Crummey Trusts and Spousal Lifetime Access Trusts (SLATs) are two popular types of irrevocable trusts. How do you know which one is right for you? This article explains what these trusts are and when they make sense.

Key Highlights and Takeaways

• Two Powerful Estate Tax Strategies: Crummey Trusts and SLATs both save estate tax, but they’re used in different circumstances.
• Crummey Trusts Optimize Around the Gift Tax’s Annual Exclusion: Crummey Trusts are designed to receive gifts of up to the donor’s “annual exclusion.” In 2024, a donor can give a donee up to $18,000 per year, increasing to $19,000 per year in 2025.
• SLATs are Tax-Efficient Trusts for the Grantor’s Spouse: SLATs are very estate-tax efficient and make a lot of sense for people who want to transfer wealth to future generations and have not used their entire lifetime gift tax exemptions. What distinguishes SLATs from other irrevocable grantor trusts is that they name the grantor’s spouse as a primary beneficiary.

What is a Crummey Trust?

A Crummey Trust is a type of irrevocable trust that is designed to receive gifts that use up the donor’s gift-tax annual exclusion. In 2024, a donor can give a donee up to $18,000 per year without exceeding the annual exclusion amount. That amount will increase to $19,000 per year per donee in 2025.

Typically, a donor (the “grantor”) creates a Crummey Trust for each loved one whom he or she would like to help. For example, a grantor might create three Crummey Trusts: one for each of her three grandchildren. The grantor funds each trust — usually with liquid assets like stock, bonds, or cash — annually, in an amount up to the annual exclusion amount. Once an asset is in the trust, that asset is outside of the grantor’s estate and will not be subject to estate tax on the grantor’s death. Any resulting appreciation will also be outside the grantor’s estate. Because most Crummey Trusts are “grantor trusts,” the grantor has the option to pay the trust’s taxes, which is a way to transfer additional wealth to the trust. This makes Crummey Trusts even more estate-tax efficient than they would otherwise be. (You can learn more about Crummey Trusts here.)

Crummey Trust Example

Imagine that Serena is a New York City resident with a $25 million net worth and a portfolio that generates 9% annual returns (divided equally between capital appreciation and cashflow). If Serena sets up Crummey Trusts for each of her three grandchildren, and then contributes the annual exclusion amount to each trust each year, she’ll be able to move a significant amount of wealth out of her estate — $54,000 or more per year, plus appreciation. Serena will also be able to pay each trust’s income taxes, which means the trusts will be able to keep their entire 9% pre-tax returns while shifting even more wealth out of Serena’s taxable estate. After 25 years, the Crummey Trusts’ assets will be worth about $6.4 million. And if Serena dies in Year 25, she will have saved her family about $2.8 million of tax because she set up these three Crummey Trusts.

Benefits of Crummey Trusts

1. Estate Tax Savings: The primary advantage of a Crummey Trust is its ability to transfer assets to a grantor’s beneficiaries free of gift tax or estate tax.
2. Asset Protection: A Crummey Trust, as a separate legal person, is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win a lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, Crummey Trusts can help shield inherited assets from a divorcing spouse.
3. Potential Income-Tax Savings: Although Crummey Trusts are generally set up as “grantor trusts,” which means they are ignored for income-tax purposes, they can be set up as “non-grantor trusts,” which have the ability to avoid state income tax. They can also distribute appreciated property to beneficiaries who are in lower tax brackets than the grantor. If those beneficiaries then sell the appreciated asset, they will pay a lower tax rate than the grantor would have if the grantor had been the seller.
4. Relative Liquidity: Compared to many other tax strategies, Crummey Trusts have little impact on a grantor’s liquidity. As long as the trust is a grantor trust, the grantor can borrow from the trust or swap assets with the trust without any tax consequences.
5. Series of Smaller Gifts: Some people prefer making lots of small annual gifts versus making a few large gifts, since the smaller gifts are less noticeable and less likely to have a significant immediate impact on the grantor’s financial situation.

