One of the major objections to taking action on estate planning reared its ugly head again on one of my recent cases - the patriarch of the family did not want to give up control of his assets by gifting them away.  In his case, at an advanced age and with insurability issues our answer was essentially "get over it".  It did bring to mind, however, a solution that is a great fit in other situations.

The real problem these days is making irrevocable gifts and the client subsequently wanting to change your mind if there is a change to the estate tax laws.  While we have talked about ILIT (Irrevocable Life Insurance Trust) provisions that allow for early distributions and products that have return of premium features, today we go in a different direction and look at using a different type of trust altogether, and funding it with an accumulation focused life product.

The trust in question, a Spousal Access Trust, is still an ILIT, but rather than naming only the children as a beneficiary, one of the two parents (typically the younger, healthier one) is also named as a beneficiary.  In addition, the trust language gives the trustee the power to make distributions during the grantor's life time.  This key difference is what unlocks access to trust assets and policy cash values and allows a measure of control for generation one.  In order for this to still pass the sniff test with the IRS, this type of trust must be funded with separate property owned by the grantor.  This creates some potential challenges in community property states that will need to be worked through with the client's attorney prior to executing on this strategy.

Of course, having access to policy cash values and having the death benefit outside the estate sounds great, but there are some things we need to be aware of before we march off to recommend this to a client:

• There needs to be cash in the policy!  Without it, there is no reason to execute on this strategy.
• Avoiding creating a MEC is critical. 
• Attention needs to be paid to the impact of loans and withdrawals on the ultimate death benefit.  These will almost certainly reduce the net death benefit available to the ultimate trust beneficiaries.
• Attention needs to be paid to trustee selection.  A bad decision here can create an incident of ownership
• The strategy can work with both single life and survivorship contracts.

So what do we accomplish by using this strategy?  The obvious is that there is now a policy outside the client's taxable estate to provide liquidity for estate tax mitigation.  The ability of the non-grantor spouse to access income creates a world of opportunity.  Addressing the objection of giving up control is certainly less of an issue.  If there is a change to the estate tax laws or a change in the client's net worth, they can now turn this trust into a source of income during the life of the non-grantor spouse.  This arrangement can be particularly attractive if there is a large age difference between husband and wife.  Using a single life contract on the older spouse (Sorry gents, that is usually us!) can be a fantastic way to provide both income protection and estate liquidity for the surviving spouse and the next generation.

The bottom line on this and many of the recent topics in the Rant is simple - the most important role we may play with our clients in this type of environment is motivator.  There is enough confusion around the estate tax to cause many clients to simply do nothing.  None of us are served by the client burying their heads in the sand on this issue.  Smart planning ideas can show them how to take action today that makes sense regardless of the future of the estate tax.