Estate Tax Planning in Uncertain Times

By Jeanne Blackmore, ESQ.

Before the recent election, Trust Company of Vermont often encouraged clients with state or federal taxable estates to establish irrevocable Spousal Limited Access Trusts (SLATs), and to make gifts to those SLATs as close as possible to the current federal estate tax exemption of $13.61 million per person. There are many reasons to make gifts to a SLAT but, until recently, a pressing reason was that the current federal estate tax exemption will sunset at the end of 2025, and decrease to about $7 million per person, unless extended by Congress. The message of the incoming Republican-controlled administration is that the current federal estate tax exemption will, at a minimum, be extended. As a result, clients are now asking: should we proceed with our SLAT planning? We continue to recommend gift planning with SLATs, and feel that the likely extension of the federal estate tax exemption provides some breathing room to attend to such planning with more care and precision.

For background, a SLAT is a special kind of irrevocable trust that allows a spouse to gift assets to an irrevocable trust to remove them from his/her gross estate for estate tax purposes, but the SLAT assets remain available as needed to the other spouse for his/her lifetime and, on that spouse’s death, will be available for the children of both spouses. More simply put, a SLAT allows a married couple to remove about $26 million of assets from their gross estates for estate tax purposes while permitting access to the assets during their lifetimes as needed. For couples with state or federal taxable estates, SLATs are very powerful planning tools for the following reasons:

1. If you are resident in Vermont, gifts you make to a SLAT are excluded from your gross estate for Vermont estate tax purposes, and do not reduce your Vermont estate tax exemption, provided you survive the gift by two years. For example, if you gift $13.61 million to a SLAT and survive that gift by two years, none of that $13.61 million will be included in your estate for Vermont estate tax purposes and you will retain a $5 million Vermont estate tax exemption for any assets you own outside the SLAT at your death. As Vermont has a flat 16% estate tax on a decedent’s assets in excess of $5 million, gifting assets to a SLAT can provide tremendous tax savings to Vermont residents. Other states, such as Massachusetts and New York, have similar rules with differing claw-back periods and exemption amounts.
2. If you are resident in Florida when you create a SLAT, and then establish residency in Vermont more than two years after the gift, the gift is similarly excluded from your Vermont gross estate. As an added benefit in this case, the SLAT will never be subject to income tax in Vermont because it was created by a Florida resident, though distributions of income (but not capital gains) from the SLAT to a Vermont resident would be subject to Vermont income tax. It is not uncommon for Vermonters to establish residency in a low income tax jurisdiction on retirement, such as Florida or South Carolina, and then for the surviving spouse to return to Vermont after the death of the first spouse. In this instance, having a non-resident SLAT may result in significant income tax savings.
3. SLATs are typically structured so the assets are treated as owned by the person who creates the SLAT for income tax purposes but not for estate tax purposes. In other words, if you create a SLAT, you will pay the income taxes on the SLAT earnings (dividends, interest and capital gains). This sounds horrible, but it is actually helpful. By paying the income taxes on SLAT earnings, you reduce your remaining estate without using any exemption and the SLAT assets grow outside of your estate without any reduction for income taxes. You can terminate this feature of a SLAT at any time it becomes onerous to pay such income taxes; from that point forward, the SLAT would pay the income taxes.
4. The post-gift appreciation of the SLAT assets will be sheltered from estate tax for as long as the SLAT remains in place. If you create a SLAT that lasts for multiple generations, the SLAT assets will be sheltered from estate tax at each generation and thus can experience tremendous growth (free from estate tax!) while being available to support your descendants. A SLAT can also provide protection from creditors and in the event of divorce for as long as it remains in place.

All the above benefits continue to apply even if the federal estate tax exemption remains at its current level. However, it is by no means certain that the federal estate tax exemption will remain at its current level indefinitely. Historically, the federal estate tax exemption has never decreased… it has only increased. But federal and state budget deficits are projected to increase over coming years, increasing the pressure on federal and state legislatures to raise taxes, so a continued pattern of an exemption that only increases is by no means guaranteed. In addition, apart from the federal estate tax, state estate tax benefits of SLATs remain significant as many states have an onerous estate tax and relatively low estate tax exemptions. The multigenerational protection a SLAT can provide to children and grandchildren, by sheltering assets from estate taxes, creditors and in the event of divorce, also remains significant. Finally, many clients have been rushing to implement SLATs in 2024 and 2025 in advance of the projected sunset. In view of the likelihood that the current federal exemption level will remain the same for the foreseeable future, clients now have a longer runway to create and fund SLATs over a period of years. This will allow more careful planning and provide additional time to understand and experience the mechanics of SLAT administration and the benefit that SLATs provide. 

This article addresses gift planning to SLATs, but the same principles apply to gift planning to other types of irrevocable trusts by married or unmarried clients. We are happy to discuss gift planning with clients at any time.