Drawbacks of Crummey Trusts

1. GST Inefficiency: In general, a person cannot allocate generation-skipping transfer (”GST”) tax exemption to a Crummey Trust. This means that Crummey Trusts don’t function as dynasty trusts, unlike many intentionally defective grantor trusts and other popular trust types. Still, Crummey Trusts can be a powerful estate-tax strategy. They are often — maybe not at first, but eventually — paired with other strategies.
2. Irrevocability: When a grantor makes a gift to a Crummey Trust, the gift is irrevocable.
3. Not Ideal for Illiquid Assets: Crummey Trusts work very well when funded with liquid assets, but they are often not the best fit for gifts of illiquid assets, like real estate or privately held stock. When gifting illiquid assets to an irrevocable trust, it’s important to get the assets appraised for tax purposes. Appraisals cost money. The cost of an appraisal is negligible when the asset being gifted is worth millions of dollars, but it can be quite significant if the asset is only worth $15,000. Liquid assets like public stock don’t need to be appraised at all.
4. No Direct Control: Typically the grantor does not act as trustee of a Crummey Trust, though he or she can remove and replace the trustee at any time.

What is a SLAT

A SLAT is a particular type of intentionally defective grantor trust (IDGT), and has much in common with other IDGTs. A person (the “grantor”) creates a SLAT and names the grantor’s spouse as either the sole initial beneficiary or one of the initial beneficiaries. Typically upon the sooner of the spouse’s death or divorce, the remaining trust principal is split into separate trusts for the grantor’s descendants. The grantor funds the trust using a portion of his or her lifetime gift and estate tax exemption. Once an asset is in the trust, that asset is outside the grantor’s estate and will never be subject to gift tax, estate tax, or generation-skipping transfer tax as long as it remains in the trust. Any resulting appreciation will also be outside the grantor’s estate. Yet, because the grantor’s spouse is a beneficiary, the grantor’s spouse can receive distributions. This can give the grantor “backdoor access” to the trust principal (though distributing SLAT principal to the grantor’s spouse is generally not very tax efficient). Because a SLAT is a “grantor trust,” the grantor has the option to pay the trust’s taxes, which is a way to transfer additional wealth to the trust. This makes SLATs even more estate-tax efficient than they would otherwise be. (You can learn more about SLATs here.)

SLAT Example

Imagine that Ellen is a New York City resident with a $25 million net worth and a portfolio that generates 9% annual returns (divided equally between capital appreciation and cashflow). If Ellen sets up a SLAT for the benefit of her spouse and then contributes a $6 million asset to it, she will use up $6 million of her lifetime gift tax exemption, but the asset will be able to grow outside of her taxable estate. Ellen will also be able to pay the trust’s income taxes, allowing the trust to generate 9% annual post-tax returns and shifting more wealth out of Ellen’s taxable estate. After 25 years, the SLAT’s assets will be worth about $51.7 million! And if Ellen dies in Year 25, she will have saved her heirs about $20.4 million of tax relative to the counterfactual where she hadn’t funded the SLAT.

Benefits of SLATs

1. Estate Tax Savings: The primary advantage of a SLAT is its ability to use a grantor’s lifetime gift tax exemption to efficiently shift assets out of the grantor’s estate for estate-tax purposes. The grantor can pay the income tax on the trust’s income, effectively shifting even more wealth into the trust and out of the grantor’s estate. Finally, the grantor can lend to the trust free of any tax consequences — loans are another powerful tool that taxpayers use to shift wealth out of their estates.
2. Asset Protection: A SLAT, as a separate legal person, is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win a lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, SLATs can help shield inherited assets from a divorcing spouse.
3. Potential Income-Tax Savings: Although SLATs don’t provide any immediate income-tax savings, they can indirectly save income tax down the line. For example, if the grantor names both the grantor’s spouse and the grantor’s child as beneficiaries, the trustee can distribute an appreciated asset to the grantor’s child, who may be in a lower tax bracket. The distribution itself will have no tax consequences, but when the grantor’s child later sells the asset, he or she will pay less tax than the grantor would have paid, due to that lower tax bracket.
4. Liquidity and Indirect Access: Compared to many other tax strategies, SLATs have little impact on a grantor’s liquidity. Though the grantor will have transferred some portion of his or her assets to the trust, the grantor can borrow from the SLAT without any tax consequences. Moreover, the grantor’s spouse can receive distributions from the SLAT if necessary.
5. Ideal for Illiquid Assets: SLATs work well whether funded with liquid or illiquid assets.
6. GST Efficiency: A person can allocate generation-skipping transfer (”GST”) tax exemption to a SLAT when the trust is first funded. As a result, the SLAT is a popular form of dynasty trust.

