The 2017 tax reform legislation dramatically expanded the transfer tax exemption beginning in 2018, making it much more likely that even super wealthy clients may no longer be subject to the federal estate tax.
On the other hand, the legislation also created a brand new “fiscal cliff” situation, meaning that the current exemption is scheduled to expire (or “sunset”) after 2025—at which point, the exemption would revert back to its 2017 level.
Clients who anticipate leaving an estate valued above the approximately $5.6 million level may hesitate to engage in planning strategies that would restrict their access to such substantial fortunes, but trust structures exist to both allow a certain degree of access and lock in the current exemption—and because the sunset provision has placed an expiration date on their viability, the clock is ticking.
The 2017 tax reform legislation roughly doubled the transfer tax exemption to $11.18 million per individual, or $22.36 million per couple, for 2018-2025. Absent Congressional action to extend the expansion, the per-person exemption will revert to its $5.6 million level beginning in 2026. Because the transfer tax exemption exempts both transfers at death and transfers made during life from estate and gift taxes, the expansion has created an opportunity for wealthy clients to shield an even greater portion of their estates from eventual taxation.
A spousal lifetime access trust (SLAT) is one type of irrevocable trust that can potentially allow a client to remove assets from his or her estate while also maintaining access to those assets during life. To fund a SLAT, a married client transfers assets into the irrevocable trust for the benefit of his or her spouse. An independent trustee is appointed to oversee the trust (adult children may serve as trustee so long as a concrete, ascertainable standard exists for trust distributions).
The gift to the irrevocable trust removes the assets from the client’s estate, but allows his or her spouse to access the trust assets if necessary. The strategy allows the client to retain a degree of control over the assets, and also puts the assets out of the reach of his or her creditors.