For all of us, 2020 was a startling reminder of life’s unpredictability and the importance of being prepared in uncertain times. If you find yourself, now, one month into your 2021 resolutions and are second guessing your new gym membership or diet, you are in luck. There is no time like the present to resolve to plan ahead and utilize the current tax legislation to you and your loved one’s advantage, before it may be too late.
The 2017 Tax Cuts and Jobs Act temporarily increased the federal estate and gift tax exemption, which gives individuals the opportunity to pass a certain amount of assets tax-free. The current estate and gift tax exemption is $11.7 million per individual (or $23.4 million for a married couple). The exemptions will continue to increase with inflation through the end of 2025 but will then be cut approximately in half beginning in 2026.
With the Democrats gaining control of the Senate in the Georgia run-off elections, President Biden’s path towards reducing these exemptions before 2026 became much less restricted. What does this mean? Well, it is impossible to predict whether changes will be implemented, but President Biden has suggested lowering the estate tax exemption to $3.5 million per individual and raising the top tax rate to 45%. Ultimately, a proposed change like this represents a multimillion-dollar reduction in the amount of wealth that can be transferred upon death, or given away during life, free of estate and gift tax.
There are numerous ways to optimize your estate plan while making full use of today’s high exemptions. One such opportunity is a uniquely drafted trust called a spousal lifetime access trust (SLAT). A SLAT is an irrevocable trust that one spouse (the grantor spouse) creates for the benefit of the other spouse (the beneficiary spouse). The grantor spouse will typically fund the SLAT with separate property, thus, using the high exemption amount and protecting the transfer from tax. In other words, the grantor spouse gifts assets to the SLAT tax free, from which the beneficiary spouse may receive distributions of income and principal.
While the beneficiary spouse is alive, they have the additional ability to access the trust for things like health, education, and general living expenses, if necessary. While access to SLAT assets is not unlimited for the beneficiary spouse, the grantor spouse retains ancillary access to the trust property since they are married to the beneficiary of the trust. From this perspective, a SLAT is a special tool because couples have a safeguard: one spouse has access to SLAT assets, while the other spouse can take advantage of the high estate and gift tax exemption. It is not uncommon, in fact, for both spouses to create a SLAT for the benefit of each other, although this increases the risk of IRS disapproval significantly.
Estate plans are never one-size-fits all, but the current low interest rates and market environment create many good estate planning opportunities. Making estate planning a priority for you and your family in 2021, or reviewing a plan already in place, will prove to be advantageous. Please contact your Kemp Klein estate planning attorney to discuss SLAT’s and other gifting techniques in today’s environment.