Currently, in 2022, the lifetime federal gift and estate tax exemption is $12,060,000 per person.  The maximum rate for estate, gift and generation-skipping transfer taxes is 40 percent.  Never before have individuals had the opportunity to transfer so much wealth out of their taxable estates during their lives.  However, this increased exemption is scheduled to expire at the end of 2025, when the exemption amount will be reduced to $5,000,000 per person (indexed for inflation).   Given the current national debt and federal budget deficit levels, which have been exacerbated by government stimulus efforts in light of COVID, many believe that a major legislative change to the estate tax is looming.  Any tax law changes could be retroactive.  Accordingly, given this short-term window, time is of the essence for planning utilizing this tremendous opportunity for wealth transfer and estate tax reduction.  It is important to note that fully utilizing this increased exemption amount prior to a reduction would immediately save nearly $6.5 million in estate taxes for a married couple.  However, the actual estate tax savings could be multiples of this figure if the transferred property appreciates before the donors’ deaths, since the gift removes both the property and the future appreciation from the estate tax base.

 

Given all that, it is ideal, from purely an estate tax planning perspective, to use the increased exemption of $12.06 million before it sunsets or sooner decreases.  Nonetheless, given the uncertain financial environment and inability to predict future financial needs, many clients are apprehensive about parting with ownership and control of their assets.  A spousal lifetime access trust (SLAT) is an ideal planning strategy that balances a donor's desire to use this increased lifetime exemption with the need to retain adequate funds to support future unforeseen financial needs.  

 

The SLAT is a lifetime irrevocable trust created for the benefit of the donor’s spouse and other beneficiaries, such as descendants, which allows the donor to take advantage of his or her current $12.06 million gift tax exemption.  This gift of the lifetime exemption amount allows the donor to reduce future estate tax liability by removing the asset and its income and appreciation from the donor's taxable estate.  By having the donor's spouse as a beneficiary of the SLAT, he or she can receive distributions from the trust, thereby allowing the donor to indirectly benefit from these distributions, as well, should the need arise.  

 

Additionally, in states, such as New York, that do not impose gift taxes but still impose estate taxes, a lifetime gift to a SLAT can result in reduced state estate tax exposure.  In addition, the trust can purchase life insurance on the donor’s life, while avoiding income taxes on the growth within the policy and allowing policy death benefit proceeds to pass free of income and estate taxes.  

 

As an irrevocable trust, the SLAT can also protect trust assets from the donor's and beneficiaries’ creditors, and avoid probate.  Further, if the donor allocates his or her generation-skipping transfer tax exemption to the gifts to the SLAT, the donor can structure the SLAT as a dynasty trust that benefits multiple generations of his or her descendants without the imposition of additional transfer taxes.