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Safeguard Against Uncertain Federal Gift & Estate Tax Exemptions with a Spousal Lifetime Access Trust

For 2023, the federal gift and estate tax exemption amount stands at $12.92 million ($25.84 million for married couples). However, if Congress does not take any action, this amount is scheduled to decrease to $5 million for individuals ($10 million for married couples) starting from January 1, 2026. According to current projections, these figures are expected to be adjusted for inflation to a little over $6 million for individuals and $12 million for married couples.

If you expect your estate’s worth to exceed those estimated 2026 exemption amounts, consider implementing planning techniques today that may help reduce or avoid gift and estate tax liability down the road. One such technique is a spousal lifetime access trust (SLAT). Under the right circumstances, a SLAT allows you to remove significant wealth from your estate tax-free while providing a safety net in the event your needs change in the future.

SLAT Basics
A SLAT is an irrevocable trust that permits the trustee to make distributions to your spouse, during their lifetime, if a need arises. Typically, SLATs are designed to benefit your children or other heirs, while paying income to your spouse during his or her lifetime.

You can make completed gifts to the trust, removing those assets from your estate. But you continue to have indirect access to the trust by virtue of your spouse’s status as a beneficiary. Usually, this is accomplished by appointing an independent trustee with full discretion to make distributions to your spouse.

Beware Of Potential Pitfalls
SLATs must be planned and drafted carefully to avoid unwanted consequences. For example, to avoid inclusion of trust assets in your spouse’s estate, your gifts to the trust must be made with your separate property. This may require additional planning, especially if you live in a community property state. And after the trust is funded, it’s critical to ensure that the trust assets aren’t commingled with community property or marital assets.

It’s important to keep in mind that a SLAT’s benefits depend on indirect access to the trust through your spouse, so your marriage must be strong for this strategy to work. There’s also a risk that you’ll lose the safety net provided by a SLAT if your spouse predeceases you. One way to hedge your bets is to set up two SLATs: one created by you with your spouse as a beneficiary and one created by your spouse naming you as a beneficiary.

If you and your spouse each establish a SLAT, you’ll need to plan carefully to avoid the reciprocal trust doctrine. Under that doctrine, if the IRS concludes that the two trusts are interrelated and place you and your spouse in about the same economic position as if you had each created a trust for your own benefit, it may undo the arrangement. To avoid this outcome, the trusts’ terms should be varied so that they’re not substantially identical.

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