Longevity And Large Estate Tax Exemption Beg Consideration Of Spousal Lifetime Access Trusts

The good news is that 2023 shows the biggest increase in IRSs adjustment of tax thresholds ever, thanks to inflation. The bad news is that the record-setting estate tax exemption is set to expire at the end of 2025. This leaves families two years to make and fund a plan to transfer wealth.

A little background on the numbers – the estate taxation threshold is going to be $12,920,000, up from $12,060,000 in 2022. The IRS looks at the annual cost of living and adjusts (or doesn’t adjust) these thresholds every year. This impacts tax brackets, annual gifting, estate tax and other figures relevant for IRS taxation schedules. From 2022 to 2023 the exemption increased by $860,000. This new estate tax threshold is the largest exemption in history. In order to demonstrate the net impact of this see Mr. Joe Schmo’s example below based on calculations I 2023 versus when the exemption shrinks again in 2026 under current legislation and expiration of our large exemption:

-In 2023, Mr. Schmo dies with $14,000,000 of assets. His family will pay $432,000 of the estate tax, excluding any consideration of discounts.

-In 2026, single Mr. Schmo does with the same sum in his estate. But, utilizing a likely exemption amount of $6,200,000 by adjusting for inflation, his family will pay $3,120,000 in estate tax.

Obviously, Joe does not want his family to pay over $3,000,000 of tax when he passes his assets at death, but Joe’s $14,000,000 comes from a business he owns, which provides his family with most of its cash flow needs. He can’t part with that cash flow because he may need it. Based on Joe’s life expectancy and inflation, Joe’s savings may not be enough for him. But, Joe could utilize a Spousal Lifetime Access Trust (“SLAT”) to pass those assets to his wife for her lifetime benefit. Under this strategy, Joe has removed the asset from his estate, even while the income from the SLAT is still flowing into the household, paying for the vacations, cars, electric bills and even the mortgage for Joe. This type of trust transfer means the assets in the SLAT are out of Joe’s estate, and also out of his wife’s estate, at death. All of the trust’s secondary beneficiaries are already set in stone so when Joe’s wife passes, it goes to them, as specified in the trust which was created by Joe. Depending on the character of assets and other factors, the family can even act as the trustee of this trust and decide how much money gets taken out of the trust in any given year.

Tools like the SLAT allow clients to find a way out of the conundrum of giving away assets for estate tax planning while still getting support from those assets through their spouse beneficiary. For families who can use this soon-to-expire $12.92M exemption, but who also may have time on their side, a SLAT is one of the most prudent ways to leverage the tools provided by the tax code. Particularly with inflation at a record high this year, getting assets out of your estate at today’s values, and allowing for all future growth to occur outside of the marital estate is an excellent way to think about tomorrow and still have assets providing for you today. As we approach 2023, with only two years until the expiration of the large estate tax exemption, I suspect that SLATs will increase in their use and popularity for married couples with larger estates.

Each person should consult with an experienced and reputable estate tax planning team before finalizing any irrevocable trust or divestment of assets. Each trust type has many considerations and risks, which can fully be explored with tax and legal professionals prior to finalizing any plan.

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