Use this Technique to Protect Your Estate and Gift Tax Exemption


This blog post was previously published September 23, 2020. It was updated July 8, 2021.

Spousal Lifetime Access Trusts (SLATs) offer a way for married couples to benefit from tax savings while retaining access to gifted assets

In 2012, the threat loomed that an expiring provision of the federal tax code would reduce the estate and gift tax exemption from more than $5 million to only $1 million. To lock in the larger exemption before it potentially disappeared, many married couples turned to a newly popularized technique referred to as Spousal Lifetime Access Trusts or SLATs. Well, as New York Yankee Hall of Famer Yogi Berra once said, “It’s like déjà vu all over again.”

Today, there is a threat that the exemption will be slashed from a sky-high $11.7 million (enacted in the 2018 Tax Cuts and Jobs Act) to as low as $3.5 million. Therefore, once again, it’s time for married couples to consider SLATs.

The estate and gift tax exemption is the maximum amount that a taxpayer can pass to beneficiaries without the imposition of estate or gift tax. There are exceptions for transfers to spouses or charity, but, generally, if during life or at death you transfer assets valued, in the aggregate, at more than the exemption amount, you or your estate must pay a 40% tax on the excess.

Each spouse gets the benefit of a separate exemption. Therefore, with an $11.7 million exemption, a married couple doesn’t get hit with estate or gift tax until they pass more than $23 million of wealth to their heirs.

However, under President Biden’s proposed plan, more estates could be impacted by the tax. The President and Democratic senators have proposed reducing the estate tax exemption to its 2009 level of $3.5 million and increasing the estate tax rate to a minimum of 45%. Although the Democrats hold only a slender majority in the Senate, courtesy of the tie-breaker vote that could be cast by Vice President Harris, it is possible that tax legislation could be enacted to reduce the exemption as soon as January 1, 2022. That would give taxpayers only until the end of this year to engage in estate planning transactions to take advantage of the super-sized $11.7 million exemption.

If Democrats are unable to advance estate tax legislation, that may only buy you a few additional years before the exemption is cut in half.  Already embedded in the current law is a “sunset” provision that will automatically return the exemption to pre-2018 levels, effective as of January 1, 2026.  That would mean an exemption around $6 million, after factoring in certain inflation adjustments.  So, whether it’s now or later, the estate and gift tax cliff likely is coming.

Married couples can have their cake and eat it too

Many strategies for locking in the current estate and gift tax exemption require you to give assets away with no strings attached, typically to your children, grandchildren or irrevocable trusts for their benefit.  Giving away $23 million may be appropriate for spouses with assets valued in excess of $50 million or $100 million. However, couples of more modest wealth typically will not be comfortable giving away the full $23 million exemption amount, because, someday, they may need the gifted property back.

SLATs were developed with these couples in mind. SLATs allow you and your spouse to use your full exemptions while retaining access to the gifted property in the event you need it.

How do SLATs work?

Each spouse creates an irrevocable trust and contributes property with a fair market value up to his or her remaining gift tax exemption. Each spouse is a beneficiary of the trust created by the other spouse, and your descendants may be additional beneficiaries. Thus, the property may be invested and held as a safety net for the beneficiary-spouse or accumulated for the eventual benefit of your descendants. The beneficiary-spouse also may be a trustee of the trust for his or her benefit, thereby giving that spouse the authority to determine if and when distributions should be made.

The trust property is not subject to estate tax upon the death of either spouse.  The IRS has clarified that, for estate tax purposes, it won’t claw back gifts if the exemption is reduced later. Moreover, you can allocate your generation-skipping transfer (GST) tax exemption to your trust, which will shelter the trust assets from transfer taxes at each generation for as long as the trust is permitted to last under state law (360 years in Florida).

Limitations on SLATs

There are a few important limitations on Spousal Lifetime Access Trusts, as follows:

  • After one spouse’s death, the property in the SLAT created by the surviving spouse will be off limits to the surviving spouse.
  • During a spouse’s lifetime, there must be a prohibition on distributions that would satisfy his or her obligation to support the other spouse.
  • The SLATs should have minor differences to avoid their being deemed “reciprocal trusts,” which could cause the SLAT assets to be included in the spouses’ estates for estate tax purposes.  Possible differences include the following:
    • One of the SLATs could have a third person act as co-trustee with the beneficiary spouse.
    • The SLATs could be funded with different types of assets and on different dates.
    • One spouse could be given special powers, such as a power to withdraw a fixed amount of trust property each year or a power to appoint trust property (in equal or unequal shares)  among your descendants.

Don’t delay!

Notwithstanding the foregoing limitations, SLATs are a great way for married couples to utilize their current estate and gift tax exemptions, while retaining access to the gifted property should they need it. But, time is of the essence. Depending on the political winds, the exemption could be reduced soon.

Start discussing gifting techniques with your estate planning and tax advisors now.  Don’t wait until later this year, when the time for planning may be more limited.  This is one planning opportunity that you won’t want to miss!

Scott Goldberger, JD, is a Estate & Trust Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

Leave a Reply

Your email address will not be published. Required fields are marked *

We respect your personal information. Please review our Privacy Policy for more details.