The estate tax exemption has always been a powerful estate tax planning tool for individuals and families. Currently, the estate tax exemption is the highest it has ever been at $11.7 million per individual or $23.4 million per couple. Under current law, the exemption will automatically decrease to approximately $6 million per individual starting in 2026. With President Biden taking office, the COVID relief bills and the growing national debt, there is discussion of the estate tax exemption decreasing sooner than 2026 and dropping even lower. With the uncertainty regarding the estate tax exemption amount, now is a great time to take advantage of the current estate tax exemption with a Spousal Lifetime Access Trust (SLAT).
What is a Spousal Lifetime Access Trust (SLAT?)
A SLAT operates like a typical irrevocable trust, but in addition to naming children, grandchildren or other future decedents, one’s spouse can also be a beneficiary by operating as the grantor of the trust. A taxpayer can then use their exemption amount to remove assets from their estate but maintain flexibility by indirectly benefiting from the assets in the trust through their spouse, if needed. However, one must be careful utilizing a SLAT, since all of the assets are now in the spouse’s name.
How to Use a Spousal Lifetime Access Trust (SLAT)
Let’s look at an example to see how a SLAT can be used. Suppose a couple has $11.7 million in appreciable assets and a net worth of $20 million. The couple wants to take advantage of the current gift tax exemption, but they do not want to outright gift all of their appreciable assets. Instead, one of the spouses sets up a SLAT and transfers all the appreciable assets to the newly created trust. In this scenario, it is assumed that the contributing spouse has never used any of their $11.7 million exemption to this point. Since this is the case, the spouse can donate the entire amount of appreciable assets to the trust and utilize their full $11.7 million exemption.
The beneficiaries to the trust are the couple’s two children and the other noncontributing spouse. The noncontributing spouse is also the trustee of the trust and is allowed to make distributions to any of the beneficiaries. The taxpayer that contributed the assets to the trust is not allowed to receive distributions from the trust, but the noncontributing spouse that acts as the grantor of the trust can receive distributions. This is important in case the couple’s other $8.3 million in assets is not enough to support them later, and they need to take a distribution from the trust. Ideally, the couple will never need to access any of the assets of the trust, and the assets can continue to grow and benefit their two children. If the assets increase to $20 million in value within the SLAT, the family has avoided paying gift taxes on the $8.5 million of asset appreciation. Although, since this is treated as a grantor trust, any income generated in the trust will be taxed on the noncontributing spouse’s tax return.
No one knows when or if the estate tax exemption will be decreased before 2026. With so much uncertainty surrounding the exemption moving forward, it is important to evaluate your gifting options. A SLAT, if utilized properly, can amplify the effects of the current estate tax exemption. Contact an Anders advisor below to discuss your estate planning options or learn more about Anders Family Wealth and Estate Planning.
