You can expect amendments and updates to tax regulations every year, if not more often. An important point to discuss with us before the end of this year is how to get the maximum benefit from the temporarily higher federal gift and estate tax exemption – before it changes.

Status Of The Federal Gift & Estate Tax Exemption

In 2017, Congress doubled the federal gift and estate tax exemption from $5 million to $10 million (adjusted for inflation). In 2021, that amount is $11.7 million. This means that an individual can transfer $11.7 million in assets to a beneficiary without paying a gift or estate tax. Why this is important: gifts or estates that exceed this amount can be taxed at up to 40%.

The exemption will be reset to $5 million (adjusted for inflation) on January 1, 2026, unless new legislation is passed to reset the exemption before then.

How A Spousal Lifetime Access Trust Works

One tool we may recommend is a specialized trust: the spousal lifetime access trust or SLAT. This allows a donor spouse to make a gift of property to an irrevocable trust for the benefit of their spouse and any children or grandchildren. The transfer to the trust is carefully designed so that it does not qualify for the unlimited marital deduction. This way, we can use the donor spouse’s estate tax exemption to the fullest extent possible. And, the appreciation of the assets transferred to the SLAT will not be subject to future gift and estate taxes.

A spousal lifetime access trust is ideal for clients who are happily married and who own property that is likely to significantly increase in value, where the couple can irrevocably transfer the property while maintaining their desired standard of living. That said, an advantage of a SLAT is that funds can be distributed to the beneficiary spouse and then used for the benefit of the couple.

Ideally, the donor spouse individually owns the assets to be transferred to the SLAT. In reality, married grantors often jointly own property, so we will need time to ensure that the assets are divided into individual shares or transferred entirely to the donor spouse before being transferred into the SLAT. The good news: transfers between US-citizen spouses are not subject to gift tax, so the beneficiary spouse can freely give property to the donor spouse to transfer to the SLAT in order to maximize the donor spouse’s exemption amount.

Sometimes, couples prefer to create two SLATs so that each spouse can fund their own trust using their own assets. To avoid the IRS’s reciprocal trust doctrine, we may recommend creating an entirely different type of trust for the second spouse, such as an irrevocable life insurance trust (ILIT) or an intentionally defective grantor trust (IDGT). Or, we may recommend creating a second SLAT with different provisions: different distribution requirements or different classes of beneficiaries.

Whatever your preferences, we can tailor an estate plan that best fits you and your loved ones. Contact us if you would like to talk through your options. We are committed to helping you protect your wealth for generations to come.