Florida Banking April 2022

TRUST BANKING

LEVELING THE PLAYING FIELD TO KEEP FLORIDA SLATS IN FLORIDA: PROPOSED AMENDMENT TO FLA. STAT. §736.0505(3) EXPLAINED

MICHAEL M. RUBENSTEIN, JD, LLM, MBA, CTFA, BMO WEALTH MANAGEMENT, SENIOR FIDUCIARY ADVISOR SOUTHEAST REGION

W e are currently living in a golden age for generational tax planning in the United States. The federal gift and estate tax exemption (the “Exemption”) is high ($12.06 million per individual), and the top federal gift and estate tax rate is relatively low (40 percent). Thus, if a married couple dies in 2022, any amount under $24.12 million is exempt from gift and estate tax, and any amount over $24.12 million is taxed at 40 percent. 1 Compare this to 2001, when married couples were taxed at any amount over $1.35 million, and the top estate tax rate was 55 percent. 2 For taxpayers wishing to transfer large amounts of wealth, times are good. However, with all things, this too will come to an end. In 2017, Congress passed The Tax Cuts and Jobs Act (the “TCJA”). The TCJA doubled the Exemption from $5 million to $10 million (indexed for inflation as of 2010). 3 Taxpayers can now transfer more wealth than ever free of gift and/or estate tax. However, there’s a catch. The doubling of the Exemption is temporary and scheduled to end (or “sunset”) at the end of 2025. As a result, if Congress takes no action, in 2026 the Exemption will revert to pre-TCJA values to an estimated $7 million. 4 This temporary increase in the Exemption provides a unique gift and estate tax planning opportunity, and there are many tax planning strategies that could be used to take advantage of this opportunity. One of the more popular strategies is the Spousal Lifetime Access Trust (“SLAT”). Spousal Lifetime Access Trust A SLAT is an irrevocable, completed gift trust that one spouse (the “donor-spouse”) creates for the benefit of the other spouse (the “beneficiary-spouse”). As the name implies, the spouse has lifetime access to the trust . Assuming Congress takes no action, when the Exemption increases to a projected $14 million in 2025, Recent History of the Gift and Estate Tax Exemption

each spouse could gift $14 million into a SLAT for the benefit of the other. They could each use their $14 million Exemption, and they would owe no gift tax on these gifts as they are fully covered by the Exemption. If they use the $14 million Exemption before it decreases to a projected $7 million in 2026, then the decrease should be irrelevant as the money has already been gifted and is no longer part of their taxable estates. 5 If they do not use the $14 million Exemption before 2026, then, when the Exemption decreases to $7 million, the additional $7 million will be part of their taxable estate. When they die, the additional $7 million will be taxed at 40 percent resulting in $2.8 million of estate tax per spouse ($5.6 million combined). Additionally, once assets are out of an individual’s taxable estate, they are no longer subject to creditor claims on that individual. Therefore, although the main consideration is typically the tax planning, there are attractive asset protection features to SLAT as well. The Issue: Unintended Planning Consequences Upon Death of the First Spouse For spouses who wish to use their Exemptions, but also access the assets during their lifetimes, a SLAT is the best of both worlds. But what happens when the first spouse dies? Is it possible for the donor-spouse to become the beneficiary of the SLAT holding the assets that they originally gifted away after the death of the beneficiary-spouse? Yes. But, again, there’s a catch. Under current Fla. Stat. §736.0505, a future beneficial interest in the donor-spouse will subject the SLAT property to creditor claims under Florida law, resulting in estate tax inclusion under federal law. The proposed amendment attempts to address this federal tax issue by limiting creditor rights under state law. 6 If the purpose of a SLAT is to gift assets out of the donor-spouse’s estate, then this potential inclusion into their estate is bad for the Florida residents.

Trust Banking, Continued on page 18

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