This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to a higher standard.

Here is something that may keep you in the holiday spirit and could make your top clients happier than Santa finding milk and cookies on your coffee table.

The Gift

A newly released $11.58 million estate and gift tax exemption for 2020, up from $11.4 million in 2019. That means a married couple will be able to shed up to $23.16 million of assets from their estates, to their heirs, and pay no federal estate or gift tax. IRS also announced that the annual gift exclusion amount remains the same at $15,000.

No Grinch Can Steal this Gift

As I have cautioned in other blog articles, these 2017 Tax Act exemptions sunset down to $5 million plus inflation in 2026. In addition, we have some politicians saying they want to bring the exception down to $3.5 million with graduated tax rates up to 77%!

This is why gifting now is so very important.

You see, IRS has issued an anti-Grinch provision through Section 20.2010-1(c) which ensures that, if your client uses the increased basic exclusion amount for gifts made while the 2017 Tax Act was in effect and they die after 2026 when it sunsets, IRS will not claw back lifetime gifts if the exception is lowered.

Perfect Wrapping and Bow for the Gifts?

One of the principal reasons I have seen hesitancy in clients making gifts is the fear that their financial circumstance may change in the future and they may need the asset they gifted or the income it generates.

What if…

What if I told you there was a way of gifting the assets, locking in part or all of the higher estate and gift exclusion, and still being able to derive income off of the gifted asset.

Consider a SLAT or a Spousal Lifetime Asset Trust. This is a trust, which ultimately benefits children and grandchildren. However, like ornaments on a Christmas tree, here is the beauty of this type of trust.

Should the spouse need supplemental income or access to trust assets, a SLAT allows the trustee to make distributions to the grantor’s spouse (grantor is the spouse who made the gift and whose exclusion we used) both during the grantor’s life and after death.

The trust can be drafted to provide distributions to the spouse during the grantor’s lifetime for health, education, maintenance or support or can be drafted to give an independent trustee broad absolute discretion to make distributions of income or principal to the spouse. Because the spouse may access trust assets via distributions by the trustee, the grantor may indirectly benefit from these distributions as well.

This may eliminate some of the fear of gifting assets. It allows your clients the benefit of using the current higher exclusion while easing the concern of needing the money in future years.

The Perfect Holiday Gift? Combining Gifts, SLATs, and Life Insurance

It is the holiday season, so let’s not forget the $15,000 annual gift exclusion.

What if we combine the SLAT, the $15,000 annual gift exclusion, and life insurance?

Like an ILIT, when funding a SLAT, the grantor can make annual contributions to the trust to pay premiums for life insurance.

Using Crummey powers, the contributions may qualify as annual gift exclusion if the beneficiaries have the right to withdraw the contributions to the trust.

Since the most powerful benefit of a SLAT is the ability for the grantor’s spouse to receive distributions from the trust, the spouse may have tax-favorable access to the potential cash value of any insurance owned by the trust, along with access to the other trust assets. As in our previous discussion, since the spouse may access trust assets via distributions by the trustee during the grantor’s lifetime, the grantor may indirectly benefit from these distributions as well.

You can avoid Crummey letters if you use your client’s lifetime exemption for gifts to fund the SLAT. This could solve the potential worry from your client about beneficiaries exercising withdrawal rights and it means they do not have to tell the beneficiaries about a large contribution they made to the trust.

Like Cyber Monday, These Deals May End

Again, scheduled to sunset in 2026, if your wealthy client does not use the $11.58 million exclusion, they may lose it.

If you would like to speak to me directly about this or brainstorm about a particular situation, please click here and please feel free to forward this to anyone considering having their client gift or buy life insurance so that they can schedule a call as well.

To you and your families, have a wonderful Holiday Season and a peaceful New Year.

Need a copy of today's post for your compliance office? Click here to download the PDF.

Subscribe to the Dunham Blog