the grantor’s death (Rev. Rul. 2023-2). If the heirs sell right after the second death, they owe about $8.2 million of capital gains tax on that growth, which leaves the family ahead by about $0.6 million.

A SLAT is an irrevocable trust one spouse creates and funds for the other spouse, and often for the kids. You gift assets into it, using part of your exemption. Because it’s irrevocable and you’ve given the assets away, they’re generally out of your taxable estate. Because your spouse is a beneficiary, your family still has indirect access to the money. That’s the appeal: get assets out of the estate without fully cutting off access.

The family is hypothetical. The husband funds the SLAT with $10 million of separate property after a written transmutation, and everything grows 6% a year. Both spouses have died by the year shown, and portability or a credit shelter trust preserves both exemptions, $30 million in total, held flat for simplicity even though the exemption is indexed for inflation after 2026. The estate tax is 40% of the amount over the exemption, with the $10 million gift added back as an adjusted taxable gift (IRC § 2001(b)). The capital gains column assumes the SLAT assets kept a $10 million basis and are sold right after the second death at a combined top rate of 37.1%: 20% federal (IRC § 1(h)), 3.8% net investment income tax (IRC § 1411), and California’s 12.3% top bracket plus the 1% tax on income over $1 million (R&TC § 17043). The model ignores the extra benefit of the donor paying the trust’s income tax.

If the heirs keep the assets and never sell, the capital gains column never arrives and the estate tax saving is the whole story. If the SLAT is funded with low-basis stock, the trade gets worse: on the same numbers with a $2 million basis, the tax on a sale at year 20 is about $11.2M, more than the estate tax saved. A swap power used before death recovers most of the lost basis (see a swap power to recover the step-up). For a couple near $30 million, the saving is small and the gift can’t be undone, so the answer at the top of this page stays “probably not.” The estate tax exposure calculator runs your own numbers.

Whether the trade is worth making depends on how far past $30 million you are

For a few years, estate planners sold SLATs on a “use it or lose it” pitch. The high exemption was scheduled to sunset at the end of 2025 and drop sharply in 2026, and a wealthy couple who didn’t use the bigger exemption by gifting assets into a SLAT before the deadline would lose it. That created genuine urgency.

The deadline no longer exists. The One Big Beautiful Bill Act repealed the sunset and set the exemption at $15,000,000 per person, permanent (indexed for inflation after 2026). California has no state estate tax and no state gift tax to complicate that. If someone is still selling you a SLAT on urgency, the pitch is out of date. With $15,000,000 each, a married couple can pass roughly $30 million to their family with no federal estate tax, before any planning at all, and the question becomes whether your own numbers justify the trade above.

Under $30 million as a couple

Most likely you don’t need a SLAT right now. Your combined exemptions already cover you, and a SLAT is an irrevocable, permanent giving-away of assets, so it needs a real reason. A regular, well-funded revocable living trust handles probate avoidance and incapacity for the vast majority of families without giving anything away.

Approaching or above $30 million, or growing fast

Now a SLAT can justify its cost and complexity, mainly by keeping future appreciation outside your estate. Gift a $3 million asset into a SLAT today, and if it grows to $8 million, that entire $8 million, growth included, sits outside your taxable estate. A couple far above $30 million may also want to use both spouses’ exemptions now through SLATs rather than leaving planning for later, even without a sunset.

Serious creditor exposure

A properly structured irrevocable trust can put assets beyond the reach of future creditors, which matters to a surgeon, a business owner, or anyone in a high-liability field. That use can justify a SLAT even below the estate tax thresholds, as a specific, deliberate decision.

How the trust has to be built to stay out of both estates

A SLAT keeps the assets, with their future growth, out of both spouses’ taxable estates if it’s drafted around IRC §§ 2036 and 2041.

The gift is complete when the trust is funded

The federal gift tax applies to a transfer “in trust or otherwise” (IRC § 2511(a)). Funding a SLAT is a taxable gift reported on Form 709, and it uses part of the donor’s $15,000,000 basic exclusion for 2026 (Rev. Proc. 2025-32). Gift splitting with the other spouse usually doesn’t help here. When one spouse transfers property partly to the other spouse and partly to third parties, consent to split applies to the third-party share only if that share is ascertainable and severable from the spouse’s interest (Treas. Reg. § 25.2513-1(b)(4)), and a spouse who can receive discretionary distributions rarely meets that test. The 2026 gift tax guide covers the filing side.

The donor spouse can’t be a beneficiary

Property comes back into the donor’s estate if the donor keeps “the possession or enjoyment of, or the right to the income from, the property,” or the right to decide who enjoys it (IRC § 2036(a)). So the donor is never a beneficiary and never holds the power to pick beneficiaries. The donor’s access is indirect, through distributions to the beneficiary spouse while the marriage lasts.

The beneficiary spouse can serve as trustee, within limits

A beneficiary spouse who is also trustee holds a power to pay trust money to herself. That power stays out of her estate if it is “limited by an ascertainable standard relating to the health, education, support, or maintenance” of the holder (IRC § 2041(b)(1)(A)). If she holds unlimited discretion over her own distributions, the exclusion fails, so broader discretion belongs with an independent co-trustee. The HEMS distribution standard page walks through the wording.

