The Tax Cuts and Jobs Act of 2017 created a window of estate tax exemption originally expiring on January 1, 2026. For now, a married couple can transfer $23.4 million without having to pay gift or estate tax.
Compromise legislation in the Build Back Better Act may move the sunset of this window up to January 1, 2022.
Whether it happens at the beginning of 2022 or 2026, this window will shrink from $23.4 million back to $11.7 million.
There are means to lock in this greater exemption via use of a Spousal Lifetime Access Trust (SLAT). SLAT’s are gifts from one spouse (the donor spouse) to an irrevocable trust for the benefit of the other spouse (the beneficiary spouse). The benefits of this are:
The beneficiary spouse has the right to receive income or principal from the SLAT.
A SLAT is considered a “grantor trust”. This means that for federal income tax purposes, the donor spouse, at the grantor of the SLAT, pays taxes on the trust assets income and capital gains. This tax payment keeps the assets and tax payment not subject to gift tax.
To gain these tax benefits, the SLAT by definition is an irrevocable trust. The donor spouse must irrevocably transfer assets to the SLAT. This means he gives up forever the income and use of those assets. However, the beneficiary spouse does have the right to receive income and principal from the SLAT. Indeed, the trust can and often is structured to require that income be paid to the beneficiary spouse.
This income and principal can be used by the family unit, including the donor spouse.
A SLAT can also be structured as a Dynasty Trust by naming children and grandchildren as additional beneficiaries and allocating Generation Skipping Trust exemptions to the trust.