There has been significant conversation regarding tax law changes and how these changes may affect estate planning. Though the proposed estate tax law changes did not happen in 2021, it is prudent to look forward and see what changes are scheduled to take place in the future.

In 2022, the lifetime federal estate and gift tax exemption amount per person is $12.06 million. This is the total amount each person can transfer by gift or at death without paying federal estate or gift taxes. This exemption is scheduled to be set back to $5 million (adjusted for inflation) in 2026, when the current federal estate tax law expires on Dec. 31, 2025.

With the idea the gift and estate tax exemption may eventually be lower, many clients want to discuss how to take advantage of the current elevated exemption. Generally, the answer is to find ways to make gifts now. But how does that work if you still need and rely on the assets you want to gift? A solution, in some cases, may be a Spousal Lifetime Access Trust (SLAT).

SLATs are irrevocable trusts. The donor transfers assets to the trust and names their spouse and children or grandchildren as beneficiaries. Because of the design of the trust, the asset is removed from the taxable estate of both the donor and their spouse. While the donor’s spouse is living, their spouse — and, indirectly, the donor through their spouse — retains access to the assets that are transferred to the trust.

Uses for SLATs

This could be helpful in a situation where a couple has farmland they want to gift, but they also want to retain access to the income and use of that farmland. In this scenario, the spouse could create trusts benefiting the other in order to keep access to the income and the farmland.

When drafting these types of trusts, special attention must be taken to not run afoul of any estate and gift tax laws, particularly the “reciprocal trust doctrine.” Under this law, trusts that are too constructively similar or interrelated will be undone, and the asset in the trust will be considered part of the donor’s taxable estate. Special care must be taken in drafting these trusts to avoid this issue.

Couples should also be aware that the assets transferred to these trusts will not have step-up in basis upon their deaths. This will be concerning if future beneficiaries plan to sell the assets. This should be considered prior to making the trust.

Balzarini is an attorney at law for Miller Legal Strategic Planning Centers, a Division of Hellmuth & Johnson. Contact him at [email protected].