SLAT vs. GRAT: How to Choose Now That the $15 Million Exemption Is Permanent

A spousal lifetime access trust (SLAT) uses your lifetime gift tax exemption to move assets out of your estate for good, including everything those assets grow into later. A grantor retained annuity trust (GRAT) moves future growth out of your taxable estate while leaving your exemption largely intact. Your exemption is finite and you spend it once, so the real question is which assets it should cover and what you do with the ones it should not.

The deadline that used to force this decision is gone. The $15,000,000 federal estate and gift tax exemption became permanent for gifts made after December 31, 2025, under P.L. 119-21. So the question is no longer how fast you can use the exemption before it shrinks. It is whether to use it at all, and on which assets.

Both are irrevocable trusts, and both move wealth out of a taxable estate before it appreciates. They are built for different problems, and for a lot of families the answer is one of each. A couple holding a concentrated stock position ahead of a sale, plus real estate they want the family to keep for two generations, is usually looking at a GRAT for one and a SLAT for the other. The order matters more than the choice.

The $15 Million Exemption Is Now Permanent

The federal estate and gift tax exemption is $15,000,000 per person for 2026, and it is permanent for gifts made after December 31, 2025, under P.L. 119-21. For married couples, that is $30,000,000 of combined exemption. The change removed the deadline that drove most SLAT planning for the past eight years.

The mechanism is worth understanding, because it is what makes the word permanent credible. Congress did not extend a deadline. It rewrote the base amount and deleted subparagraph (C) outright, the temporary provision that had housed the doubled amount enacted in 2017 and carried it through the end of 2025, at IRC §2010(c)(3). There is no longer a provision that expires.

For eight years the case for a spousal lifetime access trust was use it or lose it. The exemption was scheduled to fall by roughly half after 2025, and a couple who did not move assets before then would watch half of a $30,000,000 shelter disappear. That is no longer what the statute says.

What replaces it is a better question and a harder one. With no deadline, the issue is not how soon you use the exemption. It is whether to use it at all. A SLAT spends your exemption. A GRAT, structured correctly, spends almost none of it. Most of the decision between the two follows from that single line.

One piece of restraint belongs here. Permanent means enacted without a sunset, not beyond the reach of a future Congress. The scheduled reduction is gone, and planning can now be timed to your assets rather than to the calendar, which is a materially different thing from planning being risk-free.

What Is the Difference Between a GRAT and a SLAT?

A SLAT is a completed gift that spends your exemption to move an asset and its future growth out of your estate for good. A GRAT is a bet that an asset will outrun an interest rate set by the IRS, and if the bet works it costs you almost no exemption.

With a SLAT, one spouse makes an irrevocable gift to a trust for the other spouse’s benefit. The gift is complete when the trust is funded, which is what uses the exemption and what keeps the trust assets out of both spouses’ taxable estates. The trust is a grantor trust because its income may be distributed to, or accumulated for, the grantor’s spouse under IRC §677(a)(1) and (2). So the donor spouse pays the income tax on trust earnings personally, and every dollar of that tax is another dollar of family wealth moved without using more exemption. The beneficiary spouse’s access is what makes an irrevocable gift of this size tolerable, and it is also the structure’s weak point. Trustee selection and the shape of that access are drafting decisions, covered in how a SLAT is drafted and funded.

A GRAT works on different machinery. You transfer assets to a trust and keep the right to receive fixed annuity payments for a set term. The taxable gift is the value transferred minus the present value of those annuity payments, so a GRAT structured to pay the full value back to you, a zeroed-out GRAT, produces a gift close to zero and uses almost no exemption. Whatever the asset earns above the §7520 rate passes to the remainder beneficiaries when the term ends. The special valuation rules that make the arithmetic work are at IRC §2702. Annuity term selection and the qualified interest requirements are covered in how a GRAT is structured.

The sharpest practical difference between the two is who can receive anything while the trust is running. A GRAT’s governing instrument must prohibit any distribution to or for the benefit of anyone other than the annuity holder for the entire annuity term, under Treas. Reg. §25.2702-3(d)(3). Your spouse can receive nothing from a GRAT while it runs. In a SLAT, your spouse is the reason the trust exists. Same family, same assets, opposite answer on access.

