In the midst of the most critical period for potential changes in taxation in many years, WhaleRock asked Atty. Mark Iacono to write a piece on taxes and planning for High Net Worth individuals and families. Mark has been known to our firm for many years, and we were confident he would have strategies in mind that our clients and visitors to our blog would find helpful. His essay provides action ideas for year end tax planning.
3. Create a lifetime creditor shelter trust for a spouse. The greatest emotional hurdle for clients is relinquishing control of assets during their lifetimes. This is especially true when the client relies on the economic benefit (i.e. the income) derived from the assets. To address this concern, a spouse can create a trust for the benefit of the other spouse that provides for mandatory distribution of income. The trust is irrevocable so the assets will be outside the settlor’s estate along with any future appreciation. The income generated by the trust is paid to beneficiary spouse to be used by the marital couple. The trust can also provide for the discretionary distribution of principal, but this would only occur as a last resort. It is important to note, however, that when the beneficiary spouse dies, the settlor spouse is not a beneficiary and will lose any benefit of payments that were previously made to the deceased spouse. It is possible for spouses to create such trusts for each other, but the documents should not be identical or the IRS may disregard the transaction under the “reciprocal trust” doctrine.