Drawbacks of SLATs

1. No State Income Tax Savings: Unlike non-grantor trusts, SLATs don’t save state income tax.
2. Grantor Trust Status Locked in: With grantor trusts where the spouse is not a beneficiary, the grantor can always turn off grantor trust status and, by doing so, transform the trust into a non-grantor trust. However, as long as the grantor’s spouse is a beneficiary of a SLAT, this isn’t possible. While grantor trust status is generally desirable, there are situations where grantor trust status is inefficient. The ability to turn grantor trust status off is a valuable perk, one that SLATs can’t offer.
3. Separate Property: SLATs must be funded with the grantor’s sole and separate property — if a SLAT is funded with the spouse’s property, the SLAT will fail to avoid estate tax (at least in part). Since many couples own most of their property jointly or as community property, this can be a problem. Where it is a problem, both spouses must agree in advance of the SLAT being funded that the property that’s funding the SLAT is the grantor’s separate property. Understandably, sometimes married couples aren’t comfortable signing documents that transfer property from one spouse to another.
4. Irrevocability: When a grantor makes a gift to a SLAT, the gift is irrevocable (though the grantor can swap assets in and out of the trust at any time, as long as the swapped assets are exchanged for other assets with equal value).
5. No Direct Control: Typically the grantor does not act as trustee of the SLAT, though he or she can remove and replace the trustee at any time, lend money to or borrow money from the trust, get reimbursed by the trust for the trust’s tax liabilities (if the grantor doesn’t want to pay), and swap assets with the trust.

Should You Set Up a Crummey Trust or an SLAT?

Crummey Trusts and SLATs both save estate tax, but they’re used in different circumstances.

The gift tax’s annual exclusion is a major tax benefit, and Crummey Trusts help people maximize the value of that tax benefit. If you are looking for a way to make relatively small, annual gifts to trusts that are protected from creditors and tax efficient, Crummey Trusts may be a good fit. But Crummey Trusts are not suited for very large gifts because they’re generally not designed to be dynasty trusts that are exempt from the GST tax.

On the other hand, conventional SLATs are better suited for large gifts. SLATs are highly estate-tax efficient, and gifts to SLATs are generally GST exempt, which means that SLATs can make distributions to grandchildren or great-grandchildren without the distributions triggering any GST tax. They are well suited to receiving any type of asset — liquid or illiquid.

The other big difference between a SLAT and a Crummey Trust is that while it does not make sense for a Crummey Trust to be for the benefit of a spouse, a SLAT can be. If you are looking to create a trust for the benefit of a spouse, a SLAT is a better fit than a Crummey Trust.

It is important to note that there are lots of other gift and estate tax strategies that may make more sense than a Crummey Trust or SLAT, depending on circumstances. Those strategies are also worth exploring. Moreover, Crummey Trusts and SLATs are not mutually exclusive; many people set up both.

Conclusion

Crummey Trusts and SLATs are both powerful tax strategies. Crummey Trusts make sense for people looking to make smaller, annual gifts without using lifetime gift-tax exemption. SLATs make sense for people who are looking to make larger gifts that use lifetime gift-tax exemption.

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