The Financial Planner

Is a Spousal Lifetime Access Trust for You?

A SLAT (Spousal Lifetime Access Trust) is an irrevocable trust created to benefit one’s spouse during his or her life, and then provide an inheritance for the children.

Assets are removed from an individual’s estate and transferred to an irrevocable trust with the spouse as the primary income beneficiary. In some cases, the spouse can also be the trustee.

The purpose of the SLAT is to allow the donor indirect access to the trust income through his or her spouse and it can provide a tax-free inheritance to heirs.

SLATS have been used in recent years to move more money out of one’s estate while the lifetime exemption is at an all-time high of about $13 million, and prior to the sunset of the Tax Cuts and Jobs Act (TCJA) at the end of 2025 when the exemption will return to pre-2017 levels adjusted for inflation (about $6.2 million). The IRS has clarified that gifts made under the TCJA will be grandfathered.

How SLATS are Funded and Taxed

SLATs are often funded with life insurance through annual gifts to pay premiums. In this situation, someone other than the insured must serve as trustee. They can also be funded with closely held business interests or stock. Gift-splitting would not apply to a SLAT because one spouse is the beneficiary, so it would be funded with only the donor’s annual exclusion amounts and use of a Crummey power to allow the gifts to pay premiums. Crummey power allows an individual to receive a gift that is not eligible for a gift-tax exclusion and convert it into a gift that is eligible.

The spouse can access the life insurance policy’s cash value for income during life, and the death benefit remains outside of the estate. Think of a life insurance SLAT as an ILIT (Irrevocable Life Insurance Trust) with the ability of the donor’s spouse to obtain income. A SLAT is a type of grantor trust, meaning the grantor would report the taxable income on his or her tax return. Using life insurance to fund the trust provides an advantage in that loans and/or the withdrawal of cash value from the life insurance policy is income tax free (subject to certain limitations).

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The Financial Planner

Should You Pay Off Your Mortgage Early?

As a homeowner, you may have heard that it is wise to pay off your house before you retire. However, is this always a good idea? Paying off your mortgage early could cost you more in the long run, especially if you don’t have enough liquid assets to draw on for living expenses or to cover a possible emergency. If you invest the extra mortgage payments into other long-term investments like a diversified stock and bond portfolio, you likely will earn more than the interest you would save by paying off your mortgage early.

Staying Liquid is the Priority

Paying more toward your mortgage tends to reduce your liquidity. You will have less cash available for emergency costs, other necessary expenses, or debts. Your mortgage interest rate may be the lowest interest rate available to you compared with other loans like a home equity loan, car loan or a credit card. You don’t want to be in a situation where you would have to borrow money at a higher interest rate to cover expenses you could have paid by not making extra mortgage payments. You also do not want to take money out of retirement accounts which may require tax payments and possible penalties (if you are under 59½). It is advisable to have three-to-six months of living expenses in cash, and if you are nearing retirement, potentially more (one-to-two years).

Consider Investing for a Higher Potential Return

“For investments to make more sense than paying off a mortgage early, the annualized rate of return over a certain number of years would only need to make more than the mortgage interest.”[1] The average annual return for the S&P 500 since 1971 has been 7.58%―or 10.51% with dividends reinvested.[2] A balanced portfolio that includes stocks, bonds and alternatives funds would have a slightly lower return rate. However, it might be quite possible to earn more than a 4% or 5% mortgage interest rate. If you have ten or more years before retirement, you may find that your money would be more productive invested than sitting in equity in your house.

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The Financial Planner

Protection for Your Money

Headlines about bank collapses have gripped the news. The Silicon Valley Bank failure has caused many of us to wonder about the safety of our money at our own banks. How can you protect your money from a possible bank collapse?

Three agencies that offer protection for our wealth are Federal Deposit Insurance Corporation (FDIC) for bank accounts, National Credit Union Administration (NCUA) for credit union accounts, and Securities Investor Protection Corporation (SIPC) for brokerage accounts. These protections guard against losses caused by business failures of the bank, credit union, or brokerage firm.

