The New Paradigm: Spousal Access Trusts As A Tax Planning And Asset Protection Tool

by Adler Pollock & Sheehan P.C.
Contact

At the end of 2012 with the uncertainty of what was to happen to the gift and estate tax laws, many practitioners counseled their clients to create spousal access trusts (SAT).  Although the uncertainties in the tax laws for now are no longer present, it does not mean that SATs are no longer a useful planning technique for asset protection purposes.

A SAT is a technique whereby a spouse can gift property into an irrevocable trust for the benefit of his or her spouse yet still have the assets be used to benefit the family unit.  A SAT can be used either for estate tax purposes or asset protection.  The assets in the trust can be used by the donee spouse during his or her lifetime, or the assets can remain in the trust as a safety net for the donee spouse in case he or she needs them, or, if the donee spouse does not need them during his or her lifetime, the assets can remain in the trust to grow for the benefit of both spouses’ descendants.  Remember when creating a SAT is that if the donee spouse dies before the donor spouse, the donor spouse may lose the benefit of the assets.  Also, there should be language in the trust that terminates the donee spouse’s interest in the event of divorce.

So, how does it all work?  The donor spouse uses his or her lifetime exemption of $5.25 million for 2013 (as adjusted for inflation) and transfers the assets to an irrevocable trust for the benefit of his or her spouse.  If the trust is set up properly, these assets will be exempt from estate taxes in both spouses’ estates.  The trust acts like a credit shelter bypass trust, the only difference being that it is created during lifetime.  Although many practitioners may determine that their clients do not have enough assets to use this type of plan, clients who live in states with an estate tax, like Rhode Island, can use this technique to avoid state estate taxes as well.   

The practitioner should be reminded when creating the trust that in order to ensure that it is not included in the client’s estate, if the donee spouse is acting as trustee, he or she cannot distribute the funds to discharge a legal obligation of the donee spouse.  The practitioner might want to counsel the client to use an independent trustee who has the sole discretion to make distributions.  This avoids inclusion and creates creditor protection.  If the trust is set up for the benefit of the spouse and descendents GST should be allocated to the trust as well. 

If both spouses are setting up a SAT be careful of the reciprocal trust doctrine.  If two people create two separate trusts where they are each the beneficiary of the other trust, the IRS will say that the trust of which they are the beneficiary will be deemed to have been created by the beneficiary and therefore included in the beneficiary’s estate.  The spouses’ two trusts have to be sufficiently different to avoid the reciprocal trust doctrine.  This doctrine is factually driven and depends upon the terms of the trust and state law.  A drafting tip to avoid this is to give one of the spouses a liberal limited power of appointment over the trust.  Or make income mandatory in one and discretionary in the other.  Finally, it might be wise to create and fund the two trusts at two different times months apart. 

There has been some discussion that the limited power of appointment given to the donee spouse may include the donor spouse.  However, there is no clear authority on this and it has not yet been tested.  Therefore, the spouses should be willing to give up the assets as a gift to the other spouse and descendants with no ability to receive the funds back. 

Finally consider the income tax consequences of creating a SAT.  The practitioner should consider making the trust a grantor trust for income tax purposes.  This could be beneficial for two reasons.  First, the trust can grow without income taxes being incurred and paid for by the trust.  Second, the donor spouse’s estate is reduced by taxes paid. 

The SAT is a helpful planning technique that every estate planning practitioner should consider using.  Practitioners may think that since couples can now transfer $10.5 million tax free and it would seem that portability is here to stay that a SAT is not needed.  However, SATs should still be considered as a useful tool, especially in states where there is an estate tax or where asset protection is critical.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Adler Pollock & Sheehan P.C. | Attorney Advertising

Written by:

Adler Pollock & Sheehan P.C.
Contact
more
less

Adler Pollock & Sheehan P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!