As an insurance producer working with high net worth individuals, there are plenty of ways to ensure their families can take advantage of the money they have set aside for them without losing a large percentage of it in taxes. Gifting money to their children, in particular, can be done with relative ease through proper estate planning.
But what if your client wants to gift money outside his or her estate, but have the ability to access the funds for the spouse’s benefit? Through the use of a strategy known as Spousal Lifetime Access Trusts, your client and his or her spouse can use their gift tax exemptions to their fullest extent while still keeping control of the gifted property should your client need it in the future.
While purchasing a life insurance plan can provide liquidity for the estate, couples should do their best to ensure their policy’s death benefit proceeds are excluded from their estates. Many couples also prefer to retain access to their life insurance policy’s available cash value in case of an emergency. A SLAT is the best way to address both concerns.
Are there limitations to SLATs?
As with most financial plans, SLATs are not without their limitations. For example, should the wife create a SLAT and proceed to survive her husband, the assets would be off-limits to her. There also must be a prohibition on distributions during the beneficiary spouse’s lifetime that would satisfy obligations to support the one who created the trust.
Setting up a SLAT
To start a SLAT, one of the spouses creates an irrevocable trust and contributes property at fair market value up to the value of any remaining gift exemptions. That same spouse names the other as the beneficiary, along with any children or grandchildren as additions. This allows the property to either be invested and become a safety net for the beneficiary or accumulate and pass on to descendants. In this manner, the trust property is no longer subject to any estate taxes upon the death of either spouse.
SLATs are generally funded with permanent cash value life insurance policies so that the trustee may be able to access income from the policy as necessary. It is possible to use policies that do not create significant cash value, but the trustee would most likely incorporate other liquid assets within the trust’s portfolio to meet the spouse’s future income needs.
The future of SLATs
Currently, SLATs are one of the best ways for spouses to transfer wealth for the benefit of other. However, there may be some changes if new financial policies take place. For example, many are under the impression that such a trust is unnecessary due to the applicable exclusion amounts in the American Taxpayer Relief Act of 2012.
However, a SLAT provides several advantages that should be taken into serious consideration. For example, a SLAT gives your client the opportunity to gift their money while they are still alive, allowing them to see the enjoyment it provides. In addition, you can add terms, conditions or stipulations for their receipt, which means your client can exert control over how the gifts are received and used. Finally, it’s important to bear in mind the fact that the current tax laws are not necessarily an indication of future laws. No matter what current provisions say, they can be changed. In addition, your state’s laws can differ, as the act applies only to the federal level.