In 2017, Congress passed the Tax Cuts and Jobs Act (the “TCJA”), which increased the lifetime individual exemption from estate and gift tax to $10 million. The exemption is adjusted for inflation from time to time, so the exemption for 2020 is now $11.58 million (over $23 million for married couples). The TCJA also provides, though, that the inflation-adjusted exemption will be cut in half on January 1, 2026. The exemption might be reduced sooner.
U.S. government debt is now over $25 trillion ($25,000,000,000,000). We believe this debt will continue to increase, at least in the short term, due to additional borrowing to deal with the effects of the Coronavirus pandemic. If the Democrats gain control of the White House and Senate in the next election, an early reduction of the exemption to its pre-2017 level of $5 million, or even less, seems possible.
Taxpayers can take full advantage of the current exemption by completing gifts before the exemption expires or is altered by Congress. One way to do this is by making gifts to children or to trusts for the benefit of children and descendants. Property given away now – and all future appreciation – will be removed from the taxpayer’s estate and not taxed. However, that property will not be available for the taxpayer’s maintenance and support.
Another way to remove property from the estate and gift tax regime is by making gifts to spousal lifetime access trusts (“SLAT”). In a SLAT, each spouse transfers property to a trust for the lifetime benefit of the other spouse. All the assets transferred into the trusts remain available for the maintenance and support of both spouses so long as they do not divorce. Each spouse can be his/her own trustee. Assets in a SLAT–including all future appreciation in value–are removed from estate or gift tax. A SLAT may also provide protection from lawsuits and creditor claims for the assets in the SLAT. SLATs are not without some risks, and they require careful planning to ensure that they will have the desired effects.
For more information on gifts and SLATs, contact a member of the Branscomb Law tax department at 361-886-3800.