Attorney at Law Magazine Baltimore — Vol 1 No 5
Maximize Your Retirement Savings While Reducing Estate Taxes
Most of us think our retirement income is going to come from a 401(k) or IRA. They are wonderful retirement vehicles that create tax-deferred savings and are not subject to income taxes until withdrawn. Most, if not all of those withdrawals occur in retirement when theoretically your income tax rates are lower. However, let me pose some questions that you should be thinking about.
• Are you maximizing your retirement plan contributions and still want to save more?
• With the current economic climate that we are enduring, how long will the federal capital gains tax rate stay in the 15-20% range?
• How likely is it 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 70.5?
• Do you live in a state that has a state estate tax (such as Maryland)?
Say hello to the spousal lifetime access trust (SLAT), a trust that names your spouse as the trustee and controller of the assets within it. Your spouse is also the primary beneficiary of the trust during his/her lifetime allowing access to the assets in the trust. The concept of the SLAT is fairly simple. It operates like a bypass trust, but is funded during your lifetime instead of at your death. The goal is to place an asset (life insurance, cash, stock, real estate) inside the trust so that the asset can accumulate in value over time. By placing the asset in the trust, you are removing the asset from your taxable estate, thus reducing your potential estate tax liability. However, because your spouse is the trustee and the primary beneficiary, he/she not only controls the trust, but can also access the assets if necessary. Thus, the assets can be used for retirement while also serving an estate planning purpose in the event of your death. The trust is structured so that contributions made to the trust are considered gift s. This serves to not only minimize your taxable estate, but also provide added protection for your loved ones.
In addition to investment accounts and real estate, a common asset to put in a SLAT is life insurance with cash value. If cash value is being withdrawn for income purposes, a portion of this income would be tax-free. Furthermore, the death benefit is excluded from your taxable estate. It is also important to note that the assets are now in a trust, which provides asset protection for your spouse and children. As long as the assets remain in trust, they are protected from litigation, divorce and creditors. In addition, the assets are exempt from estate taxes at your children’s passing.
So who would be a good candidate for a SLAT?
• You are maximizing your retirement plan contributions.
• You would like greater income tax deferral.
• You wish to protect assets left to your loved ones.
• You own life insurance of which your spouse is the beneficiary.
• You want to reduce your taxable estate and minimize estate taxes.
• You live in a state with a low estate tax exemption.
A common estate planning strategy is to have each spouse create his/her own SLAT so that each can access his/her spouse’s trust during lifetime while also avoiding estate taxes. The caveat to this strategy is the “reciprocal trust” doctrine, which can cause the trusts to be taxable in the original donor’s estate. Fortunately, this can be avoided, but an adviser with experience and knowledge of drafting spousal lifetime access trusts should be consulted to ensure proper design.
Securities offered through Triad Advisors, Member FINRA/SIPC. Advisory services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. Dionot is a licensed attorney, but not practicing.
As a family wealth adviser, Chris specializes in providing advanced estate planning strategies, business succession plans and independent wealth management and retirement advice. Chris earned his bachelor’s degree from Boston College in political science and philosophy and his Juris Doctor from the University of Baltimore School of Law. Chris has been recognized twice as a 2016 Five Star Wealth Manager featured in Baltimore Magazine. Chris lives in Silver Spring, Maryland with his wife, Kristen, and their son, Aidan.