Two more requirements explain why GRATs are run the way they are. The instrument must prohibit additional contributions, and it must prohibit commutation, meaning prepayment of the annuity, under Treas. Reg. §25.2702-3(b)(5) and (d)(5). That is why a GRAT program is a series of separate short-term trusts rather than one trust you keep feeding.

The IRS Interest Rate a GRAT Has to Beat

A GRAT produces a benefit only if the asset outperforms an interest rate the IRS publishes each month, set at 120 percent of the federal midterm rate under IRC §7520(a). Through the first nine months of 2026 that rate ran between 4.6 percent and 5.4 percent, with a median of 5.0 percent, and it has climbed from 4.6 percent in April to 5.4 percent in September.

Somewhere around 5 percent is the break-even. Growth above it passes to the remainder beneficiaries free of additional gift and estate tax. Growth below it does not, and the annuity payments return the asset to you over the term, leaving you roughly where you started less the cost of setting the trust up.

The rate matters more than a single monthly number suggests, because it is fixed for the life of the trust. It locks in when you fund the GRAT and governs the full annuity term, so a GRAT funded in September has to beat 5.4 percent for its entire run regardless of what rates do afterward. In 2020 the rate fell below 1 percent and almost any diversified portfolio cleared it. At 5 percent and rising, a portfolio of marketable securities is no longer a comfortable bet, and the range of assets worth putting in a GRAT is considerably narrower, and when you fund each trust in a series matters nearly as much as what goes into it.

A SLAT has no such threshold. Once the gift is complete, every dollar of appreciation sits outside your estate whether the asset returns 2 percent or 20 percent. That asymmetry is why the rate environment belongs in this decision at all. A rate near 5 percent pushes toward the SLAT for anything other than an asset you have real reason to believe will outrun it.

What Happens If You Die During the GRAT Term?

If you die before a GRAT’s annuity term ends, the strategy fails and the trust assets come back into your taxable estate. A SLAT carries no equivalent risk. The gift is complete when the trust is funded, so your death the following week changes nothing about where those assets sit.

The reason is the annuity you kept. A retained right to payments from a trust is a retained interest, and property transferred with a retained right to income or enjoyment is drawn back into the gross estate at death under IRC §2036.

The amount drawn back is not automatically the whole trust. The includible portion is the amount of corpus needed to produce the retained annuity in perpetuity, calculated at the §7520 rate in effect on the date of death and capped at the value of the trust property, under Treas. Reg. §20.2036-1(c)(2). For a short zeroed-out GRAT the annual annuity is large relative to the corpus, so the formula usually reaches the full value and the practical answer is complete inclusion.

Two things soften the result. Assets included in the gross estate receive a basis adjustment under IRC §1014, so the family is no worse off on income tax than if the GRAT had never been funded. And this exposure is the reason GRAT terms run short. A two-year term is the common floor, and a series of short GRATs keeps the window during which your death can undo the plan as narrow as the structure allows.

What a failed GRAT costs you is time and fees, not exemption. That is the real asymmetry between the two structures here. A GRAT that fails returns you to the starting line with the option to try again. A SLAT cannot fail this way, because once the gift is complete there is nothing left to bring back.

The Risks That Actually Kill a SLAT

A SLAT fails in a completely different way. It does not depend on an interest rate and it does not care when you die. What undoes a SLAT is losing the spousal access that made an irrevocable gift acceptable in the first place, or building a structure so symmetrical that the IRS treats the assets as never having left.

The symmetry problem shows up when both spouses create SLATs for each other, which is the common design because it lets each spouse use a full exemption. Done carelessly, the two trusts can be uncrossed and each spouse treated as having funded a trust for their own benefit, which puts the assets back in both estates. The test asks whether the trusts are interrelated and whether they leave the spouses in approximately the same economic position they would have occupied had each created a trust for themselves, under United States v. Estate of Grace, 395 U.S. 316 (1969).

Matching timing and amounts is not by itself fatal. Two trusts created on the same day, with identical terms and identical funding, were held not reciprocal because one gave the beneficiary a special power of appointment that the other did not, in Estate of Levy v. Commissioner, T.C. Memo. 1983-453. What that case establishes is that the difference between the two trusts has to be economically meaningful rather than cosmetic. Different funding dates, different assets, different distribution standards, and different powers of appointment all do real work. Couples who mirrored their trusts have lost, in Estate of Bischoff v. Commissioner, 69 T.C. 32 (1977), where two spouses funded near-identical trusts days apart and both trusts were pulled back into their estates.

