Reduce your estate tax burden without losing the control!!

Making lifetime gifts can be an effective way to reduce the estate tax burden; however, giving up control of the assets is not something with which many feel comfortable. But what if you didn’t have to give up complete control of your assets
By: Summit Financial
 
BURLINGTON, Mass. - Sept. 5, 2013 - PRLog -- Making lifetime gifts to family and other beneficiaries can be an effective way to reduce the estate tax burden; however, giving up control of the assets through an irrevocable trust is not something with which many feel comfortable. But what if you didn’t have to give up complete control of your assets?

What is a SLAT?


A Spousal Lifetime Access Trust (SLAT) can provide a way for you to make a large gift of property sheltered from gift tax by the applicable exclusion amount, while providing some reassurance that if circumstances change and you need access to the property or its income in the future, discretionary distributions could be made from the SLAT to your spouse. If your spouse has only a discretionary interest, the SLAT may also provide some asset protection against future claims. The trust can be drafted to provide distributions to the spouse during the grantor’s lifetime based on an ascertainable standard of health, education, maintenance, and support (HEMS), if necessary, or can be drafted more broadly to give an independent trustee absolute discretion to make distributions of income and/or principal to the spouse.  Upon the eventual death of the grantor spouse, the appreciated value of the trust can pass estate tax free to the remaining beneficiaries, usually the children.

SLAT Benefits

The most potent benefit of a SLAT is the ability for the grantor’s spouse to receive distributions from the trust.  By allowing distributions to the spouse during the grantor’s lifetime, 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. Because the spouse may access trust assets via distributions by the trustee, the grantor may indirectly benefit from these distributions as well.

You have a basic exclusion amount (sometimes referred to as an exemption) that can protect up to a total of $5.12 million (scheduled to drop to $1 million in 2013) from federal gift tax and estate tax, and a separate $5.12 million generation-skipping transfer (GST) tax exemption (scheduled to drop to $1 million as indexed for inflation in 2013). There may also be state taxes to consider, currently the Massachusetts limit is $1 million as an example.

You can use your gift tax exemption to make a gift of property to the SLAT that is sheltered from federal gift tax. In addition, the SLAT is designed so that neither you nor your spouse retains any interest that would cause the SLAT to be includable in either of your gross estates for federal estate tax purposes. If the SLAT will be generation-skipping (i.e., it has beneficiaries who are two or more generations younger than you, such as your grandchildren), you may want to allocate GST tax exemption to the trust to protect it from the GST tax.

The SLAT also provides the trust beneficiaries protection of assets from grantor’s and beneficiaries’ creditors, probate avoidance and management of assets subject to the terms of the trust.

Funding a SLAT

To fund the SLAT, the grantor can make annual contributions to the trust, which can be used to pay premiums for life insurance. Similar to funding an Irrevocable Life Insurance Trust (ILIT), these contributions may qualify as annual exclusion gifts if the beneficiaries have the right to withdraw contributions to the trust, also known as “Crummey” powers. Depending on the number of beneficiaries with the right to withdraw and the annual premium amount, the grantor may also make lifetime exemption gifts to the trust to pay premiums.

An alternative to owning life insurance in the trust would be to fund the SLAT with existing assets or property held within your estate.   For some, the idea of protecting existing assets they have already accumulated over their lifetimes without the aspect of leveraging through life insurance may be a far simpler undertaking.  The grantor could utilize the lifetime gift tax exemption to fund the SLAT and would be required to file U.S. Gift Tax Return Form 709.  The trustee of the SLAT would then have an additional responsibility to manage the trust assets with prudency and for the benefit of its beneficiaries.  This is where it is important to consider obtaining a professional investment manager or financial advisor to facilitate the management of assets within the SLAT.

Alternative Planning Technique

A SLAT can be a great alternative for married couples where one spouse is not a U.S. citizen, because a SLAT doesn’t have to meet the rigid requirements of a qualified domestic trust.  A SLAT may also benefit domestic partners whose marriages or civil unions aren’t recognized at the federal level.

Considerations

Most importantly, transferring assets to a SLAT is an irrevocable transfer and the trust assets may only be used for the benefit of the trust beneficiaries.  In the case of the SLAT, the grantor’s spouse is a trust beneficiary, so the grantor has indirect access to the trust via the spouse, but not direct access.  If the spouse predeceases the grantor, or the grantor and spouse subsequently divorce, this indirect access may be lost.  In this instance, a simple solution to this problem is for the grantor’s spouse to create an irrevocable life insurance trust for the benefit of the grantor.

Because the spouse is a beneficiary of the SLAT, the ability to gift split may not be an option.  Typically, a gift in which the consenting spouse has a beneficial interest may not be split unless the spouse’s interest is ascertainable and severable from the interest of the other beneficiaries.  If the client and their spouse are both interested in using their lifetime exemptions, a better alternative may be to have each spouse make a transfer to a SLAT of their own creation to benefit the other spouse.

Reciprocal Trusts

Can you create a SLAT for your spouse, while your spouse creates a SLAT for you?  You can, but if the trusts essentially provide reciprocal benefits, merely switching you and your spouse as the spouse with access, the trust you create for your spouse will generally be included in your gross estate for estate tax purposes, and the trust your spouse creates for you will generally be included in your spouse's gross estate. However, you can avoid this reciprocal trust doctrine by making the two trusts sufficiently different, for example, by providing that one trust also give the spouse with access a limited power to appoint trust assets at death among a group of beneficiaries, while the other trust does not have such a provision.

Matthew T. Prifti, ChFC®, CASL®, CLTC, CRPC®, CRPS®
Wealth Management Advisor

Tax-related services offered by Summit Financial Strategies, Inc. are separate and unrelated to Commonwealth. Commonwealth does not offer tax or legal advice.
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Source:Summit Financial
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Tags:Estate Planning, Trusts, Tax Planning
Industry:Financial, Business
Location:Burlington - Massachusetts - United States
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