The Federal Estate And Gift Tax Exemption could be slashed from $11.5 Million to as low as $3.5 million and effective as soon as January 1, 2021. Setting up a Spousal Lifetime Access Trust (SLAT) now can help you lock in the current exemption before it is drastically reduced.

The 2020 Federal Estate and Gift Tax Exemption is $11,580,000, but under the current law, the exemption is slated to revert to the 2017 level of $5,490,000, adjusted for inflation at the end of 2025. In 2020, each person can give away $11.58 million during their lifetime. Whatever portion they havent used during life, they can use at death. That generous exemption is scheduled to be cut in half at the end of 2025, but could be slashed and effective as soon as January of 2021. However, if you use the exemption before it falls back, you wont be penalized by a clawback” upon your death in 2026 or later.

For example, lets say Susan has $11.58 million and gives it all away in 2020. Lets assume she lives off her social security and dies with nothing in 2026. She would not owe any estate tax, even though she had given away $11.58 million and the exemption at her death in 2026 is half that amount.

In other words, if Susan used her exemption before 2026, she wouldn’t have to worry about paying estate tax because of the gifting she did within the exemption during her lifetime, even though that exemption later decreased.

Does that mean Susan should wait until 2025 and then decide what to do? Unfortunately, no. Some voices in Congress have called for an earlier repeal of the law which included the doubling of the exemption to its current level. Others have called for the exemption to be lowered even further, to $3.5 million per person, or less.

A shift in power in Washington after the 2020 election could bring those voices to power and see their vision realized. Does that mean Susan could wait until legislation is passed by Congress and signed by the President to act? Again, unfortunately not. Legislation could be passed in 2021 and could be retroactive all the way back to January 1, 2021. In other words, to be safe, you would need to act before the end of 2020.

We want you to know that this means now may be the best time to take advantage of the exemption before it decreases significantly. One effective tool for utilizing the lifetime gift exemption at the current rate of $11.58 million per person or $23 million per couple is the Spousal Lifetime Access Trust (SLAT).

A SLAT is an irrevocable trust with one spouse as the grantor and the other spouse as the lifetime beneficiary. One way SLATs can allow continued access to the gifted property is by appointing the lifetime beneficiary spouse as trustee. With the spouse serving as trustee, he or she may make distributions of the trust property to themselves.

In other words, the trust property is still easily accessible should it be needed. This structure allows the grantor to move assets out of their estate while still potentially enjoying the benefits of those assets through their spouse.

Lets look at an example. Bill and Donna are married and have $15 million. Bill could give $11.58 million to a Spousal Lifetime Access Trust (SLAT) for the benefit of Donna and their children and grandchildren. Donna could be the trustee of the trust and decide how the assets are invested and distributed, within the ascertainable standard set in the trust (typically health, education, maintenance, and support). The assets in the SLAT are outside both Bill and Donnas estates.

By doing this, Bill and Donna would have taken advantage of Bills $11.58 million exclusion and would not have an estate tax due even if the exclusion falls back to $3.5 million. Even better, Donna would still have control of the money and be able to use it for her own benefit and that of their children and grandchildren.

Having planned now, Bill and Donna can rest easy and not worry about what legislative changes might be coming after the election in November.

A grantor may also name children as beneficiaries during the grantors lifetime, along with the spouse. If the spouse beneficiary dies before the grantor, the children then become the sole beneficiaries. This may be a concern for some, as the possibility of the sudden passing of a spouse could seemingly make the trust property inaccessible to the grantor. This is not the case if the SLAT is properly drafted.

The drafter may include a provision allowing the grantor to borrow from it without adequate interest or security, effectively preserving the grantors ability to access trust property.  Thus, in the event the lifetime beneficiary/trustee spouse predeceases the grantor, a person can be appointed to effectively fill in for the spouse for the purpose of accessing trust property for the grantor.

SLATs are taxed as grantor trusts for income tax purposes. This means that the grantor continues to bear the income tax burden for the trust. Thus, it is exactly the same income tax situation as if the trust had not been created in the first place – no better and no worse.

Typically, it is preferable to fund a SLAT with assets that are likely to appreciate significantly, as those assets that are not paid out to the beneficiary spouse can continue to grow and then pass on to their children free of estate tax.

We know this blog may raise more questions than it answers. For more information about Spousal Lifetime Access Trusts (SLATs) or other planning options and how they might work for you and your family, please call our office to schedule a time to discuss this. We are here to help you now, and in the future.