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Considering a Spousal Limited Access Trust?

Spousal Limited Access Trust

Saving and preserving wealth for younger family members is an important aspect of estate planning. Developing a strategy that removes assets from your individual estate while still providing some access in the event that your spouse would ever need it is a common desire.  A Spousal Limited Access Trust (SLAT) is a great estate planning tool that makes it possible for the spouse to receive all or part of the assets transferred into the trust, while still removing the assets from your estate.  SLATs are a great way to utilize married couples combined gift tax exemptions of $10.86 million while retaining some access to the gifted assets.

What is a SLAT and How Does It Work with Life Insurance?

A SLAT is essentially an Irrevocable Life Insurance Trust with distinctive requirements to provide for one’s spouse. This allows for the grantor to gift to the trust, which purchases a life insurance policy that is held outside of the estate to avoid federal estate taxes. Once the Irrevocable Life Insurance Trust (ILIT) and grantor are established, the grantor makes gifts to the trust which purchases a single life insurance policy on the grantors life, or a joint survivorship life policy on the couple. Note that the spouse cannot contribute to this trust, as it would then be considered hers for estate tax purposes.  By adding supplemental provisions, the trustee may make distributions on behalf of the non-donor spouse which can ease wealth transfer planning with clients who fear needing additional income in the future. At the time of the insureds passing, the death benefit of the policy is paid to the beneficiaries, which is income and estate tax free.

As noted, this may be a very advantageous strategy for those who are married seeking tax benefits and seamless wealth transfer, while still maintaining income during retirement. By implementing a SLAT, couples have increased confidence that the monetary benefit will not run low, nor will estate taxes diminish the heir’s endowment of the deceased’s death benefit.

Why fund a SLAT with Life Insurance?

By purchasing a life insurance policy to fund a SLAT, one reaps many benefits and it can be strategic to consider an option such as this.  As always, life insurance is income tax-free upon the death benefit distribution.  Not only is the death benefit income tax-free, but the cash value accumulation is also income tax-free. Also, the funding of the life insurance policy is essentially “self-completing” in the sense that the policy’s death benefit will be paid in full if the insured passes away prior to the premiums being paid in full.