An Estate Tax Exemption of $3.5M opens the door for critical planning and use of SLATS!

While the 2017 tax reform legislation doubled the Federal Estate and Gift Tax Exemption to $11.18M per individual, or $22.36M per couple, for 2018-2025, however Bernie Sanders is now proposing the per-person exemption revert to $3.5 M level or $7M per couple.  Naturally, because the Federal Estate and Gift tax exemption exempts both transfers at death and transfers made during life from estate and gift taxes, the expansion in 2019 (now $11.4 M per person) has created an opportunity to shield an even greater portion of their estates from eventual taxation.  However, the progressive mindset does not appear to lock the $11.4M per person for long and warrants careful planning.

A trust that we are implementing is the “spousal lifetime access trust” (SLAT) which is designed to take advantage of the $11,400,000 exemption today.   In a nutshell, a SLAT is one type of irrevocable trust that can potentially allow a client to remove assets from his or her estate while also maintaining access to those assets during life.  To fund a SLAT, a married client transfers assets into an irrevocable trust for the benefit of his or her spouse and an independent trustee is appointed to oversee the trust (such as adult children).  The SLAT then provides all the income to the other spouse and principal may be distributed to the other spouse so long as ascertainable standard exists for trust distributions (i.e., health education and standard of living).

By way of example,  if in 2019 a SLAT is funded with $6M from each spouse (*watch the reciprocal trust doctrine) and a Federal Gift Tax Return Form 709 is filed then documenting the gift,  and in 2020 Federal Estate Tax Exemption is dropped back to $3.5M, the client has sheltered the swing difference of $2.5M from Federal Estate Tax (or collectively $5M) (and growth in the SLAT thereafter) as the IRS has already declared they will not claw back for those that may make lifetime “gifts” in excess of the Federal Gift Tax exemption if it drops back to $3.5M or even $5.5M.  Naturally, however, if the Federal Estate Tax Exemption is $3.5 M and upon the second spouse to pass in 2026, the balance of assets held in the estate of the decedent will be subject to Federal Estate Tax  given the use of the exemption in 2020 when it was at $11.4M as per the above.