For many married couples the use of a Spousal Lifetime Access Trust (or “SLAT”) may be an ideal tax savings tool to consider while the federal gift and estate tax exemption – the so called “lifetime exemption” – remains at an all-time high and before the lifetime exemption either reverts back or is decreased.
How did we get here?
In late 2017, Congress increased the lifetime exemption from $5 million per person to $10 million per person and indexed the exemption for inflation. For 2020, the lifetime exemption is $11.58 million per person. Unless Congress passes further legislation, the tax reforms which provide the increased lifetime exemption will “sunset” on December 31, 2025 and revert back to $5 million (indexed for inflation) per person as of January 1, 2026. There is also the possibility that the lifetime exemption may be decreased before the currently planned “sunset” on December 31, 2025, in which case the exemption may be even lower than $5 million (indexed for inflation) per person.
What about “Claw-Backs”?
So what if a person made a gift after the 2017 tax reforms went into effect and before the reforms “sunset” at the end of 2025 or were decreased by new tax reforms on an earlier date but then died after the lifetime exemption was decreased? If the value of the gift was greater than the amount of the federal exemption after the exemption was decreased would the excess – the “delta” – amount be “clawed” back into such person’s estate and result in tax liability? The IRS has stated that with respect to estates of persons who die after 2017, the IRS will not seek to subject “delta gifts” to the federal gift and estate tax. For this reason, the SLAT has arguably become more useful than ever before.
What is a SLAT?
A SLAT is a trust designed to allow one spouse – the “grantor” – to make a gift to the other spouse in trust of all or a portion of the grantor’s available lifetime exemption before the lifetime exemption is decreased either by the currently planned “sunset” at the end of 2025 or an earlier change in tax law.
How does it Work?
The key, of course, is to establish the SLAT and complete the gift to the SLAT before such decrease. The gift to the SLAT can be comprised of any asset(s) – including cash, stock, real property, and closely-held business interests. From an estate and gift tax perspective, the greatest benefit of the SLAT is achieved when the value of the gift to the SLAT is in excess of the amount to which the lifetime exemption is decreased in the future but not in excess of the grantor’s available lifetime exemption in 2020 (before such exemption is decreased).
In its most basic form, the SLAT provides that once established and the gift to the SLAT is completed, the value of the SLAT property and any appreciation to such property is removed from the taxable estate of the grantor as well as the taxable estate of the grantor’s spouse. Upon the death of grantor’s spouse, the remaining SLAT property passes to those beneficiaries the grantor has named in the SLAT instrument.
Please contact the Estate Planning, Probate & Trusts or the Tax Planning & Controversy to schedule a time to discuss how a SLAT might be used in your estate plan to take advantage of the lifetime exemption while it remains at an all-time high and before it reverts back at the end of 2025 or is decreased even earlier.
Frank L. Leffingwell is a tax attorney in the firm’s Tax Planning & Controversy, Estate Planning, Probate & Trusts, and Real Estate sections.