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Plan Ahead for Reduction in Estate and Gift Tax Exemptions

Multi-generational family walking through the woods.The estate tax exemption level is a political football tossed around every time a new major round of government spending is debated in Congress. As the law currently stands of this writing, taxpayers have a higher exemption to play with:

  • $11.7 million for individuals and $23.4 million for married couples until December 31, 2025
  • Provisions sunset to $6 million for individuals and $12 million for married couples on January 1, 2026

If your estate is larger than the current exemption or will be affected by reductions to it, then inheritance tax planning is an ongoing process. It is unlikely that the current exemption level will increase in the future. It’s more likely that we will see further reduction in coming years, if not in 2022.

With that in mind, we advise clients to review the size of their anticipated estate and run different life scenarios with their advisors. We can help clients determine tax strategies for reducing their net taxable estate above the prevailing estate exemption level.

Spousal Lifetime Access Trust

Through strategic trust and estate planning, you can reduce estate taxes, maintain your preferred lifestyle and benefit future heirs.

One option gaining popularity is the spousal lifetime access trust (SLAT). A SLAT is an irrevocable trust that allows one spouse to make a gift to the trust to benefit the other spouse or other family members (e.g. children, grandchildren). The gift removes the assets from the individual’s or married couple’s combined taxable estate. Each spouse may fund their own SLAT to take advantage of the higher lifetime exclusion. Prior to a gift to a SLAT, the asset should be held individually and not jointly.

The non-donor spouse could request distributions from the SLAT if necessary to support living expenses, which also gives the donor spouse indirect access. Those distributions will be considered taxable in the non-donor spouse’s estate until expended.

There are limitations and considerations for setting up any trust. For a SLAT, there are risks with divorce or the death of the non-donor spouse. If each spouse sets up a SLAT, there must also be care taken to avoid the IRS interpretation of reciprocal trust rules that consider these trusts interrelated and possibly taxable.

Whether or not a SLAT is the right option for your estate depends on a variety of factors, but it is only one of many options. The most important step is to start estate and trust planning early. Identify how your estate may be impacted by federal or your state’s estate and gifting taxes, depending on where you live.

To take advantage of the higher estate tax exemption level for transfer of wealth, with no clawbacks, contact Steve Barkmeier for tax-smart strategies with current income and your estate.