Reciprocal-Trust Traps in SLAT Planning

Spousal Lifetime Access Trusts (SLATs) let you move assets out of your taxable estate while keeping practical access through your spouse. You fund an irrevocable trust for your spouse and descendants; your spouse can receive discretionary distributions; growth then occurs outside your estate. Many couples ask a natural follow-up: “Why not create two SLATs—one for each spouse—so both of us keep access?” You can do that, but you must avoid the reciprocal-trust doctrine. If you build mirror-image trusts or coordinate them too tightly, the IRS may treat each spouse as if they created a trust for themselves, dragging assets back into both estates under sections 2036 and 2038.

This post lays out how the problem arises, what patterns raise red flags, and how to draft, fund, and administer two spousal trusts that withstand scrutiny. The analysis aims at informed families and at counsel who want concrete drafting moves rather than theory alone.

How the Reciprocal-Trust Doctrine Works

In United States v. Estate of Grace (1969), the Supreme Court set a two-part test. The government asks whether the trusts are interrelated and whether they place each grantor in roughly the same economic position as if each had created a trust for themselves. When the answer is yes, inclusion follows. In practical terms, the doctrine targets “you give my spouse what I want for myself, and I will give your spouse the same,” especially when the trusts sit side by side and operate the same way.

The doctrine interacts with retained-power rules. If each spouse effectively holds, through the other trust, powers they could not hold directly—such as the ability to direct distributions, enjoy income, or unwind transfers—the IRS argues for estate inclusion. Avoiding that result requires real, not cosmetic, differences.

Design Choices That Invite IRS Attention

You increase risk when you do several of the following at once:

• Sign both trusts on the same day, with identical trustees, identical beneficiaries, and identical distribution standards.
• Give each spouse the same limited power of appointment over the same class of descendants on the same terms.
• Fund both trusts with equal assets of the same type, especially closely held business interests or identical marketable portfolios.
• Name each spouse as trust protector with symmetrical removal and replacement powers over the other trust’s fiduciaries.
• Have each trust own life insurance on the other spouse, with the same premium-payment pattern and split-dollar terms.
• Coordinate distributions in lockstep, including back-to-back loans or “cross-streamed” payments that mimic reciprocal income rights.

None of these items alone guarantees inclusion. When combined, they paint the “interrelated and economically identical” picture that Estate of Grace condemns.

Breaking Reciprocity: Drafting Levers That Matter

You avoid the trap by creating real asymmetry at formation and keeping it through administration. Think holistically, not as a checklist.

• Timing. Execute the trusts in different months or even different years. Allow enough time between gifts so the second trust does not look like a prearranged exchange for the first. Pair that with different funding schedules.
• Trustee structure. Use different independent trustees. Grant removal and replacement power to only one spouse, or to a third party for the second trust. Avoid symmetrical protector powers.
• Distribution standards. Give Trust A a pure “best interests” discretionary standard with an independent trustee; give Trust B a HEMS standard (health, education, maintenance, support) with an ascertainable-standard limiter and a distribution committee. Unequal discretion matters.
• Powers of appointment. Allow a testamentary limited power in one trust and no power (or a narrower class) in the other. Alternatively, allow an inter vivos limited power in one trust that requires protector consent; omit any comparable power in the other.
• Grantor-trust status. Keep one SLAT as a grantor trust via a swap power or reimbursement clause. Make the second non-grantor, or include a toggle that turns off grantor status after a set period. Divergent income-tax results help prove non-identity.
• Funding mix. Contribute different asset classes and different values. Place marketable securities into one trust and real estate or closely held interests into the other. If life insurance belongs, centralize policies in one trust and use cash or marketables in the other.
• Beneficiary class. Allow spousal distributions in only one trust, or allow them in both trusts but at different priority levels and with distinct veto or consent mechanics.
• Situs and governing law. Select different states for administration, if appropriate to your plan, and appoint different registered agents and trust companies. Distinct fiduciary regimes reinforce separation.

You do not need every lever. You do need enough meaningful differences that a neutral observer concludes these were separate, independent designs rather than a matched set.

Funding and Reporting: Where Many Plans Stumble

You must align the economics of each transfer with the legal form you drafted.

• Document separate sources. Use separate accounts for each spouse’s contribution. If you live in a community-property state, consider a marital agreement or transmutation to avoid later arguments that both spouses funded both trusts. In Colorado, confirm separate ownership before you transfer assets.
• Avoid “round-trip” cash. Do not loan from Trust A to the grantor of Trust B and then back again the same week. If loans are necessary, price them at arm’s-length rates, schedule payments, and document security.
• Gift-tax returns. File timely Forms 709. Disclose the structure in a protective way. If you allocate GST exemption, describe the variation between the trusts to reinforce non-reciprocity.
• Crummey mechanics. If you rely on demand powers, send notices separately for each trust to distinct beneficiaries. Maintain proof.
• Valuations. For closely held interests, use independent appraisals and consider discounts only where supportable. Give each trust different blocks or classes to avoid sameness.

Administration: Keep the Differences Alive

Good drafting fails if administration erases your distinctions.

• Use different investment policies and distinct advisors. One trust may hold growth equities; the other may emphasize real assets or credit strategies.
• Stagger distributions. Do not approve matching requests in parallel. Document the decision process and the separate rationale for each payment.
• Use the grantor-trust swap power in only one trust. Swap in high-basis assets for low-basis holdings as part of basis management, and leave the other trust untouched.
• When decanting or amending under a protector power, avoid symmetrical changes. If one trust needs modernization, fix it without mirroring the other.

What If You Already Signed “Twin” SLATs

You can still improve your posture.

• Decant one trust into a new instrument with different standards, fiduciaries, or beneficiary classes.
• Release a power of appointment or a protector right on only one side.
• Migrate situs for one trust to a different state with different administrative provisions.
• Restructure life insurance so only one trust owns policies; have the other hold liquid investments instead.
• Refinance loans and change investment advisors to break parallel tracks.

Make these moves for business reasons you can defend. A paper trail that shows real-world objectives—investment diversification, professional trustee oversight, or better administration—helps.

When One SLAT Beats Two

Sometimes a single SLAT paired with portability, disclaimer planning, or a credit-shelter trust at the first death gives a cleaner result. That path can reduce legal friction and administrative cost while still moving growth out of the combined estate. You control access risk with thoughtful distribution language and an independent trustee who understands family dynamics.

A Short Working Checklist for Counsel

• Different dates, different funding schedules, different assets.
• Different fiduciary teams, with non-parallel removal powers.
• Different beneficiary priority and distribution standards.
• Divergent powers of appointment and protector frameworks.
• One grantor trust and one non-grantor (or a toggle used for only one).
• Clean gift sources, no circular loans, proper valuations.
• Separate investment policies and advisors; staggered distributions.
• Thoughtful GST allocation with clear disclosure on each Form 709.
• Ongoing file memos that explain independent decisions.

Plan With Intent, Not Symmetry

You can enjoy the financial flexibility that couples seek from SLAT planning without inviting inclusion. The key is intent backed by design, funding discipline, and ongoing administration that prove each trust stands on its own. Braverman Law Group can model outcomes, draft instruments with the right asymmetry, and guide trustees so your plan works in real life as well as on paper. To discuss whether one or two SLATs fit your situation—and how to avoid reciprocal-trust pitfalls—contact our team to schedule a strategy session.