The United States Internal Revenue Code, Subtitle B–Estate and Gift Taxes, provides every taxpayer with the ability to exempt a certain amount of assets from their estate. The Estate and Gift Tax Exemption (“Exemption”) for a single individual in 2023 is $12.92 million, meaning an individual could either:
(i) gift up to the Exemption during their lifetime, or
(ii) pass through inheritance assets in value up to the Exemption without incurring tax liability.
The Internal Revenue Service (IRS) will increase the Exemption in both 2024 and 2025 to match the rate of inflation. However, in 2026 it is anticipated that the IRS will lower the Exemption to one-half of the then-2025 Exemption amount.
While there are various estate planning techniques that may be used to take advantage of the Exemption, one of the most popular is the Spousal Lifetime Access Trust, or SLAT. A SLAT is an irrevocable trust created by one spouse, the “grantor,” for the benefit of the other spouse. Upon creation, the grantor “gifts” assets to the SLAT, the value of which (including applicable discounting) may be up to or equal to the Exemption. The ability to use the Exemption now can provide an individual with the ability to remove millions of dollars from their estate and thus, from tax liability that may be incurred in 2026 or beyond. Some of the pros and cons of SLATs are as follows:
- The assets gifted to the SLAT will not be included in the estate of either spouse upon death.
- The appreciation of the assets gifted to the SLAT are not taxed upon death. For example, if the original gift is valued at $12.92 million, and upon the beneficiary spouse’s death the SLAT is valued at $20 million, no tax will be owed on the increased value.
- The grantor spouse does not lose use of the gifted assets. While the non-grantor spouse is the beneficiary of the SLAT, the grantor spouse may indirectly benefit through the beneficiary spouse.
- SLATs are irrevocable and cannot be modified.
- The assets gifted to the SLAT will not receive a step up in basis upon death, which would occur if the assets were not gifted.
- While there are various techniques available for individuals to take advantage of the Exemption, the SLAT is a popular estate planning tool that should be considered prior to 2026.
When contemplating either an Estate and Gift Tax Exemption or the use of a Spousal Lifetime Access Trust, it is advisable to consult an experienced estate planning attorney that specializes in the use of these tax exemptions and trusts. For individuals with the ability to gift assets now, utilizing the Estate and Gift Tax Exemption has the potential for significant tax savings.
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