The donor keeps paying the trust’s income tax

A trust whose income may be paid to the grantor’s spouse is a grantor trust: the grantor is treated as the owner of any portion whose income may be “distributed to the grantor or the grantor’s spouse” (IRC § 677(a)), and the grantor is treated as holding any interest held by the spouse (IRC § 672(e)). The donor pays the income tax on trust income each year. The IRS has ruled that the grantor’s payment of that tax is not a gift to the trust beneficiaries (Rev. Rul. 2004-64), so every tax payment moves a little more value out of the donor’s estate at no gift tax cost. See the grantor trust definition for the income tax basics.

Two SLATs for one couple have to differ in real ways

When each spouse wants a SLAT, the couple runs straight into the reciprocal trust doctrine, from United States v. Estate of Grace (1969) 395 U.S. 316. When two trusts are interrelated and leave each spouse in about the same economic position as if each had set up a trust for himself or herself, the trusts are uncrossed and each estate includes the trust the other spouse created, to the extent of mutual value.

In Grace, Joseph Grace signed a trust for his wife Janet in December 1931. About two weeks later Janet signed a trust for him that was, in the Court’s words, “virtually identical,” funded with property he had given her over the years, as part of a plan he devised. The Court held that the doctrine doesn’t depend on proof that each trust was the price of the other, or on a tax-avoidance motive. It “requires only that the trusts be interrelated,” and that the arrangement leave the settlors in about the same economic position as trusts naming themselves. The value of Janet’s trust went into Joseph’s estate. Mirror-image SLATs signed for each other on the same day with the same assets are the version to avoid.

The usual fix is to make the two trusts different in ways that change each spouse’s economic position, and to document the differences. In Estate of Levy v. Commissioner, T.C. Memo. 1983-453, a husband and wife created trusts on the same day, with the same stock and the same son as remainder beneficiary. The husband’s trust gave the wife a lifetime special power to appoint the trust property to anyone other than herself, her estate or their creditors. The wife’s trust gave the husband no such power. The Tax Court held the trusts were not interrelated and not reciprocal. Levy is a memorandum opinion, and nobody should treat one power of appointment as a safe harbor. Differences that planners stack together include signing the trusts at different times, funding them with different assets and amounts, naming different beneficiaries or trustees, and giving the spouses different powers. Some couples sidestep the issue by having only one spouse create a SLAT. Grace is also on estate tax cases won and lost, and other strategies that tend to go wrong are collected in estate planning strategies that backfire.

What the marriage can do to the trust

Your access runs through your spouse, so the SLAT is only as stable as the marriage. Most SLAT pitches skip that it’s irrevocable: once assets go in, you can’t take them back, and if you divorce, or the beneficiary spouse dies, your indirect access can vanish. A SLAT is high-end planning, drafted for each family.

A divorce leaves the trust in place

The trust survives the divorce because it is irrevocable, and under IRC § 672(e) the donor can keep paying income tax on trust income that goes to a former spouse.

The grantor trust rule treats the grantor as holding any power or interest held by “any individual who was the spouse of the grantor at the time of the creation of such power or interest” (IRC § 672(e)(1)(A)). The test looks at the marriage when the interest was created, so a later divorce doesn’t end it on the statute’s terms. The old rule that shifted trust income to the former spouse, IRC § 682, was repealed for divorce or separation instruments executed after December 31, 2018 (Pub. L. 115-97, § 11051). Read together, a donor can be left paying tax on income an ex-spouse receives.

Many SLATs use a “floating spouse” definition: the beneficiary is whoever the donor is married to at the time, so a former spouse drops out at divorce and a later spouse comes in. For income tax purposes, a later spouse’s interests are attributed to the grantor only “with respect to periods after such individual became the spouse of the grantor” (IRC § 672(e)(1)(B)). The divorce itself still has to be negotiated with the trust in view. Estate planning after divorce covers the rest of the plan.

If the beneficiary spouse dies first, the donor’s access ends

The donor loses the indirect access, because the donor can’t be added as a beneficiary of a trust the donor funded without pulling it back into the donor’s estate under IRC § 2036.

The trust keeps running for the children or other remainder beneficiaries on its own terms. Because the beneficiary spouse never owned the trust assets, they generally aren’t in her estate either, unless she held a general power of appointment, and that means no new basis at her death. Property gets a basis adjustment under IRC § 1014 only if it fits one of the categories listed in § 1014(b), which is the reasoning the IRS applied to grantor trust assets in Rev. Rul. 2023-2. Couples who rely on the SLAT for living expenses sometimes insure the beneficiary spouse’s life, often through an irrevocable life insurance trust, to replace that access.

Where California changes the price of the trade

Community property has to be transmuted in writing before it funds a SLAT

In California each spouse’s interest in community property is “present, existing, and equal” (Fam. Code § 751), and a spouse “may not make a gift of community personal property” without the other spouse’s written consent (Fam. Code § 1100(b)). If community property funds a SLAT for the wife, she has put half of her own property into a trust for herself. That half is the problem: it invites inclusion in her estate under IRC § 2036, and California lets a settlor’s creditors reach what the trustee could pay the settlor, “not exceeding the amount of the settlor’s proportionate contribution to the trust” (Prob. Code § 15304(b)).

