Client Case Study: Tax Savings Now

Joe Biden is the President-elect, and the House and Senate are Democratic. There could be massive tax increases on the wealthy, including estate taxes.

Clients that did not complete planning in 2020 should be advised to use their gift exemptions before they may be changed. There are many gifting strategies consider now including spousal lifetime access trusts (SLATs). SLATs are an important tool for married couples seeking tax savings now that may not be available in the future. The following client case study helps to illustrate this planning opportunity:

Background Assumptions
Jay and Maya are married and both 67 years old. Jay has $7 million in assets that he wishes to use to benefit Maya and their children. The 2021 estate tax exemption is currently $11.7 million. The Democrats won the White House and control of both houses of Congress, and plan to reduce the estate tax exemption to $1 million in 2021. Further, the estate tax exemption remains $1 million at Jay and Maya’s death and current estate tax rates (about 40%) remain the same.

SLAT in Action
Because of the pending change to the exemption amounts, we recommend that Jay establishes a SLAT for the benefit of Maya and transfers $7 million in assets to the SLAT before any change to the exemption goes into effect. Jay and Maya both die 15 years later and the assets in the SLAT increase in value by an average of 8% per year since the date of transfer and are now worth $22,205,000. All the while, Jay (indirectly), Maya (as a beneficiary of the SLAT), and their children were still able to have access to the assets and benefit from them and their tax-free growth.

The High Cost of Inaction
The savings resulting from Jay establishing the SLAT are the estate taxes that may be due upon the death of the last to die of Jay and Maya (they die at the same time for illustrative convenience). Assuming the estate tax exemption is $1 million at death, if they would have died with these assets in their estates, then the estate of the second to die would face an approximate estate tax bill of $8,100,000 for the $22,205,000 of appreciated assets. However, because the assets were in the SLAT, no estate taxes would be due on the SLAT assets. In Jay and Maya’s case, the cost of doing nothing is approximately $8,027,000.

The benefits of acting now to establish a SLAT are that the current exemption amount can be used before it is substantially reduced by an expected change in law, and all growth within the SLAT escapes estate taxes. The net result of using the exemptions available now is the potential of massive tax savings resulting from the exclusion of the gifted assets, plus any appreciation from the estates of the transferor-spouse and his or her family and the comfort of knowing that the assets will be protected from claims of creditors. All the while, the transferor-spouse (indirectly), his or her spouse, and their children, will still be able to enjoy the benefits of the assets as they appreciate. The amount of the tax savings is in direct correlation to the gift transferred to the SLAT, the appreciation in the gift, and the reduction to the estate tax exemption. In fact, with proper planning, both spouses could establish non-reciprocal SLATs for each other thereby potentially doubling the tax savings.

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