Spousal Lifetime Access Trust A Gifting Strategy for Careful Donors

The Dilemma of Large Gifts You may be thinking about making a large gift to your children or grandchildren. Logically the gift makes financial sense. Some of your friends have already made such gifts. Your tax advisors assure you it’s a wise decision. But deep down you’re not sure. It seems to make sense now, but what if things change? Will it still make sense if: (1) your financial situation changes, or (2) if your objectives change or (3) if the tax laws change? You know that once you make a gift, you can’t take it back. It’s gone forever. Wouldn’t it be great if there were a way to make the gift and somehow retain the ability to get it back? You’d feel much more comfortable if you had the flexibility to “undo” the gift later if you needed to. So would your spouse.

Make Gifts Through a Trust Even though you can’t take back a gift once you’ve made it, it is possible to make a gift in a way that could put your spouse in a position to “undo” the gift. When you make your gifts through a Spousal Lifetime Access Trust (SLAT) and name your spouse as a beneficiary, you can make it possible for your spouse to receive money from the trust. With your trustee’s help, it may be possible for your spouse to retrieve all or part of any gifts you’ve made to the trust!

What Is a SLAT? A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust designed to preserve and pass on family wealth to younger family members. In addition to your children (and possibly grandchildren), you can name your spouse as a beneficiary. Your SLAT can be drafted with several provisions that allow the trustee to distribute trust assets to your spouse and those distributions can precede distributions to the other beneficiaries. In fact, you may structure your SLAT so that the trustee is not allowed to make distributions to other beneficiaries while your spouse is alive. Distributions to your spouse can potentially result in the removal of some or all of your gifts from the trust. These provisions effectively position your spouse as the trust’s “first” beneficiary.

How Can Your Spouse Be a “First” Beneficiary? Your SLAT can include provisions that create potential opportunities for your spouse to remove/receive assets from the trust without causing him/her to be treated as their owner for tax purposes. The trust won’t provide these opportunities to any other beneficiaries during your spouse’s lifetime. SLATs often have two general ways to distribute assets to your spouse: 1. Distributions Your Spouse Controls Your spouse may be given some opportunities to take money out of the trust without anyone else’s consent. They include: • The annual option to receive all of the trust’s income, and • The annual option to withdraw the greater of $5,000 or 5% of the trust’s assets (sometimes called a “5 X 5 power”).

2. Distributions the Trustee Controls The trustee is a fiduciary who must follow the terms of the trust. If the trustee is independent (not beholden to, controlled by, or subservient to you as the grantor), he/she/it can be given unlimited discretion to distribute trust assets to your spouse. In fact, an independent trustee’s discretion could potentially be used to distribute ALL the trust’s funds to your spouse. Although it is seldom recommended, you could name your spouse as the trustee. If your spouse is both a trustee and a beneficiary, he/she would be treated for tax purposes as the owner of all the trust assets. This may be prevented by restricting the spouse-trustee’s ability to make discretionary distributions to him/herself to what attorneys call an “ascertainable standard.” The spouse-trustee’s discretion would be restricted so distributions could only be made for purposes of health, education, support and maintenance. Whether a SLAT trustee is independent or not, all distributions to the spouse are discretionary. The trustee has the power to make them, but is not required to do so. Depending on your spouse’s circumstances, distributions for health, education, support or maintenance could potentially be quite substantial. SLATs sometimes include additional provisions to guide trustees in how and whether to use his/her/its discretion. For example, the trustee could be instructed to take into account your spouse’s other assets, income or personal net worth. In the alternative, the trust could direct the trustee to be liberal in using discretion and to make distribution decisions without considering your spouse’s other assets or income.

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SLATs and Life Insurance Well-to-do people often consult with experienced tax and legal advisors in deciding how pass on their wealth. Although there are many financial products and strategies available, when they are healthy, they often use life insurance as a component of their wealth transfer plans. Life insurance can be an effective tool for passing on family wealth for a number of reasons, including the facts that the premiums are usually paid in a series of installments and that policy death benefits are generally federal income tax free under IRC Section 101. To insulate the policy’s death benefits from federal estate taxes, they often use irrevocable life insurance trusts (often called “ILITs”) to own and manage their policies. Donors make gifts of cash to the ILIT and the trustee uses those gifts to pay the policy premiums. Like SLATs, ILITs are irrevocable trusts that generally have several beneficiaries. If their circumstances or objectives change, insureds often want the security of knowing they have the potential to recover some or all of the money they have given to the trust over the years to pay premiums. This can be accomplished by including SLATlike distribution provisions in the ILIT trust agreement. The grantor’s spouse can be positioned as the “first” beneficiary and be given the ability to receive regular and discretionary distributions during life. Including these provisions in an ILIT can make it more flexible and increase its ability to meet both spouses’ needs. When an ILIT is designed to assist the grantor’s spouse as the first beneficiary, the trustee should strongly consider using a policy designed to produce reasonable cash values. That’s because the trustee may have to distribute funds to the spouse prior to the payment of the death benefit. If early distributions are needed, the trustee needs to be sure cash can be obtained from the policy* without materially jeopardizing its long-term performance. Term insurance policies and guaranteed death benefit universal life insurance policies usually don’t produce much in the way of distributable cash values. On the other hand, indexed universal life policies and variable universal life policies provide the opportunity to build cash values. They may make it easier for trustee to accomplish the trust’s goals. * Policy loans and partial withdrawals may vary by state, generate an income tax liability, reduce available surrender value and death benefit or cause the policy to lapse.