Divorce ends the marriage and does not end the trust. Your former spouse stays the beneficiary unless the instrument was drafted to address it, which means your indirect access to those assets now runs through someone you are no longer married to. The problem has known drafting solutions, and it is the clearest reason a SLAT should not be run off a form.

The death of the beneficiary spouse is a quieter version of the same loss. The assets stay outside both estates, which is the result you were after, but the practical access ends. A couple funding a SLAT with assets they might genuinely need later should price that possibility in rather than treating the spouse’s access as permanent.

If You Want the Assets to Skip a Generation

Every person has a separate generation-skipping transfer tax exemption, equal to the estate and gift exemption at $15,000,000 for 2026 under IRC §2631. Allocating it to a trust at funding is what keeps the trust, and everything the trust later earns, outside the transfer tax system for as long as the trust runs.

A SLAT is built for that job. The gift is complete when the trust is funded, the exemption can be allocated at that moment against the funding value, and every dollar of appreciation after that is sheltered.

A GRAT is not. Generation-skipping exemption cannot be effectively allocated to property during an estate tax inclusion period, which for a GRAT lasts the entire annuity term, under IRC §2642(f). The allocation waits until the term ends, by which point the assets are worth whatever they have grown to, so the leverage that made the GRAT attractive on the estate tax side is simply unavailable on the generation-skipping side. A GRAT can move appreciation out of your estate. It cannot cheaply move that appreciation beyond the reach of the generation-skipping tax.

The exemption, the inclusion ratio, and dynasty trust planning are covered in how the generation-skipping transfer tax works.

For California Couples, Funding Is the Gating Issue

For a married couple in California, the first question is not which trust to use. It is whose property you are giving away. Community property belongs to both spouses equally, so funding a SLAT with community property means both spouses are making the gift, and the beneficiary spouse has given away property they will still benefit from. That is the same retained interest problem that drags a failed GRAT back into the estate, and here it can put half the trust into the beneficiary spouse’s estate.

The answer is to convert the property to the donor spouse’s separate property before the trust is funded. California requires a transmutation to be in writing, by an express declaration made, joined in, consented to, or accepted by the spouse whose interest is adversely affected, under Cal. Fam. Code §852.

Two details decide whether it holds. A transmutation of real property is not effective against a third party without notice unless it is recorded, so a family home or a rental property needs the deed work done and recorded, not a signed agreement sitting in a file. And the transmutation has to come before the funding, in that order. It cannot be papered afterward to describe a gift already made.

California has no state estate tax of its own, so the estate planning exposure a California couple plans against is federal. That does not make the funding sequence optional. It makes it the one part of this plan that California law controls outright.

GRAT vs. SLAT: How to Decide Which to Fund First

This is an estate planning allocation, not a choice between two products. Decide what your $30,000,000 of combined exemption is for, then decide what to do with the assets it will not cover.

Exemption belongs on the asset you want out of the estate permanently and want working for more than one generation, because a completed gift is the only way to get generation-skipping exemption onto that asset at today’s value. A GRAT belongs on the asset carrying the growth, particularly a concentrated or pre-IPO position with a real chance of clearing 5 percent by a wide margin. For most high-net-worth families those are two different assets, which is why the answer is frequently one of each.

Take a California couple holding $18,000,000 of stock in a company heading toward a sale, plus $6,000,000 of real estate they intend the family to hold for two generations. The sequence that works is to transmute the real estate to the donor spouse’s separate property, fund a SLAT with it, and allocate generation-skipping exemption at that funding value. Then run a series of short GRATs on the stock through the pre-sale period, when the volatility that makes a GRAT work is at its highest. Their combined assets sit below the exemption today. The sale is what carries them past it, which is exactly why the growth is the thing to move and the current value is not.

For assets that fit neither pattern, a sale to an intentionally defective grantor trust is the third path, trading the annuity requirement for a promissory note at the applicable federal rate.

Sometimes the answer is neither, at least not yet. A couple comfortably under $30,000,000 holding highly appreciated assets may do better keeping them in direct ownership, because the capital gains tax their heirs avoid through the basis adjustment at death can be worth more than removing assets that were never going to be taxed. The exemption is permanent. The one thing you no longer have to do is act ahead of a deadline.

