Spousal Remainder Annuity Trust ("SRAT")
When a couple’s
financial assets have reached a level of at least twice the
applicable exemption ($1,350,000 as of 2000) it is appropriate
to investigate planning vehicles to supplement the classic
Revocable Living Trust utilizing the Marital Trust and Family
Trust concept. One vehicle which we recommend is the Spousal
Remainder Annuity Trust (“SRAT”).
Example:
Husband
creates an irrevocable trust for wife with $300,000 in assets.
Husband applies $300,000 of his $675,000 applicable exemption
amount to the gift in order that no gift tax is payable. Each
year thereafter for 10 years husband transfers $10,000 to
the SRAT and claims the $10,000 annual exclusion from gift
tax for the transfer. If the trustee earns 7% on the investments,
the SRAT will be worth approximately $738,000 in ten years.
The trust agreement provides that the trustee (who may be
the wife) (i) pays income to wife, (ii) may retain and grow
the trust principal, or (iii) may distribute principal to
the wife for her health and maintenance. Upon the death of
the wife, the trust property may pass to the children.
The SRAT
therefore has the following advantages:
- The value
of the assets used to fund the SRAT and all the subsequent
appreciation should be excluded from both the husband’s
and wife’s estate for federal estate tax purposes.
- The income
and principal of the SRAT should be available to the wife
should the need arise in the future.
- The SRAT
may include a special power of appointment that would allow
for a change in the distribution pattern to be accomplished
during the husband’s life.
- The SRAT
is taxed for income tax purposes as if the income were earned
by the husband. Therefore, there are no adverse income tax
consequences to the establishment of the SRAT.
- It is
possible for both the husband and the wife to establish
SRATs as long as the reciprocal trust doctrine is avoided.
- The SRAT
has the following disadvantages:
- It requires
independent administration and operation.
- If the
wife (in example above) dies before the husband, the assets
are distributed in accordance with the terms of the trust
(in our example above the children) and therefore, are no
longer available to the husband.
There are
two situations where this technique is particularly attractive.
FACTS:
Husband and wife (both retired), each age 60, have $1,000,000
in non-retirement plan financial assets, a $250,000 residence
and husband has a $1,000,000 IRA which includes a roll-over
from his former employer’s 401(k) plan. Properly, husband
and wife have historically divided their non-IRA assets so
that approximately one-half (1/2) of the value thereof is
in each of their Revocable Living Trusts (i.e., each Revocable
Living Trust has $675,000 in value), utilizing the Martial/Family
Trust concept.
OPTION
1:
The husband
and wife make no change in their current plan, and (1) their
assets grow at a rate of 7%
per year; (2) the husband dies in 10 years; and (3) the
wife dies in 15 years.
Result:
The total federal estate tax payable upon the second death
is approximately $2,052,556.
OPTION
2:
(1) The
assets still grow at a rate of 7% per year; (2) the husband
still dies in 10 years; and (3) the wife still dies in 15
years, except the wife creates a $200,000 SRAT for the benefit
of the husband; wife contributes $10,000 to the SRAT each
year after its creation for the 10 years the husband lives.
Husband withdraws $25,000 more from the IRA than he currently
withdraws (at an income tax cost of $7,500) and places the
$17,500 after tax withdrawal in the wife’s trust to begin
to replace the $200,000 utilized by the wife to fund the
SRAT.
Result:
The total federal estate tax payable upon the second death
is approximately $1,769,731.
Conclusion
THEREFORE,
ONLY A $200,000 SRAT PROVIDES AN EXTRA $280,000 FOR THE FAMILY
THAT WOULD HAVE OTHERWISE BEEN PAID IN FEDERAL ESTATE TAX!
