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Final IRS Rules Shield Large Gifts from Future Tax

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Internal Revenue Service (IRS) has issued final rules protecting taxpayers from having to pay estate tax later on large gifts made from 2018 through 2025 that are currently exempt from tax because of changes made by the Tax Cuts & Jobs Act of 2017.

The final regulations (TD 9884), released on November 22, 2019, allow an estate to apply a higher credit currently available for gifts rather than a lower credit that  goes into effect after 2025.

  • The 2017 tax law doubled the estate and gift tax exclusion.  Because of the change, wealthy individuals in 2020 will be able to transfer up to $11.58 million to beneficiaries without paying estate tax at death, and a married couple can transfer twice that amount at $23.16 million.
  • Under the exclusion, the amount returns to its pre-2018 level (approximately $5,500,000) after 2025.
  • The statement issued by the IRS said the rules mean that, “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.”

Establishing a Spousal Lifetime Access Trust

One of the best techniques for taking advantage of the higher estate gift tax exclusion is called the Spousal Lifetime Access Trust (SLAT).   Using this technique, each spouse establishes a trust for the benefit of the other spouse, children, and grandchildren.  Under the terms of the SLATs the trustee can distribute income and principal to themselves, the children, and grandchildren for health, education, maintenance and support of any one or more.  It is helpful to note that distribution can be made equally or unequally.

The SLATs are treated as grantor trusts for income tax purposes, which means that all income earned on the SLAT assets would be chargeable to the grantor for income tax purposes.  Further, the SLATs can be drafted in a manner so that if the grantor does not want to pay the income tax, the SLATs can reimburse the grantor for any income taxes paid on behalf of the SLATs.  The SLATs also would be designed to be exempt from the generation skipping transfer tax (GST).

The gift transfers to the SLATs would use a portion of the $11.58 million federal gift tax exemption and thus no federal gift tax would be due.  It would also use a portion of the $11.58 million dollar GST tax exemption.  The estate tax benefit to be achieved by the plan is that all future appreciation of the value of the assets gifted, plus all accumulated income, would accrue outside of the taxable estate.  This structure effectively saves both federal and state estate taxes, while providing access to the gifted assets.

After the first death, the SLAT for the benefit of that deceased spouse will be held for the benefit of the children.  The survivor would no longer have access to one-half of the gifted assets. 

The SLAT provides a “best of both worlds” approach while both spouses are alive.  At the first spouse’s death, however, the survivor would lose access to the SLAT in which the deceased spouse was a beneficiary.

We would be pleased to confidentially discuss the SLAT or any other estate planning issues you may have at your earliest convenience.

Ken Hydock, SobelCo