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Retirement

Long-term care

Estate planning

Executive compensation

Business succession

Provide flexibility to preserve your client's estate

Some high net worth clients who need liquidity outside of their estate may have estates valued high enough to be subject to estate taxes and wish to protect those assets for the benefit of their spouse. A SLAT may be the best solution for such clients.

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What is a SLAT?

A SLAT is a type of traditional irrevocable life insurance trust (ILIT) with the added flexibility that allows spousal access to the life insurance policy’s cash value. Like an ILIT, it owns life insurance outside your client’s estate, keeping it from being subject to income or estate taxes.

Benefits of a SLAT

If properly administered and drafted, a SLAT:

  • May reduce both federal and state estate taxes by taking death benefit proceeds out of the estate
  • Provides liquidity at death to pay estate taxes or increase the beneficiaries’ inheritance
  • Protects the trust assets from beneficiaries’ creditors
  • May allow professional management of trust assets, with the use of an independent trustee
  • May allow an independent trustee (such as a corporate trustee) absolute discretion to make distributions to the beneficiaries

Considerations

  • Desired annual life insurance premium may be greater than annual exclusion gifts
  • If circumstances change, the grantor is not able to change the terms of the trust after it is established
  • The grantor cannot terminate the SLAT once it is established
  • Assets in a SLAT are not available for the grantor’s access or use
  • Transfers of assets to a SLAT may only be used for the benefit of trust beneficiaries
  • Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods

Target client

Married business owners who are looking for life insurance to be owned within an irrevocable trust for estate tax or asset protection reasons, but want access to the cash value and death benefit for the non-grantor spouse. They may:

  • Be married, with a desire to access to cash value inside an ILIT
  • Have or will have a federal or state estate tax liability
  • Wish to protect and grow assets outside of their estate
  • Want to protect assets from creditors
  • Want to control the distribution of assets to beneficiaries

Additional estate planning strategies

BOLD highlights several different estate planning strategies to fit your clients needs.

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How a SLAT works

A SLAT can make a traditional ILIT more flexible by providing access to the life insurance policy’s cash value to the non-grantor spouse.

Loans and withdrawals of the cash value can be used for emergencies, supplemental retirement income or other needs, while maintaining the policy’s death benefit outside the taxable estate. This is how one works:

  • Client(s) establishes a trust for the benefit of his/her spouse, and possibly other heirs. One spouse is the grantor and the other is the non-grantor.
  • The trustee purchases a single life or survivorship life insurance policy.
  • Client gifts the premiums to the SLAT, which pays the premium on the life insurance policy.
  • The SLAT strategy provides flexibility for the client’s estate planning by creating a decision point at some time in the future. For most clients, the decision point is retirement.

Clients have two choices:

With distributions

Under limitations of the terms of the trust, the non-grantor spouse may choose to take income from the trust via the cash value in the life insurance contract.

Without distributions

This individual may also choose not to take distributions and simply maintain the death benefit for estate tax purposes.

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Additional resources for SLAT and estate planning

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Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any way where it would be accessible to the general public.