End of the Year Gifting May Be Particularly Important this Year

Genova Burns LLC
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Genova Burns LLC

With the end of the year quickly approaching and the 2020 election largely behind us, it is a good time to revisit important estate planning strategies to protect and preserve your wealth for future generations. At $11,580,000 per donor (indexed with inflation), the current federal estate and gift tax exemptions are exceptionally high by historical standards. Under current law, these exemptions are scheduled to decrease by approximately 50% at the beginning of 2026. However, the incoming administration may look to enact legislation to decrease this as soon as next year and to levels below the scheduled 50% reduction. Additionally, any decrease implemented in 2021 may be made retroactive to as early as January 1, 2021. Of course, the results of the Georgia Senate runoff elections, scheduled for January 5, 2021, may influence the likelihood of such legislation being enacted.

Under the current IRS regulations, the applicable exemption amount at the time of one’s death is the greater of the then exemption amount or the exemption amount used in lifetime gifting. As such, and presuming that these IRS regulations remain unchanged, if your level of wealth allows, you may want to turn your attention to gifting in order to lock in the current exemptions.

In our previous post, we discussed the special circumstances that make the current environment especially advantageous for gifting, specifically: depressed asset values due to the global pandemic, historically low interest rates and, of course, the increased exemption. For married couples who are hesitant to completely part with gifted assets, but would benefit from reducing their estate taxable estates, the use of spousal lifetime access trusts, or SLATs as they are commonly known, can be an attractive planning strategy.

As an example, each spouse, as Grantor, creates and funds a trust for the benefit of the other spouse (and potentially others). During the beneficiary spouse’s lifetime, the beneficiary spouse has possible access to the funds. The gift to the trust is subject to gift taxation, thereby using the applicable wealth transfer exemptions; however, the trust is not generally subject to estate taxation at the death of either spouse. It is important to note that, if the provisions of the trust agreements are too similar, the IRS and the courts will apply the “reciprocal trust doctrine”, which treats the assets of each trust as includable in the estate of the beneficiary spouse as if the beneficiary spouse was also the trust Grantor.

To avoid the trusts from being considered reciprocal, the trust agreements must be carefully drafted with meaningful differences. Although there is no absolutely clear guidance from the IRS or the courts regarding the differentiating provisions SLATs need to contain in order to eliminate the risk of application of the reciprocal trust doctrine, prior IRS rulings and case law can be enlightening.

  1. For example, SLAT One might contain the following provisions:
    During the lifetime of the beneficiary spouse, distributions can be sprayed to the spouse and descendants
  2. The beneficiary spouse is the trustee
  3. The standard for distributions to the beneficiaries is limited to health, education, maintenance and support
  4. The beneficiary spouse has a noncumulative, annual power to withdraw $5,000 or 5% of the value of the trust annually (a 5&5 power).
  5.  The spouse beneficiary has a lifetime and/or testamentary power of appointment, allowing for the appointment of trust assets in favor of a class of persons that can be virtually as broad or as narrow as the Grantor wishes

While SLAT Two might contain the following provisions:

  1. The beneficiary spouse is the only beneficiary during his/her lifetime
  2. The trustee is not the beneficiary spouse
  3.  Distributions can be made to the beneficiary spouse for any purpose at the discretion of an independent trustee
  4. The beneficiary spouse does not have the power to appoint trust assets

Using the SLAT strategy, spouses can transfer assets out of their taxable estates without completely losing access to those assets (provided that the beneficiary spouse is living and generous towards the non-beneficiary spouse). The gifts to the trusts can be direct and straightforward, or can employ discounting or other methods to leverage the value of the gift.

The above is just one example of wealth transfer planning that may be utilized. We cannot predict future events; however, whether the exemption goes down at the beginning of 2026 or earlier, current circumstances make consideration of this type of planning particularly timely.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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