Create a Richer Legacy, Not a Bigger Tax Headache
Last year’s changes to the Federal tax code have created an opportunity to avoid estate and gift taxes.
Under the new tax law, the amount that can pass free and clear of federal estate and gift taxes has been almost doubled, from $5.49 million to $11.18 million per spouse (indexed for inflation). This is especially significant since the passing of funds isn’t just tied to death – rather it is possible to gift this money during your lifetime. But the time to act on this is now, because in 2026 the amount of the exemption will revert to $5.49 million adjusted for inflation.
In essence, married couples have been given an additional $10 million they can transfer at their death or gift during their lifetime, and those with estates in excess of $10 million have a number of advanced planning strategies that should be considered in light of this change. The first step for anyone is to, together with their personal legal advisor, review their current estate plans and gifting strategies to ensure that they are in alignment with the most recent tax law.
One strategy I’ve been discussing with my clients is setting up a Spousal Lifetime Access Trust (SLAT). This is a specific technique in which someone can gift — whether it’s $1 or $10 million — to an irrevocable trust for the benefit typically of their spouse primarily and for children as well. Using this type of trust enables a married couple to take advantage of gifting while allowing their spouse access to the money during their lifetime for retirement planning or other purposes, and can then pass the trust assets to their heirs later. In theory, both husband and wife can each create a SLAT as long as the terms of the trusts are different.
Creating and funding a SLAT allows access to the money by the spouse who is a beneficiary and removes any growth that occurs to the trust assets from the estate.
This type of strategy requires careful planning. To give an idea of the legal complexity of such advanced strategies, I recently worked with a law firm to set up SLATs for a client, one for each of the spouses. The attorney ensured the SLATs were not what’s known as reciprocal trusts, which would potentially cause the trusts to be included in the couple’s estates. This involved using different language and different trustees, so the trusts were not identical. The clients also chose to use maximum funded whole life policies as one of the strategies the trusts, with the goal to create a significant amount of tax-free money outside of the estate for retirement and wealth transfer purposes.
No strategy is right for everyone, so talk to your financial adviser to determine if it would be useful for you to consider a SLAT. If you are considering funding the trust with life insurance, I suggest that you act sooner rather than later. The downside of waiting is that you may become potentially uninsurable for health or other reasons.
No matter what the size of your estate, however, I recommend that you review your estate plans and documents to ensure they are up to date and in alignment with your needs and current law. The designation of trustees, executors, and guardians is especially important. People think long and hard about the financial issues, but they forget about the relationship and philosophical issues that are implied with the selection of people to fulfill those roles. Sometimes, such things are even more important than the financial issues. Estate plans need to be reviewed every couple of years. It shouldn’t just go into a box and be forgotten.
For educational purposes only. Penn Mutual and its affiliates do not provide tax or legal advice. Please talk to a licensed professional regarding your specific situation. Life insurance policies are subject to eligibility requirements and restrictions, and may not be right for everyone.