For 2023, the federal gift and estate tax exemption amount is set at $12.92 million (or $25.84 million for married couples). However, in the absence of action from Congress, on January 1, 2026, it’s scheduled to decrease to a mere $5 million ($10 million for married couples).
According to current estimates, those numbers are expected to be adjusted for inflation to just over $6 million and $12 million, respectively.
If you anticipate the value of your estate will surpass estimated 2026 exemption thresholds, consider implementing planning techniques today that may assist in reducing or avoiding gift and estate tax liability in the future.
One such planning technique is a spousal lifetime access trust (SLAT). In appropriate circumstances, a SLAT enables you to remove substantive wealth from your estate without incurring tax while also providing a safeguard if your circumstances change in the future.
SLAT fundamentals
A SLAT is an irrevocable trust that permits the trustee to distribute funds to your spouse if a need arises during their lifetime. Usually, SLATs are designed to benefit your children or other beneficiaries while providing income to your spouse throughout their lifetime.
You can make completed gifts to the trust, thereby removing those assets from your estate. However, you can still maintain indirect access to the trust through your spouse if they are named a beneficiary of the trust.
This is commonly achieved by appointing an independent trustee with complete discretion to distribute funds to your spouse.
Beware of potential complications
SLATs must be meticulously planned and drafted to avoid undesired consequences. For instance, to prevent the inclusion of trust assets in your spouse’s estate, your gifts to the trust must be made with your separate property.
This may necessitate additional planning, particularly if you reside in a community property state. Additionally, after the trust is funded, it’s crucial to ensure that the trust assets aren’t commingled with community property or marital assets.
It’s essential to remember that the benefits of a SLAT rely on indirect access to the trust through your spouse, which means your marriage must be strong for this strategy to be successful.
There’s also a risk of losing the safety net a SLAT provides if your spouse passes away before you do. One way to mitigate this risk is to establish two SLATs: one created by you with your spouse as a beneficiary and one created by your spouse naming you as a beneficiary.
If both you and your spouse establish a SLAT, careful planning is required to avoid the reciprocal trust doctrine. Under this doctrine, if the IRS determines that the two trusts are interconnected and place you and your spouse in a similar economic position as if you had each created a trust for your individual benefit, it may invalidate the arrangement. To avoid this outcome, the terms of the trusts should be sufficiently varied.
Have questions? Smolin can help.
If you’re having issues wrapping your head around making a SLAT work for you or your spouse, contact the knowledgeable professionals at Smolin, and we’ll help you navigate this complex process.