July 31, 2023 •HoganTaylor
When it comes to estate planning, uncertainty looms over the federal gift and estate tax exemption amount. As of 2023, the exemption stands at a substantial $12.92 million ($25.84 million for married couples). However, there is a potential impending drop to just $5 million ($10 million for married couples) on January 1, 2026, unless Congress takes action. These figures are expected to be adjusted for inflation, landing at approximately $6 million and $12 million, respectively.
If you anticipate that your estate's value might exceed these projected 2026 exemption amounts, it's wise to explore planning techniques that could help mitigate or avoid gift and estate tax liabilities in the future. One such technique gaining popularity is the Spousal Lifetime Access Trust (SLAT). Under specific circumstances, a SLAT allows individuals to remove a significant portion of their wealth from their estate without incurring estate taxes, all while providing a safety net in case future needs change.
SLAT Basics:
A SLAT is an irrevocable trust that empowers the trustee to make distributions to the creator's spouse during their lifetime if circumstances warrant it. Generally, SLATs are designed to benefit the creator's children or other heirs while providing income to the spouse during their lifetime.
By making completed gifts to the trust, the creator effectively removes those assets from their estate. Nevertheless, indirect access to the trust is retained due to the spouse's status as a beneficiary. Typically, this is achieved by appointing an independent trustee with the full authority to make distributions to the spouse.
Pitfalls to be Aware of:
Creating SLATs requires careful planning and drafting to avoid unintended consequences. For instance, to prevent trust assets from being included in the spouse's estate, gifts to the trust must be made with the creator's separate property. This may necessitate additional planning, particularly for those residing in community property states. Furthermore, it is crucial to ensure that trust assets remain separate and are not mixed with community property or marital assets once the trust is funded.
It's essential to bear in mind that a SLAT's advantages rely on indirect access through the spouse, making a strong and stable marriage vital for the success of this strategy. Additionally, there is a risk that the safety net provided by a SLAT could be lost if the spouse predeceases the creator. To mitigate this risk, some individuals choose to set up two SLATs—one established by each spouse, with the other named as the beneficiary.
For those opting for dual SLATs, careful planning is necessary to avoid the reciprocal trust doctrine. This doctrine scrutinizes trusts created by spouses, and if they are deemed to be interrelated, providing each spouse with roughly the same economic benefits as if they had created trusts for their own benefit, the IRS may undo the arrangement. To prevent this, the terms of the trusts should be sufficiently varied to avoid substantial similarities.
In conclusion, navigating estate planning in light of potential changes to federal gift and estate tax exemptions can be challenging. A well-structured SLAT can be a powerful tool to safeguard your wealth from tax liabilities while providing financial security for your loved ones. However, it's crucial to proceed with caution, seeking expert guidance to ensure that the SLAT aligns with your specific needs and circumstances.
HoganTaylor Estate Planning Services
HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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