30 Nov Spousal Lifetime Access Trust

Phelps LaClair is an estate planning law firm serving Chandler, Mesa, Phoenix and Scottsdale. We help our clients to protect the wealth they have labored to build, and to pass it on to succeeding generations. With another presidential election on the horizon for 2020, many people are examining their tax liability in case the election affects the gift tax exemption. It is currently set at $11.4 million dollars. Several potential candidates propose to lower it to $1 million. How would this affect your tax situation, and what steps can you take to protect your assets?

Plan ahead!

Planning ahead is the best strategy, no matter what happens. When you understand your goals, timing becomes much clearer. If one of your goals is to maximize the lowered exemption for tax purposes, what happens if the gift tax exemption remains the same? Is your plan still working? Gifting assets to an irrevocable trust, for instance, may not be of benefit under an unchanged tax exemption. It will, however, provide asset protection against liability.

You might need to access some of the funds in the irrevocable trust to cover future needs. When the trust is created, you need to include ways to access those assets in case of medical costs or unforeseen expenses. There are several ways to do this while protecting those assets from tax law changes and liability. Examples include a grantor trust that enables you to be reimbursed for income taxes paid. Or a trust that enables you to borrow money from the trust. Or a spousal lifetime access trust that allows distributions to your spouse.

Spousal Lifetime Access Trust

With this trust, the trustor’s spouse is a lifetime beneficiary of the trust. The spouse can also be named as the trustee. The assets of the trust are protected from your creditors because you are not an eligible beneficiary and cannot receive distributions. They are also protected from your spouse’s creditors by using discretionary trust provisions available under Arizona law— because the spouse is a named beneficiary. And because he/she is an eligible beneficiary, he/she can receive distributions from the trust when there is a legitimate need.

Suppose both spouses set up a non-reciprocal spousal lifetime access trust. They then fund those trusts with assets equal to half of their community property. Now they are both covered as beneficiaries of each others’ trusts. What comes into play at this point is any change in the gift tax exemption. If this is the case, some of the trusts’ assets may become subject to estate tax, dependent upon the new gift tax exemption amount.

Crystal ball thinking

No one can predict the future. But we do know there are two inevitables: death and taxes. Estate planning deals with both of these complicated issues. As an estate planning law firm, Phelps LaClair has been designing custom estate plans for forty years. While we can’t see the future with utmost clarity, you can rely on our extensive experience to guide you into the best solutions for your goals and unique situation. Call us for a free first consultation. We will be happy to explain in greater detail how to protect your assets, minimize your tax and liability exposure, and gain great peace of mind, no matter what the future holds.

Images used under creative commons license (Commerical Use) 11/30/2019 Photo by Nicole De Khors from Burst