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March 9, 2021
In 2021, the federal gift and estate tax exemption is $11.7 million per person. Thus, today, a married couple can transfer a total of $23.4 million to heirs during their lifetime or at death (without taking into account other exclusions, such as the annual gift tax exclusion or direct gifts for tuition or payments to medical providers).
In accordance with the provisions of the Tax Cuts and Jobs Act of 2017, on January 1, 2026, the current federal gift and estate exemption amount is set to revert to pre-2018 levels (indexed for inflation), which is approximately $6 million per person. However, new tax legislation under the Biden administration could accelerate the sunset date of these provisions and possibly even lower the gift and estate exemption amount.
In November 2019, the Treasury Department issued regulations confirming that if the gift and estate tax exemption reverted to pre-2018 levels, taxpayers who made gifts during the increased exemption period over the exemption amount available at their death would not have those gifts “clawed back” into their estates. In other words, the estate would retain the benefit of the higher exclusion amount.
Given the 2026 sunset of the higher exemption as well as the increased likelihood of a rollback of the gift and estate exemption amount during the Biden administration, some taxpayers are looking for ways to use the increased exemption amount before it is lost. However, some married couples are concerned about gifting strategies that involve the loss of control of assets during their lifetime and may be unsure about whether they will need the gifted assets in the future. For those with such concerns, a spousal lifetime access trust (SLAT) may be a good technique to consider.
A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse. The grantor spouse uses their gift exemption to make a gift to the SLAT and the other spouse is the beneficiary of the SLAT. Some SLATs also allow children to be beneficiaries along with the spouse.
The following further explains the key characteristics of SLATs:
Steve and Alison have a joint estate of $20 million. They have been married for 50 years and have two adult children. Under current tax law, the total of their assets are below the gift and estate exemption amount of $23.4 million. Steve and Alison understand that if they both die with the high gift and estate exemption in place, their children will not owe any estate tax upon the second spouse’s death. However, they are concerned that the estate and gift exemption amount will be lowered in 2026 or sooner and that estate taxes may be owed when the second of them dies.
Steve and Alison are looking for a strategy to use the higher exemption while in place but are not comfortable with making a large gift of the majority of their assets to lock in the benefit of the higher exemption. They know that life brings uncertainties and that they may need their wealth to maintain their lifestyle or to cover other expenses in the years to come.
After a complete review of their finances with their financial advisor, Steve and Alison are willing to make a $10 million gift, securing a portion of the higher temporary exemption and Alison remaining the beneficiary of the gifted assets. They decide to use the SLAT strategy to accomplish this goal.
Steve and Alison enter into a written agreement that divides their $20 million of joint assets in half, giving them each $10 million of separate property assets. Steve creates a SLAT for the benefit of Alison and his two children and transfers his $10 million to the SLAT. Alison can use the distributions from the SLAT for the joint benefit of Steve and herself or may use the unlimited marital deduction to make gifts from the SLAT distributions to Steve free of gift tax.
If the gift and estate exemption drops to $6 million in 2026, Steve will have used his $10 million exemption during his lifetime so he will have no exemption left. Alison will have $6 million of exemption. So, with Steve’s $10 million and Allison’s $6 million, they will have preserved $16 million of exemption. If Alison dies before Steve, Steve should be fine financially because he will still be the beneficiary of Alison’s $10 million in separate assets. As discussed below, additional exemption could be preserved if each spouse creates a SLAT for the other.
Since the Biden administration has yet to put forth new tax legislation, it currently remains unknown whether gift and estate exemption amounts will have a retroactive date back to January 1, 2021. Lower gift and estate exemption amounts are a real possibility and should be considered in all wealth transfers made in 2021. With that in mind, structuring an estate plan that can be unwound if the tax law results are different than anticipated should be explored with your estate planning attorney.
If you wish to learn more about SLATs, please contact a member of your Cerity Partners team or estate planning attorney to discuss how they might be used as a part of your estate plan.
Please read important disclosures here.
Judy is a Principal based in the Silicon Valley office. She provides consulting advice for private clients and advisors on estate planning, wealth-transfer strategies, trust...
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