The federal exemption from gift and estate tax for 2023 is $12.92 million ($25.84 million for married couples). However, if Congress does nothing, it will only be $5 million ($10 million for married couples) on January 1, 2026. According to current projections, such sums should increase by about $6 million and $12 million, respectively, to account for inflation.

Consider using planning strategies now that can help lessen or eliminate gift and estate tax obligations in the future if you anticipate that the value of your estate will exceed those estimated exemption amounts by 2026. A spousal lifetime access trust (SLAT) is one such method. A SLAT offers a safety net in case your needs alter in the future. It also allows you to remove a sizable amount of cash from your estate tax-free.

SLAT basics

A SLAT is an irrevocable trust that enables the trustee to pay your spouse while they are still alive, should the need arise. The purpose of creating a SLAT is to provide income to your spouse during their lifetime while benefiting your children or other heirs.

You can transfer assets from your estate to the trust as completed gifts. However, since your spouse is a trust beneficiary, you still have indirect access to it. Typically, you would select a separate trustee with complete authority to distribute funds to your spouse.

Beware of potential pitfalls

To minimize unintended outcomes, SLATs must be appropriately prepared and written. For instance, you must give to the trust using separate property to avoid the assets in the trust being in your spouse’s estate. If you reside in a community property state, this may necessitate further planning. After funding the trust, keeping the trust assets separate from the marital or communal property is crucial.

The benefits of a SLAT depend on your spouse’s indirect access to the trust. Therefore, your marriage must be solid for this method to be effective. Additionally, there’s a chance that if your spouse dies before you do, you’ll lose the security that a SLAT offers. Setting up two SLATs is one approach to spreading your risks. You could make one with your spouse as a beneficiary and your spouse would create another with you as a beneficiary.

To circumvent the reciprocal trust doctrine, you must carefully plan if you and your spouse each create a SLAT. According to that doctrine, the IRS could annul the agreement if it determines that the two trusts are connected and put you and your spouse in a similar financial situation to what would have happened if you had individually established a trust for your personal benefit. The trusts’ terms should change so that they are not nearly identical to prevent this consequence.

Federal gift and estate tax exemption

Contact our RRBB accountants and advisors for more information.

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