Taking Advantage of the Estate and Gift Tax Exemption
The United States Internal Revenue Code, Subtitle B—Estate and Gift Taxes, allows individuals to transfer a certain amount of assets without incurring federal estate or gift tax. This amount is known as the Estate and Gift Tax Exemption (the “Exemption”). For a single individual in 2023, the Exemption is $12.92 million. In practical terms, this allows an individual to:
- make lifetime gifts with a total value up to the Exemption, or
- transfer assets at death, through inheritance, up to the Exemption without federal estate tax.
The Internal Revenue Service (IRS) adjusts the Exemption annually for inflation, and increases are expected to continue through 2024 and 2025. Under current law, however, the Exemption is scheduled to decrease in 2026 to approximately one-half of the 2025 amount. This anticipated reduction has led many individuals to review their estate planning strategies sooner rather than later.
There are several planning approaches that may be used to make use of the Exemption. One commonly used option is the Spousal Lifetime Access Trust, often referred to as a “SLAT.” A SLAT is an irrevocable trust established by one spouse (the “grantor”) for the benefit of the other spouse. When the trust is created, the grantor transfers assets to the SLAT, and the value of those transferred assets—taking into account any applicable valuation discounts—may be applied against the Exemption.
Using the Exemption during life may allow an individual to remove substantial value from their taxable estate, potentially reducing future estate tax exposure after 2025. Below are several considerations commonly associated with SLATs.
Potential Advantages
- Assets transferred to a SLAT are generally excluded from the taxable estates of both spouses.
- Any post-transfer appreciation of the trust assets is not subject to estate tax at the death of either spouse. For example, if assets valued at $12.92 million are transferred to a SLAT and later grow to $20 million, the increase in value is not subject to estate tax.
- Although the grantor spouse is not a beneficiary, the beneficiary spouse may receive distributions from the SLAT, which can indirectly benefit the household.
Potential Drawbacks
- SLATs are irrevocable, meaning the terms generally cannot be changed once the trust is established.
- Assets transferred to a SLAT do not receive a step-up in income tax basis at death, which may have income tax implications if the assets are later sold.
While a SLAT is only one of several tools available for making use of the Estate and Gift Tax Exemption, it is often considered in light of the scheduled reduction in the Exemption beginning in 2026.
Individuals who are evaluating the Estate and Gift Tax Exemption or considering the use of a Spousal Lifetime Access Trust may wish to consult with a qualified estate planning attorney to discuss how these concepts apply to their particular circumstances. For those in a position to make lifetime gifts, thoughtful use of the Exemption may offer meaningful long-term tax planning opportunities.
