The estate and gift tax exemption is set to decrease in 2026.
Estate taxes do not affect everyone.
With a threshold of $12.06 million for individuals and $24.12 million for married couples, few American households need to plan for federal estate taxes at this time.
This may be changing in the not-too-distant future.
According to a recent Forbes article titled “Is 2026 An Important Year For Your Wealth?,” the estate tax exemption is set to revert to the 2010 level on January 1, 2026.
This means an individual will only be able to exempt $5 million adjusted for inflation from estate taxes.
The exemption level may be lowered even further a Congress and the White House.
What does this mean?
More Americans will be subject to paying 40 percent of any amount in excess of the exempt $5 million or fewer per individual, depending on actions of Congress.
Have you heard the news lately?
The national debt and government spending are both high.
Estate taxes are one likely and easy source of funding for the government.
If you live in a state with its own estate or inheritance tax, the tax owed on your assets when you die could be even greater.
Those who are at risk of owing estate taxes need to focus on creating a tax-efficient estate plan prior to 2026.
Working with an experienced estate planning attorney is key.
These professionals will be able to incorporate helpful tax strategies and tools into your estate plan.
One option they may recommend is a Spousal Lifetime Access Trust (SLAT).
This type of trust is irrevocable and completely removes the assets held by the trust from your estate.
Each spouse can create a trust to benefit the other spouse.
These trusts must not be identical because doing so would bring IRS scrutiny and may disqualify them under the so-called “reciprocal trust” doctrine.
You can fund each trust up to the available estate and gift tax exemption level without “paying” taxes out of pocket.
You must, however, file a timely Form 709 Gift Tax Return.
In addition to removing these gifted assets from your estate, you can also protect future growth of these assets from estate taxes.
Income and even principal may be available to the spouse as the SLAT beneficiary.
If income is taxed to the grantor rather than the trust, the assets can even grow free from taxes.
What happens when the spouse who is the beneficiary dies?
The children and grandchildren are typically the remainder beneficiaries.
The SLAT is useful for generation-skipping transfer tax planning, as well as for blended families.
Because a SLAT is irrevocable, the grantor no longer retains control of the assets held in the trust.
Enough money should be left outside of the trust to allow for a comfortable lifestyle.
Although 2026 is still several years away, it can take a while to create a large SLAT.
You will want to work with CPAs, financial advisors, and your estate planning attorney to ensure you have enough to meet your daily needs, while also shielding the necessary assets from federal estate taxes after 2026.
This is definitely one of those “measure twice and cut once” techniques.
Reference: Forbes (Oct. 4, 2022) “Is 2026 An Important Year For Your Wealth?”