Denha & Associates, PLLC Blog


By: Randall A. Denha, J.D., LL.M.

We all know that IRA’s and 401(k)’s are wonderful retirement vehicles that create tax-deferred savings and are not subject to income tax until withdrawn. Most, if not all of those withdrawals occur in retirement when theoretically your income tax rates are lower. However, with the economic crisis we are currently enduring, how long will the capital gains tax rate stay at 15%? It is likely that that income tax rates are going to be higher in the future than they are now. What if you want to retire at 60 or 65 but would prefer not to withdraw from your retirement accounts until required at age 70-½?

Say hello to the SLAT – a “Spousal Lifetime Access Trust” is a Trust that is created where your spouse is the Trustee and controls the assets within the Trust. Your spouse is also the primary beneficiary of the Trust as well. The goal is to place an asset (in this case, a life insurance policy) inside the trust that can accumulate assets for retirement while also serving an estate planning purpose in the event of your death. The Trust can be structured so the contributions made to the trust are considered gifts to your loved ones so you can not only minimize your taxable estate, but also provide added protection for your loved ones. And best of all, if your family needs retirement income from the Trust, it may come out tax-free!

As you may know, Congress has raised the estate tax exclusion amount (the amount that you can pass on at death without owing estate taxes) to $5.12 million for 2012. But the really big news is that the gift tax lifetime exemption is also increased to $5.12 million. However, in order to take advantage of the gift tax exemption, most strategies require that you give the assets away, either outright or via a trust that is irrevocable and without an ability to get the asset back. This is not an attractive idea for many who are concerned that they may someday need the gifted funds. The SLAT strategy allows you to take advantage of the gift tax exemption, while retaining some access to the funds.

The SLAT provides a creative way to access life insurance cash values while having the death benefit excluded from the estate. Benefits provided by a SLAT include the following:

* Family Protection
* Tax-deferred savings
* Estate tax-free accumulation
* Supplement retirement savings
* Asset protection
* Generational tax planning
* Liquidity

Who is an ideal candidate for a SLAT?

*You are maximizing your retirement plan contributions
*You would like greater income tax deferral
*You wish to protect assets and your loved ones
*You own life insurance that a spouse is the beneficiary
*You wish to transfer assets without getting hit with estate taxes.

How Does a SLAT Work?

One spouse creates a SLAT for the benefit of the other spouse (you want the beneficiary spouse to be the one with the longer life expectancy), in this case the wife, funding it with an amount up to his available gift tax exemption and naming the other spouse as the trustee of the trust. The trustee may make distributions for the health, education, maintenance and support of the beneficiaries, including the spouse herself! Thus, the couple (even if technically, just the wife) retains access to the funds in the trust. Upon the eventual death of the wife, the appreciated value of the trust can pass estate tax free to the remaining beneficiaries, usually the children.

A drawback of this type of trust is that if the wife dies first, the trust assets will generally become inaccessible to the husband. A possible strategy is to purchase life insurance on the life of the beneficiary.

There are some pitfalls that you have to avoid in order to receive the full benefit of this type of trust. In order to avoid inclusion of the SLAT assets in the estate of the beneficial spouse, the trust should be funded with separate property of the grantor spouse.

After the policy is in force, the wife (i.e. non-insured spouse) has access to policy account values through loans, withdrawals and distributions subject to the trust provisions of health, education, maintenance and support (“ascertainable standard”.) Additionally, many of these Irrevocable Life Insurance Trusts contain what is commonly referred to as a “5 and 5” power. This special power allows the wife beneficiary, through ascertainable standard language that gives the trustee power to make distributions to the spouse, and by the grantor’s giving the trustee “sprinkling powers” to direct trust income and assets to the wife at his discretion.