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updated: 11/16/2012 11:06 AM

Give It or Keep It (or do both)

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  • Alan Orlowsky

    Alan Orlowsky

Alan Orlowsky

Many planning professionals are talking about the fact that 2012 is a banner year for those considering the transfer of significant wealth.

As many already know, the current federal estate and gift tax exemption is at an all-time high at $5,120,000. The bad news is that it is scheduled to go back to $1,000,000 unless action is taken by Congress and the White House causing a lot of uncertainty for the second time in three years.

Some of our clients are seizing this opportunity to give away a substantial sum of money to their family. Others have decided that giving away money at this point in their lives is too stressful, not knowing what the economy or the future will bring. These families are concerned about whether they will have enough to live on if they make a substantial gift.

These last two groups of clients might find it easier to give if they were aware of a planning technique called a spousal access trust. As with most estate planning strategies, this one has some complexity, but many find the advantages of these trusts to outweigh the time and expense that comes with the complexity.

The idea is to begin by creating a trust for your spouse and "gift' or transfer assets to this trust, using your exemption to cover the gift. Your exemption is the amount of money up to $5.12M in 2012 that you can pass tax free to your heirs. Transfers that exceed $5.12M in gifts will be taxed.

If your spouse needs the money, the trustee has the power to make a distribution. If not, the trustee can hold the assets in the spousal access trust to protect them from future estate taxes.

Careful consideration must be given to which spouse should create this trust and fund it. If the beneficiary spouse passes first, the surviving spouse would lose access to the funds. Many think the best way to avoid either spouse losing access to these funds in this event would be to have each spouse set up a similar spousal access trust. This is possible, but expert guidance should be sought to ensure the language, structure and functionality of the trusts provide the desired outcome.

If you are hesitant about making such a large transfer of wealth to your children and grandchildren for fear of losing access to available funds, consider using a spousal access trust.