A Spousal Lifetime Access Trust is treated as a grantor trust whenever its terms include at least one power or interest listed in Sections 671 through 679 of the Internal Revenue Code. In practice, nearly every SLAT qualifies from the day it is signed, because the trust’s income can be distributed to or accumulated for the grantor’s spouse. That alone triggers grantor trust status under Section 677. Most well-drafted SLATs also build in a second, independent trigger, usually the power to swap trust assets for assets of equivalent value under Section 675(4)(C), so that classification continues even if circumstances later change.
The question of when a SLAT becomes a grantor trust matters because grantor trust status determines who pays income tax on trust earnings. When the trust qualifies, the grantor pays, the trust itself owes nothing, and every dollar of income left inside compounds for the beneficiaries.
The Section 677 Trigger Does Almost All the Work
Section 677 treats the grantor as the owner of any portion of a trust whose income can be distributed to the grantor’s spouse, accumulated for the spouse’s future benefit, or used to pay premiums on life insurance covering the grantor or spouse.1Office of the Law Revision Counsel. 26 US Code 677 – Income for Benefit of Grantor The whole point of a SLAT is to let the beneficiary spouse take distributions during the marriage, so Section 677 is satisfied as soon as the trust is funded.
A related provision reinforces this result. Under the spousal unity rule in Section 672(e), the grantor is treated as holding any power or interest that the grantor’s spouse holds at the time the trust was created.2Office of the Law Revision Counsel. 26 USC 672 – Definitions and Rules If the SLAT gives the beneficiary spouse a right to income, the IRS looks through the spouse and treats the grantor as personally holding that right. That is why Section 677 reaches SLATs so cleanly.
For a grantor trust, the IRS ignores the trust as a separate taxpayer and routes all income, deductions, and credits onto the grantor’s personal return.3Office of the Law Revision Counsel. 26 US Code 671 – Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners The trust still exists for estate tax purposes, which is what allows the assets to sit outside the grantor’s taxable estate. It just does not exist as a separate taxpayer for income tax.
The Swap Power as a Backup Trigger
Experienced drafters rarely rely on Section 677 alone. The most common belt-and-suspenders move is to give the grantor a power to substitute trust assets for personal assets of equivalent value, exercised in a non-fiduciary capacity. That is the swap power under Section 675(4)(C), and holding it independently makes the trust a grantor trust.4Office of the Law Revision Counsel. 26 US Code 675 – Administrative Powers
Why bother with a backup if Section 677 already applies? Because the Section 677 trigger depends on the existence and status of the beneficiary spouse. If the marriage ends, or the beneficiary spouse dies, that trigger can disappear. The swap power keeps grantor trust status alive regardless. It also opens a basis planning move described below.
Other Powers That Can Independently Trigger Status
Section 677 and the Section 675 swap power are the usual pair, but several other provisions can each independently make a trust a grantor trust. Any one of them is enough on its own.5Office of the Law Revision Counsel. 26 US Code Subtitle A Chapter 1 Subchapter J Part I Subpart E – Grantors and Others Treated as Substantial Owners
- Section 673 applies if the grantor retains a reversionary interest exceeding 5% of the trust’s value at inception.6Office of the Law Revision Counsel. 26 US Code 673 – Reversionary Interests
- Section 674 applies when the grantor or a non-adverse party controls who receives trust income or principal, subject to a long list of exceptions for independent trustees and ascertainable standards.7Office of the Law Revision Counsel. 26 US Code 674 – Power to Control Beneficial Enjoyment
- Section 675 also covers the power to borrow trust funds without adequate interest or security, and certain voting and investment powers over stock held by both the grantor and the trust in a closely held business.
- Section 676 applies if the grantor or a non-adverse party can revest title to trust assets in the grantor. A SLAT is irrevocable by design, so this one does not come up in practice.8Office of the Law Revision Counsel. 26 USC 676 – Power to Revoke
Several of these turn on whether a power is held by an “adverse party” or a “non-adverse party.” An adverse party is someone with a substantial beneficial interest in the trust that would be harmed by exercising the power at issue; a non-adverse party is anyone who does not meet that definition. A power held by a non-adverse party is more likely to pull the trust into grantor status than the same power held by an adverse party.
Why Grantor Trust Treatment Is Usually the Goal
Grantor trust status is almost always wanted, not avoided. Because the grantor pays income tax on the trust’s earnings out of personal funds, nothing is bled out of the trust each year to cover taxes. The whole return compounds inside for the beneficiaries.
Those tax payments are not treated as additional gifts. Under Revenue Ruling 2004-64, the grantor is paying a personal tax liability imposed by Section 671, not transferring value to the beneficiaries, so the payments do not use any of the grantor’s lifetime gift and estate tax exemption. For 2026, that exemption is $15 million per individual and $30 million for a married couple, made permanent and indexed to inflation by the One Big Beautiful Bill Act.9Internal Revenue Service. What’s New – Estate and Gift Tax Over time, the grantor’s absorption of the tax bill functions as a steady, exemption-free transfer of wealth.
There is a real trade-off on the capital gains side. In Revenue Ruling 2023-2, the IRS confirmed that assets held in an irrevocable grantor trust do not receive a step-up in basis when the grantor dies.10Internal Revenue Service. Revenue Ruling 2023-2 Because the assets sit outside the grantor’s estate, the usual basis reset at death does not apply, and whoever eventually sells the asset owes capital gains tax on all the appreciation since the grantor’s original purchase.
The Section 675(4)(C) swap power is the standard response. The grantor can pull low-basis property out of the trust in exchange for cash or high-basis assets of equal value. The low-basis asset moves back into the grantor’s personal estate, where it will get a step-up at death. The swap itself has no income tax consequences because the trust is still a grantor trust, and transactions between a grantor and a grantor trust are ignored for income tax purposes.
When a SLAT Can Lose Grantor Trust Status
Classification is not permanent. Two events tied to the beneficiary spouse can end it.
Divorce
If the grantor and the beneficiary spouse divorce, Section 677 may no longer apply, because distributions to a former spouse do not carry the same income-to-the-grantor consequence. Whether the trust stays a grantor trust then depends on whether another trigger is in the document. If the swap power or some other independent power is in place, the status continues. If Section 677 was the only hook, divorce can end grantor trust treatment.
Divorce can also create a trap in the other direction. Because the spousal unity rule in Section 672(e) looks at who held a power at the time the trust was created, the grantor can remain treated as holding a power or interest that benefits a former spouse. The grantor could stay on the hook for income tax on trust earnings that no longer flow anywhere near the grantor. Trust documents typically address this by removing the former spouse as a beneficiary on divorce, or the issue gets handled by a postnuptial agreement.
Death of the Beneficiary Spouse
If the beneficiary spouse dies first, the Section 677 trigger drops away because there is no longer a spouse eligible to receive distributions. A document with a backup trigger such as the swap power keeps running as a grantor trust without interruption. Without a backup, the trust becomes a separate taxpayer and starts paying tax at the compressed trust rates, which hit the top marginal rate at relatively low income thresholds. That shift can meaningfully increase the overall tax drag on trust earnings, which is a large part of why planners build in the backup from day one.