For families with substantial assets, estate planning is a critical strategy in safeguarding wealth and ensuring its careful distribution across generations. A Spousal Lifetime Access Trust is one of the more advanced tools available to reduce estate taxes while maintaining flexibility for both spouses.
What Is a Spousal Lifetime Access Trust?
A Spousal Lifetime Access Trust is an irrevocable trust one spouse creates to benefit the other. The assets transferred into the trust are removed from the donor spouse’s taxable estate, which helps reduce future estate tax liability. This trust protects wealth from estate taxes and allows the beneficiary spouse to request distributions from the trust for health, education, maintenance, or support.
Although the donor spouse no longer has direct control over the assets placed in the trust, the couple may still benefit from them through the beneficiary spouse. This balance of removing assets from the taxable estate while maintaining access to them makes the Spousal Lifetime Access Trust a compelling option for families with significant wealth.
A Spousal Lifetime Access Trust shares similarities with a traditional irrevocable trust, as both are designed to remove assets from the donor’s taxable estate, offering potential tax savings and asset protection. However, the key difference—and added complexity—of a Spousal Lifetime Access Trust is the ability of the donor’s spouse to retain access to the trust’s assets during their lifetime. In a standard irrevocable trust, once assets are transferred, neither the donor nor their spouse can benefit from the assets, locking them away entirely for the benefit of future heirs. On the other hand, a Spousal Lifetime Access Trust provides a unique balance: while the donor relinquishes direct control, the beneficiary spouse can request distributions to maintain their standard of living, offering indirect access to the wealth. This combination of estate tax reduction, asset protection, and continued access for the spouse makes a Spousal Lifetime Access Trust a more intricate yet highly flexible option within the broader realm of irrevocable trusts.
Benefits of a Spousal Lifetime Access Trust
Reduction of Estate Taxes: One of the primary advantages of a Spousal Lifetime Access Trust is the ability to remove assets from the taxable estate, reducing estate taxes. This is especially important as current federal estate tax exemptions are set to decrease after 2025. By transferring assets into the trust now, families can take advantage of the current higher exemption rates, securing more favorable tax treatment for future generations.
Protection of Assets: The assets in a Spousal Lifetime Access Trust are protected from creditors and potential legal claims, providing an additional layer of security. For families focused on preserving wealth across multiple generations, this protection ensures that family assets remain intact and secure from external threats.
Indirect Access to Assets: The trust still provides financial flexibility while the donor spouse no longer owns or directly controls the assets. The beneficiary spouse may request distributions to maintain their standard of living, which can indirectly benefit the donor spouse, particularly in supporting the household’s overall financial well-being.
Long-Term Wealth Transfer: A Spousal Lifetime Access Trust can effectively ensure that wealth passes seamlessly to future generations. Upon the death of the beneficiary spouse, the remaining assets typically transfer to the couple’s children, grandchildren, or other designated heirs, free of estate taxes. By transferring high-growth assets like securities or real estate into the trust, families can ensure that these assets appreciate outside of the taxable estate, maximizing the wealth transferred to future generations. This makes the Spousal Lifetime Access Trust a valuable tool for preserving and growing wealth within the family, ensuring long-term financial security for descendants.
Important Considerations for Spousal Lifetime Access Trusts
While the Spousal Lifetime Access Trust offers numerous benefits, it is important to carefully consider several factors when establishing one:
Selection of Assets: The types of assets placed in the trust are critical to its effectiveness. To maximize long-term tax savings, it is often beneficial to transfer assets with strong growth potential, such as securities or real estate. However, not all assets are suitable for inclusion, requiring careful planning.
Use of Lifetime Gift Exemptions: When assets are transferred into a Spousal Lifetime Access Trust, the donor spouse uses a portion of their lifetime gift tax exemption. When planning, it is important to factor in the total value of gifts and transfers to avoid exceeding exemption limits and triggering unnecessary tax liabilities.
Structure and Flexibility: A Spousal Lifetime Access Trust is irrevocable, meaning it cannot be changed once it has been established. Despite this, there are ways to structure the trust that allows for flexibility and adaptation to changing circumstances, ensuring that it continues to meet your financial goals as tax laws evolve.
Planning for Life’s Changes
A Spousal Lifetime Access Trust should be structured with life’s changes in mind. While the primary beneficiary is typically the spouse of the donor, it is important to consider how a change in marital status, such as divorce or the passing of the beneficiary spouse, could affect the trust’s utility.
If the couple were to divorce, or if the beneficiary spouse were no longer living, the donor spouse would lose indirect access to the trust’s assets. Therefore, this estate planning tool is best suited for families with long-term stability and a desire to ensure financial protection for future generations.
That said, the potential benefits of a Spousal Lifetime Access Trust remain significant, even if life’s circumstances change. Properly structured, a Spousal Lifetime Access Trust effectively reduces estate taxes, protects assets from creditors, and transfers wealth tax-efficiently to heirs. By combining it with other estate planning tools, it becomes an integral part of a long-term financial strategy.
Is a Spousal Lifetime Access Trust Right for Your Estate Plan?
A Spousal Lifetime Access Trust is a sophisticated estate planning tool that offers substantial benefits to families with significant assets. However, it is not the right solution for everyone. The decision to establish a Spousal Lifetime Access Trust should be made in consultation with trusted estate planning professionals who understand your financial goals, the complexities of tax law, and how this tool fits into your broader estate plan.
At Legacy Private Trust Company, our experienced team works closely with clients to create personalized estate planning strategies. We help you navigate the complexities of advanced trusts and ensure that your plan aligns with your family’s long-term financial objectives.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
