[author: Cody McDavis, Law Clerk]
Now may be the time to take advantage of a historically favorable tax environment. It is unclear how long the lower rates and tax exemptions established by the Tax Cuts and Jobs Act (TCJA) of 2017 will last. We know that many provisions of the TCJA will automatically expire in 2026 unless Congress makes them permanent. However, Congress could modify them prior to their 2026 expiration date. The outcome largely depends on who controls the White House and the Senate after the November 2020 elections.
Some of the most significant changes by the TCJA are those made to the federal lifetime gift and estate tax exemption equivalent amount. The federal lifetime gift and estate tax exemption equivalent amount controls how many dollars an individual can gift/devise to their loved ones before being subject to a 40% gift/estate tax. Prior to the TCJA, an individual could gift/devise $5 million tax free dollars before being subject to the tax. The TCJA more than doubled the exemption equivalent amount, with the exemption equivalent amount now at $11.58 million per individual and $23.16 million per married couple.
The lifetime gift and estate tax exemption amount is one of the TCJA provisions that will automatically expire in 2026, but may be rescinded earlier or made permanent depending on the will of Congress and the White House. Upon expiration in 2026 or an earlier modification by Congress, the exemption equivalent amount will be cut in half to pre-TCJA levels or as otherwise modified by Congress.
In light of such uncertainty, people are taking advantage of the high lifetime gift and estate tax exemption equivalent amount now. There are many ways that the high exemption amount can be currently utilized. One way of doing so is through a Spousal Lifetime Access Trust (SLAT).
A SLAT is an irrevocable trust that contains assets gifted to it by one spouse (the donor spouse) for the benefit of the other spouse (the non-donor spouse), with the residual passing to the children. By placing the assets within the trust, the assets are removed from the taxable estates of both spouses and therefore not subject to the 40% gift and estate tax. Any post-gift appreciation of the trust assets is excluded from the estate of both spouses for federal estate tax purposes.
The primary goal of the SLAT is to let the trust assets grow outside of the taxable estate for future generations. As mentioned, the appreciation of the assets will not be subject to the federal lifetime estate and gift tax upon the passing of the donor-spouse. With this goal in mind, special consideration should be given to the appropriate amount and type of assets to contribute to a SLAT, while also taking into account the budgetary needs of each spouse.
One benefit of the SLAT is that the non-donor spouse can receive distributions from the SLAT while both spouses are still alive. These distributions are most typically made for healthcare costs, education costs, or to maintain an accustomed standard of living. The donor spouse can indirectly benefit from the SLAT distributions made to the non-donor spouse, too. To do so, the non-donor spouse need only transfer some or all of the SLAT distribution to the donor spouse (utilizing the unlimited marital deduction to make gifts).
SLATs also provide protection from creditors of the donor spouse and the SLAT beneficiaries (the non-donor spouse or descendants). A SLAT will generally contain a “spendthrift” provision, which stipulates that a trust beneficiary cannot sell, pledge, or encumber a beneficial interest, and a creditor cannot attach a beneficiary’s interest. With the spendthrift provision in place, SLATs are generally effective at protecting the trust assets against creditors.
There are a number of important considerations to take into account when drafting a SLAT such as, the amount and type of assets being used to fund the SLAT, the tax return filing requirements, the individual selected to serve as the trustee, and more. Accordingly, a lawyer should be consulted in the preparation of any SLAT.
 The exclusion is adjusted each year to account for inflation.