By Donald Albach
Taxes are an inescapable part of life, touching nearly every financial aspect, from the income we earn to the things we buy, and even the investments and properties we hold. We come across taxes in many forms, like income tax, sales tax, and property tax. And when we travel, we’re faced with hotel or tourism taxes. But there’s one type of tax that’s often overlooked: the taxes that come into play after we pass away, sometimes referred to as “death taxes.”
Death doesn’t exempt us—or, rather, our estates—from the taxman’s grasp. After we’re gone, our financial legacies can still be subject to estate taxes, as dictated by federal and state laws. These “death taxes” particularly target high-net-worth families and can significantly affect the wealth you hope to leave for your loved ones. That’s why it’s crucial to think about smart estate planning strategies to navigate these tax implications effectively.
Changing Estate Tax Exemption Limits
The right estate planning strategy to lower, or eliminate, any taxes your estate will owe at your passing is especially more important to consider in light of changing legislation. Effective in 2018, the Tax Cuts and Jobs Act (TCJA) significantly impacted estate planning by nearly doubling the federal estate and gift tax exemption. The exemption rose from $5 million to $10 million per person, indexed for inflation, resulting in a $13.61 million exemption per individual and $27.22 million for married couples in 2024.
However, these increased exemption amounts are not permanent and are set to “sunset,” or revert back to the pre-TCJA levels, after December 31, 2025. This means that unless further legislation is enacted, starting in 2026, the exemption will fall back to $5 million per person (adjusted for inflation), which could notably affect estate planning strategies for many individuals and families. If not planned for properly, any assets above these amounts may be subject to estate taxes, which start at 18% and go all the way up to 40%.
Given the political uncertainty of if and how these amounts will change in the future, the best time to plan is right now. Furthermore, there is actually a way to use these higher exemption amounts now, before it reverts back to the lower threshold. One way to do that is through a Spousal Lifetime Access Trust (SLAT).
Basics of SLAT Trusts
In a SLAT, one spouse, known as the donor or grantor, transfers assets into the trust for the benefit of the other spouse, who becomes the beneficiary. A donor can put cash, real estate, investments, life insurance policies, or even business shares into the trust. This allows for a reduction in the estate of the donor spouse, thereby minimizing potential estate taxes, while still allowing the couple to indirectly access the assets through distributions to the beneficiary spouse.
The assets within a SLAT, and any growth they accrue, are removed from the donor spouse’s taxable estate and remain outside the beneficiary spouse’s estate as well. Upon the death of the beneficiary spouse, the remaining trust assets are distributed to the remaining beneficiaries, typically children or grandchildren, in accordance with the trust terms.
Benefits of SLAT Trust
First and foremost, a SLAT facilitates significant estate tax savings. By transferring assets into the trust, the grantor reduces the size of their taxable estate, thereby potentially minimizing estate taxes upon their death. Meanwhile, the assets and their future appreciation are excluded from the beneficiary spouse’s taxable estate as well.
Even though the assets have been transferred into the trust, the couple can still indirectly benefit from them through distributions of income or principal made to the beneficiary spouse.
Furthermore, a SLAT can be set up as a grantor trust, meaning the trust’s income would be taxed to the grantor, reducing their estate even further. If the trust is set up this way, it would also mean that no separate trust tax return would be required while the grantor is still alive.
Lastly, SLATs also provide a level of protection against creditors, as the assets in the trust are generally not accessible to satisfy the grantor’s debts.
Downsides to Consider
Despite its benefits, a SLAT also has certain downsides that must be carefully considered. Since a SLAT is an irrevocable trust, the decision to transfer assets into the trust is final and cannot be undone. This lack of flexibility can be a drawback, particularly in situations where the financial circumstances of the grantor spouse change.
Also, if the beneficiary spouse predeceases the grantor spouse, or if the couple divorces, the grantor spouse loses any indirect access to the assets in the SLAT. If the grantor depends, even indirectly, on the distributions of the SLAT, it would be wise to proceed with caution in terms of what assets and how much you contribute.
Additionally, SLATs are most appropriate for high-net-worth individuals with the risk of going over the estate tax exemption amounts. If you might fall under that limit, you can still give to others without setting up a SLAT. You can give to future generations in your family through annual gifts, or direct payments to hospitals and universities, or you can give to charitable organizations with donor-advised funds.
Finally, setting up dual SLATs—one for each spouse—can be complex and could potentially fall foul of the reciprocal trust doctrine if the two trusts are considered too similar, leading to the potential loss of any of these tax benefits. To follow all the proper rules and don’t negate any potential tax benefits, it’s wise to work with financial and estate professionals who are well versed in SLAT trust rules and best practices.
Plan Your Estate Properly to Reduce Your Taxes
Spousal Lifetime Access Trusts (SLATs) can be a smart move for estate planning, but they’re not without their complexities and potential downsides. It’s essential to weigh these factors against your unique financial and family situation, ideally with the guidance of experienced advisors by your side.
If you’re seeking to reduce your tax burden both now and in the future, our team at Millstone Financial Group is here to assist. Feel free to contact us directly for personalized advice by calling (732) 385-8544 or emailing dalbach@millstonefinancial.net.
About Don
Donald Albach is President and Co-Founder of Millstone Financial Group, an independent financial advisory firm helping pre-retirees and retirees pursue their retirement goals. Don has over 26 years of experience in the financial industry and focuses on retirement planning, designing retirement income planning strategies to guide his clients toward financial independence. Don graduated from Norwich University, the nation’s oldest private military college, and has worked his entire career in the financial services industry, including First Boston, MetLife, and C&A Financial Group. He co-founded Millstone Financial Group in 2012 with Michael Russo. Don and Mike met each other while working at MetLife, and in 2003 both he and Mike were recruited to work at C&A Financial Group, where they spent the next 10 years. It was at C&A Financial Group where they decided they needed to start their own company that strictly focused on retirement income planning. They both had a desire to help people navigate the complexities of retirement and created Millstone Financial to do just that.
Don currently lives in Monroe Township, NJ, with his wife, Tina, to whom he has been married since 1992. They have three children together: Paige, Donny, and Ally. Don’s two passions are sailing and watching college football, and he also enjoys cooking Sunday dinner for his family. To learn more about Don, connect with him on LinkedIn.
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to its accuracy or completeness. Investing involves risk including the loss of principle.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
This material is intended to provide general financial education and is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
