Estate Tax Exemption in 2020 is $11,580,000
In 2020, a married couple can transfer approximately $23 million before having to pay any gift or estate taxes. However, unless Congress acts, the exemption amount will be reduced to approximately $6 million per person on January 1, 2026. The IRS has issued regulations that indicated a married couple can give away their approximately $23 million without fear that the IRS will later “claw back” the estate taxes when the exemption amount is reduced. The prospect of losing the high estate tax exemption in 2026 or sooner under the current administration is causing many families to look for ways to use their exemption before it goes away.
What is a SLAT?
A Spousal Lifetime Access Trust or SLAT is a bypass trust created during your life instead of at the death of the first spouse. It is a gift from one spouse to an irrevocable trust for the benefit of the other spouse. By creating a SLAT you use your exclusion amount before it goes away. Your spouse and or your children can receive distributions from the SLAT during their lifetime, and your contributions to the SLAT (under your exemption amount) and any appreciation in the SLAT will not be subject to estate taxes at your death or at your spouse’s death.
The SLAT must be irrevocable in order to achieve the estate tax benefits. That means you must legally part from the assets that your transfer to the trust. However, since your spouse is the beneficiary, you have indirect access to the assets of the trust.
Although the SLAT is an irrevocable trust and a competed gift (and outside of your estate), because the trust is for the benefit of your spouse, you will still pay the income tax associated with the income generated by the trust assets.
Besides the estate tax savings, another advantage of the SLAT is creditor protection. If your spouse is the trustee of the SLAT there is a level of asset protection. If asset protection is a major goal, maximum asset protection can be achieved by naming a Professional Fiduciary as the trustee of the SLAT.
The Reciprocal SLAT
Often married couples want to provide reciprocal SLATS for each other. This is possible, however, there is case law that indicates reciprocal trusts may not be “substantially similar.” To avoid the trusts being substantially similar, the trusts can be executed in different years and have differing provisions. For example, the trust you create could require that all the income must be paid to your spouse each year, but your spouse’s trust created for you may allow distributions of income to you and your children. Another example is to have one trust give a spouse the ability to modify how the property is ultimately distributed among the children and grandchildren where the other trust would not allow for any modifications to the ultimate beneficiaries. While the trusts can’t be the same, there are a variety of ways to vary the terms depending on your family dynamics.
It’s Time to Act
Even though 2026 seems like a long way off, especially with the change in administration, there is potential for a change in the estate tax laws sooner rather than later. If estate tax is a concern for you, now is the time to act. Take advantage of the estate tax exemption now while you can give away more than ever before without paying the estate tax because this opportunity may not be around for much longer.