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Yahoo
12-06-2025
- Business
- Yahoo
Wealthy couples often face an estate tax: Here's their favorite legal maneuver to get around it
High-net-worth couples have no shortage of tools and strategies at their disposal to lower their tax obligations and pass on their wealth. But financial planners say one especially favorable arrangement has become a go-to in recent years—one that helps them pass on generational wealth while still benefiting from it during their lifetimes. It's called a spousal lifetime access trust, or SLAT. SLATs are irrevocable trusts that let the spouses maintain access to their assets while keeping them out of their taxable estate. A growing number of wealthy customers are using them to take advantage of high estate and gift tax exemptions, a strategy that can lead to significant tax savings over a lifetime. Here's how it works: One spouse, called the grantor, transfers her individually owned assets from her estate into the SLAT for the benefit of her spouse, called the beneficiary. Once removed from the grantor's estate, the future appreciation of the assets is also removed, meaning those gains won't be taxed. But the couple aren't cut off from the money: The beneficiary spouse can access the assets in the SLAT for health, education, maintenance, and support for both him and his spouse, says Bob Peterson, senior wealth advisor at Crescent Grove Advisors. 'Some would say you are having your cake and eating it too.' The primary purpose of a SLAT is to move future asset growth out of the estate, says Peterson. He gives the example of moving $5 million into the SLAT. If it eventually grows to $15 million, the $10 million appreciation is not subject to estate taxes upon the grantor's death. Establishing a SLAT can also be a good way to safeguard assets from creditors or claims against either spouse. 'It should be remembered that SLATs are an estate tax strategy, not necessarily an income tax strategy,' says Peterson. 'SLATs are typically structured as grantor trusts, so the grantor continues to pay income taxes on the trust earnings.' This is an especially beneficial arrangement to some couples because many irrevocable trusts don't allow beneficiaries to take distributions until after the death of the grantor. With a SLAT, however, beneficiaries are able to withdraw the income or principal to maintain the couple's standard of living. While those benefits may seem too good to be true, there are also drawbacks, says Peterson. The main one being that any gift is irrevocable—the grantor gives up all rights to the funds. That 'can become problematic in the event of divorce or the spouses passing,' says Peterson. Additionally, jointly owned assets cannot be transferred into the SLAT. Grantors should be sure, then, that they can continue to live their lifestyle if they lose access to those funds in the future, for whatever reason. If the beneficiary spouse dies before the grantor, the remaining assets will pass to that spouse's beneficiaries, typically children, without estate taxes. SLATs have been especially popular lately, thanks to the impending sunset of the 2017 Tax Cuts and Jobs Act, or TCJA. That law doubled the estate tax exemption, or the maximum that individuals and couples can give their beneficiaries during their lifetime and as part of their estate without paying federal gift or estate taxes. The transfer of assets from one spouse's estate to the SLAT is reported on a gift tax return, meaning it is applied against the donor's lifetime gift and estate tax exemption. That currently stands at $13.99 million for individuals—and double for married couples—but could be halved come January, depending on what Congress is able to pass as part of its ongoing tax bill negotiations. That has created something of a race-against-the-clock mentality for some high-net-worth families, financial advisors say, should Congress fail to re-up the doubled exemption. 'By making a gift now, you can use the full $13.99 million, versus waiting until 2026 and only having the ability to gift around $7 million without gift tax consequences,' says Peterson. But again, couples will want to be careful. The expanded exemption could easily be extended, and then they may have put limits on how they can access their funds for no reason. This story was originally featured on
Yahoo
22-03-2025
- Business
- Yahoo
High-net worth families are racing against the clock to shield their wealth before the estate tax increases
The wealthiest people in the U.S. could see major tax hikes next year, sending high-net worth clients to financial planning offices around the country to try to get around them, their money managers say. Next year, the estate tax exemption, which was generously increased under the Trump administration, could be halved. That's a result of the possible sunsetting of many of the individual tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA), which are currently scheduled to expire at the end of 2025. The federal estate tax is a tax of up to 40% on property transferred from a deceased person to their heirs. It applies only to very wealthiest estates—currently, only those valued at least $13.6 million need to worry about it, and they pay tax on the portion of the estate's value over that exemption level. That's less than 0.1% of returns filed each year. If the TCJA provisions sunset—it's possible that Congress could step in and extend it—some wealthy families in the U.S. could see "a significant tax hike," says Nita Vyas, trust counsel and managing director at Fiduciary Trust International. The exemption level will fall to around $7 million (and double that for couples) in 2026. "This is the number one issue that's looming large in peoples' minds," says Vyas. "For our high-net worth clients, it takes some thought to implement whatever it is you're going to do." In the U.S., there's no shortage of moves high-net worth individuals and families can make to avoid taxes. Gifting is one of the biggest avenues: Anyone can gift up to $19,000 per year tax-free to anyone else without it counting against their lifetime gift exclusion, and married couples can gift double that. That can significantly lower a wealthy person's taxable estate: If a married couple gifts the maximum to three children and six grandchildren this year, for example, that's $342,000 that comes out of their estate tax-free. That same couple would still be able to gift an additional $27.22 million tax-free under the lifetime gift tax exemption. "The gifting, if you can afford to it, is a net positive," says Vyas. "If you can afford to give $14 million to your children and you live another 30 years, the entire appreciation on that $14 million is also out of your estate." They can also set up irrevocable trusts for dependents and descendants, as well as real estate trusts to get their estate tax bills down. That said, Bob Peterson, senior wealth advisor at Crescent Grove Advisors, says most of his clients aren't actually making the moves just yet—they're waiting to see whether or not the tax cuts will actually expire. It's difficult for many to give up control of their assets because of a theoretical tax hike, even if their children are benefitting (once an irrevocable trust is established, for example, the assets are removed from the person's estate and they no longer own them). So many high net worth individuals are taking their time. "We're in the wait-and-see stage right now," says Peterson. "The last 90 days of 2025, everyone will want to seriously consider starting to do it." President Joe Biden proposed keeping the tax cuts for those earning less than $400,000 per year, and supported higher taxes on wealthier households as well as businesses, whereas Republicans generally support making the cuts permanent. Trump has said he wants to extend the cuts—or even make them deeper—but the legislation to do so has yet to be introduced. A version of this story originally published on on Jan. 14, 2024. More on taxes: Republicans plan to use 'weird accounting' to pass $4 trillion in tax cuts Congress wants to kill two education tax credits and that would cost American students billions Can you pay your taxes with a credit card? This story was originally featured on