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How Could You Recover Gifts You Made to Your Trust? Although there won’t be any provisions in a SLAT that allow you as a donor to recover any gifts you’ve made, your spouse could facilitate their recovery for you. Your spouse could exercise his/her distribution rights and the trustee could use its discretion to distribute funds to your spouse for health, education, support or maintenance. Once your spouse receives the distributions, he/she could gift all or part of them back to you. Such a gift may be gift tax free if it qualifies for the gift tax marital deduction under IRC Section 2056. Thus, with your spouse’s help, you could recover gifts you made to the trust.

Here’s How the Spousal Lifetime Access Trust Strategy Works

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Grantor creates the Spousal Lifetime Access Trust and makes gifts to the trust; the grantor’s spouse is one of the trust’s beneficiaries.

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Trustee uses the gifts to purchase a cash value life insurance policy on the grantor and pay the policy premiums; death benefits are paid to the trust when the grantor dies.

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Each year the trust allows the Spouse to elect to receive all trust income and/or to demand the trustee distribute the greater of $5,000 or 5% of the trust’s assets.

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Each year the trustee has the discretion to distribute additional assets for the spouse’s health, education, maintenance and support.

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Spouse may elect to gift or share any distributions from the trust with the grantor.

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After the spouse’s death, the trustee may make distributions to the other beneficiaries according to the trust’s directions.

Life Insurance Company

Grantor

Spousal Lifetime Access Trust

Grantor’s Spouse

Other Beneficiaries

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Some Possible Advantages SLATs have a number of advantages. Some of them include: • Potential for Recovery of Gifts—Through a spouse, the trust creates an opportunity to recover gifts previously made to an irrevocable trust. • Peace of Mind for You—Knowing that gifts to the trust could possibly be recovered if circumstances change can increase your comfort level with the gift. • Increased Financial Security for Your Spouse—The fact that the spouse’s distribution rights last for life means potential access to trust’s assets continues even if the donor dies. • Peace of Mind for Your Spouse—Your spouse may have greater comfort level with wealth transfers when he/she has access to the gifts and can undo them if there is a need to do so.

Some Possible Disadvantages SLATs also have a number of possible disadvantages. Some of them include: • Failure to Share Distributed Assets— The spouse may decide not to gift or share distributed trust assets. • Uncooperative Trustee—The trustee may decide not to make discretionary distributions to the spouse and can’t be forced to do so. • Your Spouse May Die First—The spouse’s death ends his/her distribution rights as well as the potential for the donor spouse to recover gifts made to the trust. • Divorce may terminate the spouse’s status and may end his/her ability to receive trust distributions. • Federal Estate Taxes on Distributed Funds— Funds distributed from the trust could be included in the donor’s or the spouse’s taxable estates. • You Should Only Make Gifts of Your Separate Assets—If your spouse has a community property interest or other interest in the gifted property, he/she could be considered a grantor of the trust for tax purposes.

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Example John and Carol Williams (both age 67) have been financially successful and want to pass on some of their wealth now by making a significant gift to their children. After considering several different assets for their gift, they have decided to use life insurance because of its overall potential for transferring wealth. They have decided to use a $5,000,000 policy insuring John’s life. John will create an irrevocable life insurance trust (ILIT) to own the policy. While John and Carol are quite comfortable with this strategy today, they have several concerns: • The ILIT is irrevocable and can’t be changed once it is signed. Will it be flexible enough to meet their needs over time? • It’s possible something could happen in the future which will make it impossible for the trust to accomplish what they want. If something unexpected happens, is there a way for them to change the strategy or get their money back? • They expect Carol to die last. Is there any way for Carol to have access to the policy’s cash values and death benefits in the event she needs them? • Can the trust be this flexible without having the policy death benefits taxed in either of their estates? Their attorney suggests that John’s ILIT include SLAT provisions. Carol would be a beneficiary of the trust with the ability to take distributions through her own powers or receive additional distributions through the exercise of the trustee’s discretion during her lifetime. No other beneficiaries would be able to receive distributions until Carol’s death. The SLAT provisions in the ILIT should provide the flexibility they need to respond to changes in their circumstances or objectives. Carol’s ability to have indirect access to policy cash values and death benefits will strengthen her financial security and increase her peace of mind.

Conclusion One of the possible disadvantages of transferring family wealth through lifetime giving is that once you make the gift, you can’t undo it. The gifted property is gone forever. However, if you have a loving and cooperative spouse and make your gifts through a well-drafted Spousal Lifetime Access Trust (SLAT), your gifts may be structured so that your spouse can possibly recover them if they are needed in the future. If the gifts are recovered, your spouse has the ability to share them with you. By having your spouse as your SLAT’s “first” beneficiary, you may accomplish two important objectives: pass on some of your assets to younger family members while retaining the ability to recover them if there is a need to do so. A SLAT may add an important element of flexibility to your wealth transfer plan.

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Not FDIC/NCUA Insured | Not A Deposit Of A Bank |  Not Bank Guaranteed | May Lose Value | Not Insured By Any Federal Government Agency These materials are not intended to and cannot be used to avoid tax penalties and they were prepared to support the promotion or marketing of the matters addressed in this document. Each taxpayer should seek advice from an independent tax advisor. The Voya® Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws change frequently and the strategies suggested may not be suitable for everyone. You should seek advice from your tax and legal advisors regarding your individual situation. Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and its products issued. All are members of the Voya® family of companies. ©2015 Voya Services Company. All rights reserved. CN0928-17979-1017 165391 10/01/2015

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