WHAT IS AN ACCESS TRUST? An Access Trust is a specially drafted ILIT for married couples who want to: ⢠Keep life insu
Access Trusts USING LIFE INSURANCE TO ACCUMUL ATE, ACCESS, AND TRANSFER WE ALTH
The Prudential Insurance Company of America, Newark, NJ. 0257428-00003-00 Ed. 12/2016 Exp. 06/20/2018
ACCESS TRUSTS
The challenge of providing a legacy while maintaining flexibility
RECENT TAX LAW CHANGES The American Taxpayer Relief Act of 2012 (ATRA) made permanent changes to estate, gift, and generation-skipping transfer (GST) taxes starting in 2013. Some estate strategy highlights are that it:
A financial legacy is important to you. You want to be sure that your loved ones ultimately receive your wealth—without an accompanying tax burden. Experience, however, has taught you that the only safe prediction is that life is unpredictable. You need a strategy that’s flexible, so you can maintain access to your assets in life. For transferring wealth, permanent life insurance can be an appealing strategy because it: • Provides estate liquidity through a death benefit that may be significantly greater than the cumulative premiums paid, depending on age and health upon purchase. • Has a death benefit that is typically received income tax-free. • Can also be estate tax-free if ownership is properly structured within an Irrevocable Life Insurance Trust (ILIT). • Features cash value with tax-advantaged accumulation potential that can be accessed through withdrawals and loans at any time, for any reason.1 However, the dilemma you may face is that removing the death benefit from your federally taxable estate through the use of an ILIT usually restricts your flexibility by making the policy cash value inaccessible. Employing an Access Trust strategy can help.
• Maintains unification of the estate, gift, and generationskipping tax applicable exclusion amounts.
WHO ARE ACCESS TRUSTS FOR?
• Continues to index the applicable exclusion amount for inflation. In 2017, the exclusion is $5,490,000 or $10,980,000 for a married couple.
• Are married.
• Sets the maximum rate for estate, gift, and generation-skipping tax at 40%. • Permanently maintains the portability provision that makes any applicable exclusion amount remaining unused after the death of the first spouse generally available to the surviving spouse. A timely filed federal estate tax return is required, even if no taxes are due, to qualify portability of the decedent’s unused applicable exclusion amount.
You may be ideally suited for an Access Trust if you: • Are 55 to 85 years old. • May have an estate value subject to federal estate tax. • Want to maximize the benefits of annual federal gift tax exclusions. • Want to reduce the income and estate tax consequences of transferring assets to beneficiaries. • Are reluctant to create an estate strategy for fear of losing control and wanting access to assets during life.
WHAT IS AN ACCESS TRUST? An Access Trust is a specially drafted ILIT for married couples who want to: • Keep life insurance proceeds outside of their estate. • Allow one spouse indirect access to the trust’s life insurance policy values through the trustee.
Unpaid loans and withdrawals will reduce cash values and death benefits and may have tax consequences.
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Typically in an Access Trust, one spouse is the grantor and the other is not. This trust is also known as a Spousal Lifetime Access Trust (SLAT). Using gifts from the grantor, the trust purchases either a single-life policy insuring the grantor or a second-to-die policy insuring both spouses. The non-grantor spouse will retain the ability to access the life insurance policy values through the trustee, because the non-grantor spouse is a beneficiary of the trust. This benefit can persist throughout the non-grantor spouse’s lifetime. It is important to note that the grantor spouse should contribute separate property to the trust. By doing so, the non-grantor spouse should have no ownership in the property and be able to benefit from this trust.
HOW AN ACCESS TRUST WORKS
HUSBAND OR WIFE
• Grantor spouse creates and makes gifts to the Access Trust. Annual and lifetime gift-tax exemption amounts can be used; otherwise, gift tax may be incurred.
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GRANTOR SPOUSE
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ACCESS TRUST 3
WEALTH ACCUMULATION AND ACCESS
• Trustee uses gifts to purchase a life insurance policy insuring either the grantor alone or both spouses, through a second-to-die policy. The non-grantor spouse is a trust beneficiary.
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• Trustee can make distributions to the non-grantor spouse during that person’s lifetime, providing the nongrantor spouse with indirect access to policy values in the trust.
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• Access Trust receives the death benefit free of both income and estate taxes when the grantor dies, if a single-life policy is used. If the trust owns a secondto-die policy, it will receive the death benefit of a joint policy when the second death occurs. Trust beneficiaries can then receive wealth through the trust, income and estate tax-free.
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WEALTH TRANSFER
IN SUMMARY, ACCESS TRUSTS ARE A WAY FOR YOU TO: • Create an ILIT. • Allow you or your spouse indirect access to policy cash values. • Keep death benefit proceeds free from income and estate tax for beneficiaries.
ABOUT LIFE INSURANCE Life insurance policies contain fees and expenses, including cost of insurance, administrative fees and premium loads, surrender charges, and other charges or fees that will impact policy values.
ACCESS TRUSTS
NOTES ON ACCESSING CASH VALUES Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy’s account value and death benefit. The value may be worth more or less than the original amount invested in the policy. Assuming a policy is not a Modified Endowment Contract (MEC), withdrawals are taxed only to the extent that they exceed the policyowner’s cost basis in the policy and usually loans are free from current federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. A MEC occurs when premium funding of a policy in relation to the death benefit provided exceeds federal guidelines for life insurance.
HOW PRUDENTIAL CAN HELP Prudential offers a wide range of insurance products that can help your family meet not only the liquidity needs of your estate but also other potential family financial needs. Whether you have estate tax obligations or other concerns, Prudential can help.
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