The fix is a written transmutation before funding, converting the assets that will fund the SLAT into the donor spouse’s separate property (Fam. Code § 850). The worked example above starts with one. A transmutation is not valid unless it is “made in writing by an express declaration” by the spouse whose interest is adversely affected (Fam. Code § 852(a)), and in Estate of MacDonald (1990) 51 Cal.3d 262 the California Supreme Court held that the writing must contain language “which expressly states that a change in the characterization or ownership of the property is being made.” A signed consent on a form isn’t enough. Community funds that go straight in, with no transmutation, make the beneficiary spouse a settlor of half. Transmutation agreements and trust assets covers the drafting.

The double step-up is lost on whatever goes into the SLAT

At the first spouse’s death, both halves of community property get a new basis, because IRC § 1014(b)(6) covers “the surviving spouse’s one-half share of community property” when the other half is in the decedent’s estate. Separate property doesn’t get that. And assets inside a SLAT get no basis adjustment at the grantor’s death at all, because they aren’t in the grantor’s estate (Rev. Rul. 2023-2). So the transmutation that protects the SLAT also gives up the community property double step-up on those assets. California taxes capital gains as ordinary income, so the lost basis costs more here than in most states.

The common partial fix is a swap power: the donor’s power, held in a nonfiduciary capacity, “to reacquire the trust corpus by substituting other property of an equivalent value” (IRC § 675(4)(C)). The IRS has ruled that this power will not, by itself, put the trust in the grantor’s estate, if the trustee has a fiduciary duty to confirm the swapped property is of equivalent value and the power can’t shift benefits among beneficiaries (Rev. Rul. 2008-22). Late in life, the donor swaps cash or high-basis assets into the SLAT and takes back low-basis assets, which then get a step-up at death. Step-up in basis for irrevocable trusts has more.

Tax reimbursement doesn’t make the donor a beneficiary

The IRS has said a trustee’s discretion to reimburse the grantor for income tax on trust income won’t, alone, cause estate inclusion, but that discretion combined with “applicable local law subjecting the trust assets to the claims of A’s creditors” may (Rev. Rul. 2004-64). California addresses that directly: a settlor is not treated as a beneficiary of an irrevocable trust “solely by reason of a discretionary authority vested in the trustee to pay directly or reimburse the settlor” for income tax on trust income (Prob. Code § 15304(c)).

Working with Ridley Law

The call is for California couples over the federal exemption, or headed there, who are weighing whether a SLAT saves enough on their own numbers to justify giving up the basis step-up and control. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts. The first call is free and runs 30 minutes, by phone or Zoom. For the wider set of tools at this size, see high net worth estate planning in California.

Book my 30-minute call or call 805-244-5291.

Frequently asked questions

Do I still need a SLAT now that the exemption is permanent?

For most families, no. The 2025 sunset that drove SLAT urgency was repealed, and the exemption is now $15,000,000 per person, permanent. A SLAT mainly makes sense for estates approaching or above about $30 million as a couple, or for specific asset-protection goals.

Is there still a deadline to set up a SLAT before 2026?

No. The One Big Beautiful Bill Act repealed the scheduled sunset, so the “use it or lose it before 2026” deadline no longer exists. There’s no ticking clock forcing a decision this year.

What does a SLAT still do if the exemption is so high?

It can move future appreciation out of your taxable estate, provide creditor protection, and lock in exemption for very large estates. Those are real benefits for the right family, they’re just no longer tied to an expiring deadline.

What are the downsides of a SLAT?

It’s irrevocable, so you can’t take the assets back. Access runs through your spouse, so divorce or the death of the beneficiary spouse can cut off that access. Setting up both spouses’ trusts identically can also trigger the reciprocal trust doctrine and undo the tax benefit.

Does California have its own estate or gift tax that a SLAT addresses?

No. California has no state estate tax and no state gift tax, so a SLAT is purely a federal estate-tax and asset-protection tool here, relevant only to larger estates.

Can both spouses create SLATs for each other?

Yes, but identical trusts risk the reciprocal trust doctrine from United States v. Estate of Grace (1969) 395 U.S. 316, which uncrosses them and puts each trust back in the other spouse’s estate to the extent of mutual value. The trusts need real differences in timing, assets, beneficiaries and powers.

Can a SLAT be funded with community property in California?

Not safely. Community property belongs equally to both spouses, so the beneficiary spouse would be funding half of a trust for herself. The couple first converts the funding assets into the donor’s separate property with a written transmutation that meets Family Code § 852 and Estate of MacDonald, which gives up the community property double step-up on those assets.

What happens to a SLAT if we divorce?

The trust stays in place because it is irrevocable. Unless it uses a floating spouse definition, the former spouse can stay a beneficiary, and under IRC § 672(e) the donor can keep owing income tax on the trust’s income.