One of the most significant upcoming changes to estate planning is the scheduled sunset of the federal estate and gift tax exemption after 2025. Nickerson Law Group is working to prepare for the potential changes to the law and educating clients on how their estate plans could be impacted. Between now and December 31, 2025, our office will be creating a lot of SLATs. What are SLATs and why are they now all the rage?
Current Estate & Gift Tax Law
As of 2024, the federal estate and gift tax exemption stands at $13.61 million per individual. This means that an individual can transfer up to this amount upon their death without incurring federal estate taxes. For married couples, the exemption amount is effectively doubled, allowing for the transfer of up to $27.22 million tax-free. Any amount exceeding the exemption is taxed at a rate of 40%.
But you do not have to wait until you die to use this exemption amount. People can gift this amount during their lifetime. The lifetime exemption for gift tax is unified with the estate tax exemption, currently set at $13.61 million.
The 2026 Sunset Provision
The current exemption amounts were established under the Tax Cuts and Jobs Act (TCJA) of 2017. However, these provisions are set to expire at the end of 2025.
The sunset provision will cut the exemption limit in half–expected to be about $7 million per person or $14 million for a married couple. Obviously, this is a massive difference that could reduce the tax-free value of your estate that you intend to pass on to your heirs.
The Impact of the Change
If the exemption amount decreases as anticipated, many estates that are currently below the taxable threshold may become subject to federal estate taxes. This potential increase in tax liability makes it essential for individuals and families to review their estate plans now. Proactive planning can help mitigate the impact of these changes and ensure that your assets are protected and your wishes are honored.
Why 2024 and 2025 Are Critical Years for Estate Planning
Given the looming changes, the next few months offer a valuable window of opportunity to take advantage of the current higher exemption amounts.
Many couples with taxable estates are deciding to use their exemptions before 2026 and many of them are creating two SLATs, one for the benefit of the husband and one for the benefit of the wife.
In a SLAT, or Spousal Access Lifetime Trust, the non-gifting spouse is the trust beneficiary, allowing the gifting spouse to have indirect access to trust assets through the beneficiary spouse.
Time is ticking
One concern we have to be very careful with when designing SLATs is the ‘reciprocal trust doctrine.” At a simple level, if husband creates a trust for the benefit of wife, and wife creates a substantially identical trust for the benefit of husband, the reciprocal trust doctrine could result in uncrossing the trusts upon audit. Once way around the reciprocal trust doctrine is to create the SLATs at different times, such as 12 or more months apart – the longer the period of time the stronger the argument will be. One goal is to implement one trust in 2024 and another in 2025, thereby spreading the gift tax return into two separate years. People should not wait any longer to start implementing this strategy.
How Nickerson Law Group Can Help Nickerson Law Group has been designing and implementing SLATs for our clients for over 15 years. Our experienced team can help you navigate the complexities of the estate and gift tax laws and develop a tailored strategy to protect your family’s hard-earned assets prior to the 2025 sunset.
