Time may be running out to use the increased gift tax exemption afforded by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The 2010 Act increased the gift tax exemption from $1 million to $5 million per donor (indexed for inflation to $5.12 million in 2012), but the increased exemption is scheduled to revert back to $1 million on January 1, 2013.
Congress and the President may agree on legislation to extend the increased exemption (and other tax breaks) beyond 2012, but that’s impossible to predict. Further, it seems unlikely that any such legislation will be passed before November’s elections. Sitting on the sidelines until then is not advisable because it may not leave you with enough time to make the most of your exemption. Now is the time to consider exemption planning strategies.
Married couples can have their cake and eat it too
Many strategies for using the gift tax exemption require you to give assets away with no strings attached, typically outright to your children, grandchildren or irrevocable trusts. Giving away $10.24 million combined may be appropriate for spouses with assets valued in excess of $50 million.
However, couples with assets valued between $20 million and $50 million typically do not want to give away the full $10.24 million in case they someday need the gifted property. A strategy referred to as Spousal Lifetime Access Trusts (SLATs) has been developed with these couples in mind. SLATs allow you and your spouse to use your full remaining gift tax exemptions while retaining access to the gifted property in the event you need it.
How do SLATs work?
Each spouse creates an irrevocable trust and contributes property with a fair market value up to his or her remaining gift tax exemption. Each spouse is a beneficiary of the trust created by the other spouse, and your descendants may be additional beneficiaries. Thus, the property may be invested and held as a safety net for the beneficiary-spouse or accumulated for the eventual benefit of your descendants. The beneficiary-spouse also may be a trustee of the trust for his or her benefit, thereby giving that spouse the authority to determine if and when distributions should be made.
The trust property is not subject to estate taxes upon the death of either spouse. Moreover, each of you can allocate your generation-skipping transfer tax exemption to your trust, which will shelter the trust assets from transfer taxes at each generation for as long as the trust is permitted to last under state law (360 years in Florida).
There are a few important limitations, as follows:
- After the husband’s death (assuming the wife survives the husband), the property in the SLAT created by the wife will be off limits to her. The reverse is true if the husband survives the wife.
- During a spouse’s lifetime, there must be a prohibition on distributions that would satisfy his or her obligation to support the other spouse.
- The SLATs should have minor differences to avoid their being deemed reciprocal trusts, which could cause the SLAT assets to be included in the spouses’ estates for estate tax purposes. Possible differences include the following:
- One of the SLATs could have a third person act as co-trustee with the beneficiary spouse.
- The SLATs could be funded with different types of assets and on different dates.
- One spouse could be given special powers, such as a power to withdraw a fixed amount of trust property each year or a power to appoint trust property (in equal or unequal shares) among your descendants.
Notwithstanding the foregoing limitations, SLATs are a great way for married couples to utilize their current combined gift tax exemptions of $10.24 million, while retaining access to the gifted property should they need it. But time is of the essence, as the exemption is scheduled to revert back to $1 million per spouse at the end of 2012. Don’t miss out on this unique opportunity!
Scott Goldberger, J.D., is an estate and trust director in Kaufman, Rossin’s Boca Raton office. Kaufman, Rossin & Co. is one of the top CPA firms in the country and offers a wide variety of services for high-net worth individuals. Scott can be reached at firstname.lastname@example.org.