Estate planning is a critical aspect of securing your family’s financial future. This blog post will provide a comprehensive breakdown of estate planning, with a specific focus on the differentiation between revocable and irrevocable trusts. Lastly, we delve deeply into the benefits of Spousal Lifetime Access Trusts (SLATs), an irrevocable trust designed for married couples.
Understanding the Federal Estate Tax
The federal estate tax is a 40% tax imposed by the U.S. federal government on the transfer of assets and property upon death. It is levied on the total value of your gross estate, which typically includes all the assets and property you own or have an interest in at the time of your death, such as real estate, personal property, bank accounts, investment accounts, retirement accounts, and life insurance death benefit proceeds.
Generally federal estate tax does come into play unless you pass away with a gross estate, plus lifetime taxable gifts, over $12.92M (if single) or $25.84M (if married). As of writing (2023), the current estate tax exemption amount is $12.92M per person, and married couples may share exemptions by electing portability, which doubles this limit to $25.84M.
This means that individuals / married couples can transfer up to $12.92M / $25.84M during life or at death, without incurring the 40% federal estate tax.
The exemption amount is currently at its highest point in history, and it is important to note that this can and most likely will change under future tax law. The current estate tax exemption is set to sunset at the end of 2025, which will effectively reduce the exemption amount by half.
State Tax Considerations
In addition to federal estate tax, considerations should also be made for state death taxes. As of 2023, twelve states and the District of Columbia impose estate taxes, and six impose state inheritance taxes. This ranges anywhere from 0 – 20% depending on your state of residence.
A revocable trust, also known as a “revocable living trust” is a legal document that you create during your lifetime to manage and distribute your assets at your passing. It is called “revocable” because, as the grantor (the person creating the trust), you retain the ability to make changes to, amend, or even revoke the trust entirely while you are still alive and of sound mind.
Assets held in revocable trusts do not avoid federal estate tax or state death tax.
Instead, they are primarily used for:
An irrevocable trust is a type of trust that, once established, generally cannot be modified, amended, or revoked by the grantor (the person who creates the trust). Once the assets are transferred into an irrevocable trust, they are no longer considered the property of the grantor, and control over those assets is transferred to the trustee (the person or entity responsible for managing the trust) and the trust’s beneficiaries.
Assets held in irrevocable trusts do avoid federal estate tax because they were taxable gifts at the time of transfer. For state death tax, some states require you to live a certain period of time after transfer for the assets to escape the death tax.
Irrevocable trusts are primarily used for the following:
It’s important to note that once assets are placed into an irrevocable trust, the grantor generally relinquishes direct control over those assets. The trustee becomes responsible for managing the trust according to the trust document’s terms.
A Spousal Lifetime Access Trust (SLAT) is a type of irrevocable trust designed for married couples. SLATs are used in estate planning to leverage the benefits of irrevocable trusts while allowing one spouse (the donor spouse) to provide for the other spouse (the beneficiary spouse). SLATs can be a powerful tool for minimizing estate taxes and preserving family wealth, all while maintaining an element of control via the beneficiary spouse.
Structure of a SLAT:
Benefits of SLATs:
Considerations for SLAT planning:
When setting up a Spousal Lifetime Access Trust (SLAT), several important considerations should be taken into account. Firstly, it’s vital to understand that the irrevocable nature of the trust means that once assets are placed into it, the donor spouse forfeits direct control over those assets. Additionally, SLATs are subject to specific tax rules and regulations, necessitating compliance to achieve the intended tax benefits. Lastly, the strength and trust of the spousal relationship plays a pivotal role, as the beneficiary spouse’s needs and financial security must be considered when determining distributions from the trust.
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