Three Types of Protection for Your Wealth

Federal Deposit Insurance Corporation (FDIC)

The FDIC is an independent agency of the U.S. government and was established in 1933 after a series of bank failures during the Great Depression. The stock market crash of 1929 triggered over 9,000 bank failures by March 1933, ushering in the worst economic depression in modern history.[1]

In the 1930s, the FDIC helped stop the “run on banks” by insuring bank accounts up to $2,500. Currently, the FDIC insures bank accounts up to $250,000 at any U.S. bank. FDIC insurance is backed by the “full faith and credit of the U.S. government.”[2]

How does the FDIC (Federal Deposit Insurance Corporation) work? The amount of FDIC coverage depends on the FDIC ownership category. These ownership categories include single accounts, joint accounts, certain retirement accounts and employee benefit plan accounts, trust accounts, business accounts and government accounts. All single accounts owned by the same person at the same bank are added together and insured up to $250,000. A married couple is eligible for $500,000 protection on a joint bank account and $250,000 for each individual account, for a total of $1 million in coverage at a single bank.[3]

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The Financial Planner

The New SECURE Act 2.0 Has Many New Options for Planners and Savers

Congress has packed a lot into the SECURE Act 2.0 recently signed into law at the end of 2022. We are highlighting a few planning opportunities that are actionable in 2023, and some starting in 2024. We’ll cover many of the other future rule changes and enhancements that may be of interest from time to time in 2023.[1-2]

RMD Starting Age Moved Back Again

Congress has again pushed back the age at which you must begin taking RMDs (required minimum distributions) from your IRA as per the chart. This means that in 2023 no retirement account owners will have to start RMDs based on their age. The good news for planning purposes is that you will have more years to consider making Roth conversions prior to beginning RMDs. With a Roth conversion, you pay income taxes on the amount converted from a traditional IRA to a Roth. However, unlike an RMD, you decide on the amount of income you want to take. This allows you to distribute just enough income from your IRA to fill up lower tax brackets. Once in the Roth, all future growth and distributions are tax free. 

RMD Mistakes have Lesser Penalties

Starting this year and going forward, the 50% penalty for missing an RMD or not taking enough of a distribution is reduced to 25%. Plus, if the shortfall is made up within a “correction window”, the penalty is further reduced to only 10%. The correction window (in most instances) starts January 1 of the year following the missed RMD and ends December 31 of the second tax year after that. 

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The Financial Planner

Revocable Trusts: Common Questions and Answers

Who Needs a Revocable ("Rev" or Living) Trust?

Anyone who wants privacy, continuity of financial affairs and to avoid probate should consider establishing a revocable trust. Probate is expensive and takes a long time — it may tie up assets for months or even years after the person passes. It is a public proceeding where the decedent’s assets and heirs will become part of the public record. Today that includes the Internet.

People with property in more than one state will have to go through probate court in every state where property is located. A revocable trust, also called a living trust, is a very simple way to bypass this and ensure continuity in the management of financial affairs at one’s death. 

What Is a Revocable Trust?

It is a legal entity—a trust— that represents your wishes. One way to think of it is as a service provider that holds the assets you give it and follows your instructions during life, and then distributes the remaining assets to your heirs according to your wishes at death with no intervention from anyone including probate court. A revocable trust can be changed or revoked at any time during your life. At your death the trust becomes irrevocable, and it serves as the “will” for all assets that are titled into the trust.  

In trust terminology, the person creating the revocable trust is the grantor, the person making the decisions for the trust is the trustee, and the person who benefits from trust assets is the beneficiary. With a revocable trust, the grantor holds all three roles during life. At death, a successor trustee takes over, normally a spouse or relative, and the beneficiaries you named receive the distributions in the manner you stipulated. 

During life, all income from revocable trust assets is taxed to you, the grantor. That makes revocable trusts tax neutral – no tax benefits or disadvantages as compared with individual ownership of an asset.  You don’t need a separate tax ID as you file your return under your name and social security number as usual.

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