We’re in the middle of 2024, and there’s a ton of conversation around what’s going to happen in the next 18 months related to estate tax changes. Today, we’re going to talk about the most important and most popular estate tax strategy that you’re going to see in the next 18 months, one that every wealthy family and individual needs to know about.
There are various ways to reduce your estate tax. Gifting is probably the most popular strategy. You can sell assets, leverage life insurance to pay off estate tax, and employ different methods to minimize and pay it off. Different attorneys have different strategies, but gifting assets is probably the most common approach. There are different techniques that the IRS recognizes or, as some attorneys might say, sanctions—meaning that it’s actually written into the tax laws. Just because something isn’t explicitly written into the tax laws doesn’t mean it’s not a legitimate strategy, but there are certain strategies that the IRS likes, and therefore, they include them in the tax laws, regulations, and explanations.
In 2024, and over the next 18 months, due to changes in U.S. estate tax laws, you’re going to see a ton of people using what’s called a SLAT—a Spousal Lifetime Access Trust. This is an irrevocable trust, and I’ll explain more about it in a moment. But first, let’s recap what’s going to happen with the estate tax laws in the next 18 months.
Today, in 2024, every individual is allowed to pass up to $13.61 million in assets free of any estate tax. That amount is known as your exemption—it’s what’s exempt from being subject to estate tax. Anything over that threshold of $13.61 million will be subject to estate tax. It’s important to remember that this exemption amount can be used during your lifetime as well as upon your passing. So, estate tax isn’t just about what happens when you die; the IRS actually looks at what you’ve given away during your entire lifetime. It’s more accurately described as a lifetime transfer tax.
During your lifetime, you can give up to $13.61 million in assets free of any estate tax. This amount is indexed for inflation every year, so in 2025, it’s likely to be more—it could be $14 million or even $15 million, depending on inflation. The Treasury will let us know closer to the new calendar year what the exact amount will be. However, the current exemption amounts are set to revert to around $5.5 million, effective January 1, 2026, due to the way tax laws were passed in previous years, particularly in 2017. This means we have time to do some planning. When the exemption amount drops, it could be indexed for inflation, bringing it closer to $6 million or $7 million.
What’s unique about this situation is that you can actually lock in the $13.61 million exemption that you have today. If you start gifting assets now, you can lock in that higher exemption. That’s why over the next 18 months, you’re going to see a lot of people using the Spousal Lifetime Access Trust (SLAT).
Let’s dive into what a SLAT is. It’s an irrevocable trust, and in my examples, I often pick on men because they usually marry someone younger and have lower life expectancies, meaning they’re likely to pass away before their spouse. So, in its simplest terms, a husband sets up an irrevocable trust for the benefit of his wife. He can also make it benefit his children, or it could benefit both the wife and children simultaneously. Often, it’s set up to benefit just the wife, and then, when she passes away, the trust benefits the children. You can make the distribution standards very loose and discretionary, or you can tighten them up for creditor purposes by using a Health, Education, Maintenance, and Support (HEMS) standard.
Usually, the husband sets up the trust for the benefit of his wife, and the wife can also be the trustee. As trustee, she can make decisions regarding the investment of those assets, selling assets, how they’re used, what to buy, and when to make distributions to herself or the children, if they’re also beneficiaries during her lifetime.
The concern here is what happens to the husband who sets this up. He has to give up these assets and put them in trust. So, why is he doing this? He’s using his exemption amount—let’s say he puts up to $13.61 million in assets (maybe securities or a brokerage account) into the trust for his wife. Those assets are typically going to appreciate over time, and any appreciation within that trust will be free of estate tax because he’s locked in his $13.61 million exemption. He’s using all of it, so if he passes away many years from now, his estate will be subject to the exemption amount in place today, not whatever the exemption amount may be five, ten, or twenty years from now when it could be much lower.
By taking advantage of this exemption, he ensures that the appreciation of those assets is free of estate tax. For example, if those assets grow from $13.61 million to $40 million or even $80 million, he’s only accountable for the $13.61 million under the current exemption, meaning he won’t have to pay estate tax on that $80 million.
The name of the game is to get assets out of your individual name and into the name of a trust. You’ll often see this strategy used in conjunction with a Family Limited Partnership (FLP) or a Family Limited Liability Company (FLLC), where people give an interest in these structures to a trust. But in its simplest terms, a SLAT is just an irrevocable trust that one spouse sets up for the benefit of the other.
Now, the spouse who sets up the SLAT might worry about losing access to the money if the other spouse dies or if there’s a divorce. This is a legitimate concern. However, commentators, attorneys, and planners often talk about how the spouse who sets up the SLAT has indirect access to those funds. For example, the wife, as the beneficiary, can take distributions to herself and use that money to take the husband on vacations, buy a new home, or purchase a new car. Essentially, the funds can still benefit both spouses, even though the trust is technically outside of their individual names.
If there is a divorce, you could use what’s called a floating spouse provision, which doesn’t name a specific spouse but instead states that “your spouse” is the beneficiary. If there were a divorce, the ex-spouse would no longer benefit from the trust, and the kids would become the beneficiaries. There are different ways to account for this and tighten up the terms of the trust to ensure flexibility while still giving up enough control to get the assets out of your individual name for estate tax reduction purposes.
In 2024, and over the next 18 months, you’re going to see a lot of Spousal Lifetime Access Trusts being created. It’s something to seriously consider.