Tax Law Changes: A closer look at estate and gift taxes
Part three of our four-part series on 2021 tax law changes is a topic that might not impact everyone, but if it does impact you, it’s important to understand what changes are in store. The topic at hand is proposed estate and gift taxes.
Check out some of the proposed changes below, followed by a discussion of how you can use Spousal Lifetime Access Trusts (SLATs) to your advantage.
Estate and Gift Tax Changes
- The current 2021 gift and estate tax exemption is $11.7 million for each U.S. citizen. The Biden administration’s plan would lower that tax exemption amount to $3.5 million, meaning all gifts and estates more than that value would be required to pay estate taxes. The House Ways and Means Committee has proposed lowering the tax exemption amount to approximately $6.02 million in 2022.
- Increase the top estate tax rate from 40% to 45%. This tax will be applied to estates that exceed $11.7 million in value (or $3.5 million/$6.02 million under the new proposals). The estate tax traditionally impacts only a small percentage of families. According to a Bloomberg report, in 2019 (the last year data is available), fewer than one in every 1,000 people who died had an estate on which taxes had to be paid.
- The portability of estate tax exemption to surviving spouses is expected to continue.
- An elimination of step-up in basis was proposed by the Biden administration but the House Ways and Means Committee has omitted this from their proposal.
Spousal Lifetime Access Trusts
- Spousal Lifetime Access Trusts — or SLATs — are an estate-planning strategy that could reduce estate tax burdens. A SLAT is an irrevocable trust created by one spouse for the benefit of the other. The grantor, or “donor spouse,” uses their current gift tax exemption to make a gift to the SLAT, and the “beneficiary spouse” is named as a current beneficiary.
- While the donor spouse gives up his or her right to the property transferred into the trust, the beneficiary spouse maintains access to that same property.
- Some families allow only the beneficiary spouse to access funds during his or her lifetime, while children and grandchildren benefit after the beneficiary spouse’s death. Still other families structure SLATs to permit distributions to the beneficiary spouse and children simultaneously.
- Assets that may appreciate in the future would be an optimal candidate for transfer. For example, if you transfer an asset worth $1 million today to a SLAT, and in five years that asset grows to $3 million, that appreciation is also outside of your taxable estate, even though you only used $1 million of your exemption amount. If the assets in the SLAT are not distributed to the beneficiary spouse, they may continue to grow free of estate and gift taxes while remaining available for the next generation.
For more information about estate planning or how a SLAT could benefit you, contact us.
Erin Sunday is the Vice President, Investment & Trust Services Relationship Manager at F&M Trust.
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