Where to Start

Sequence is where these plans go wrong. Transmuting community property after the trust is already funded, allocating generation-skipping exemption to the wrong asset, or funding a GRAT in a month when the rate makes the bet unwinnable are all errors of order rather than errors of judgment. None of them is easy to repair afterward.

Timing also runs past the estate planning question into the tax one. A couple heading into a company sale is deciding what to transfer, when to transfer it, and what the capital gains tax will look like on whatever stays behind, and those answers constrain each other. Moving stock into a GRAT before a letter of intent is a different transaction than moving it after, both for what the shares are worth and for how much appreciation is still left to shift.

The decision worth getting help on is not which trust is better. It is which of your assets should absorb the exemption, in what order the trusts get funded, and whether the transfer happens before or after the event that changes what everything is worth. Those three answers depend on one another, and all of them depend on facts a form cannot capture: how your property is titled, what your assets are likely to do over the next five years, and what you are genuinely willing to give up access to permanently.

A consultation with Evolution Tax & Legal is where those questions get worked out against your actual balance sheet, with the estate planning and the tax analysis done together rather than one after the other. If a liquidity event is anywhere on the horizon, the useful time to have that conversation is before the terms are set.

Frequently Asked Questions

Who pays the income tax on a GRAT or a SLAT?

You do, in both cases. Each is a grantor trust, so trust income is reported on your personal return rather than taxed to the trust. A GRAT reaches that result because you keep the right to the annuity payments, under IRC §677(a)(1). A SLAT reaches it because income may be distributed to or accumulated for your spouse.

Paying that tax personally is an advantage rather than a cost. Because the grantor pays that tax from other funds, the trust assets compound without being reduced by income taxes every year, which for a GRAT improves the odds of clearing the IRS interest rate, and for a SLAT moves additional wealth to your family without using any more of your lifetime exemption.

Do you have to file a gift tax return?

Yes for both, and the gift tax return matters more than most people expect. A SLAT is a completed gift, reported on Form 709 for the year of funding, and that return is also where generation-skipping exemption gets allocated. A GRAT is reported even when the taxable gift is close to zero, because the remainder is a gift of a future interest and no annual exclusion applies to it.

The reason to take the filing seriously is the statute of limitations. The limitations period on a gift does not begin to run unless the gift is adequately disclosed on the return, under IRC §6501(c)(9). A thin filing on a hard-to-value asset leaves the valuation open indefinitely.

Can you put a private business interest in a GRAT or a SLAT?

Yes, and closely held business interests are among the most common assets in both. What the transfer requires is a defensible number. Fair market value has to be established by a qualified appraisal, and discounts for lack of control and lack of marketability often apply to a minority interest.

The exposure runs in one direction. If the value is later determined to be higher than reported, a zeroed-out GRAT produces an unintended taxable gift, because the annuity was sized to the lower number. That is why the annuity is usually expressed as a formula tied to the value as finally determined rather than as a fixed dollar amount.

Two further traps are worth naming. Preferred or other special interests held by family members can trigger the special valuation rules of IRC §2701. And S corporation stock carries its own eligibility rules for trust shareholders, which need to be confirmed before the transfer rather than after.

Can a SLAT be changed or undone later?

Not by you. A SLAT is an irrevocable trust and the gift is complete when it is funded, so there is no mechanism for the grantor to take the assets back.

What can be built in at drafting is flexibility for someone else to exercise. A trust protector can be given power to amend administrative terms, the beneficiary spouse can hold a special power of appointment to redirect assets among a defined class, and many states allow a trustee to decant trust property into a new trust with different terms. All of that has to exist in the document from the beginning. Flexibility cannot be added to an irrevocable trust after the fact, which is the strongest argument for spending real time on the instrument before anything is funded.

Can you use a GRAT and a SLAT at the same time?

Frequently that is the right answer, because the two do not compete for the same resource. A SLAT consumes lifetime exemption and a properly structured GRAT consumes almost none, so funding both in the same year is entirely workable.

The allocation is the part that takes thought. Exemption goes on the asset you want removed permanently and sheltered from generation-skipping tax, and the GRAT takes the asset carrying the future appreciation. What does not work is expecting a single asset to do both jobs.

This article is for informational purposes only and does not constitute legal or tax advice. Tax laws and regulations change frequently and may affect the accuracy of this information. Consult a qualified tax attorney or CPA before making any decisions based on the content of this article.