How to Protect your Assets with a Spousal Lifetime Access Trust (SLAT) and Life Insurance
If you’re worried about giving up control of your assets, a SLAT combined with a life insurance policy is the golden ticket.
Estate planning can be made easier with something called a Spousal Lifetime Access Trust, or SLAT. It’s become popular because it’s a useful way for couples to protect their money, pay fewer taxes, and have more financial options.
With a SLAT, you can put your money into a special trust, called an irrevocable trust, that can’t be changed. But here’s the clever part: your spouse can still benefit from it. And the best part? It might help you pay less in taxes when you pass on your money.
If you also get life insurance along with a SLAT, it can make your finances even more secure and help you plan for the long term.
A SLAT is a type of trust where one spouse, known as the grantor, creates a trust for the other spouse. The trust itself is “irrevocable” because once you put assets into it, you can’t change your mind.
The important thing to note about a SLAT is that when you put your money or property into it, it effectively removes the assets from the taxable estate, potentially reducing estate taxes upon your passing. The spouse who benefits from the trust can use the trust’s income, and sometimes even the principal, during their lifetime.
You can customize how the trust works based on what you want to achieve. For example, if you want the money to grow for future generations, you can set rules to limit how much your spouse and others can take out. On the other hand, if you want your spouse and others to have more access to the money, including for health, education, maintenance, and support (HEMS), you can set these terms up too. However, if large sums of money are taken out beyond HEMS while you’re alive, an independent trustee has to oversee the trust.
But here’s an important point: if both spouses create SLATs that look too similar, the IRS might view the SLATs as an arrangement to avoid taxes. In order to avoid violating the Reciprocal Trust Doctrine, you need to be careful and make them different in various ways, like creating them in different years, in different jurisdictions, with different assets, trustees, and provisions.
Incorporating Life Insurance into SLATs
Life insurance is an essential part of SLATs because it provides extra financial security and flexibility.
Here’s the issue with a SLAT without life insurance: when one spouse in a couple dies, the surviving spouse can only use the assets in their own trust, not the one that belonged to the deceased spouse. As a married couple they had access to both trusts.
Involving life insurance can replace this loss of access.
Each spouse’s SLAT should purchase a life insurance policy on the other spouse. When one spouse passes away, the surviving spouse still gets benefits from their own trust. Plus, they get a payout from the life insurance policy to make up for the assets they can no longer access in the deceased spouse’s trust.
Advantages of a SLAT
- Estate Tax Reduction: By transferring assets into a SLAT, you remove them from your taxable estate. This can help reduce estate taxes upon your death, as the assets in the trust are no longer considered part of your estate.
- Asset Protection: Assets held within a properly structured SLAT may be protected from creditors’ claims and shielded from potential legal actions or financial challenges.
- Lifetime Access to Trust Assets: While the primary beneficiary of the SLAT is your spouse, the trust can also allow for distributions to other family members or beneficiaries, such as children or grandchildren. This allows your spouse to have access to the trust assets during their lifetime while also providing for future generations.
- Use of Cash Value Life Insurance: By combining a SLAT with a cash value life insurance policy, you can enhance the benefits of the trust. The policy’s death benefit can provide liquidity to pay estate taxes or other expenses, ensuring that your heirs receive the full value of the assets held in the trust. Additionally, the cash value of the policy can serve as a source of tax-efficient income or provide a source of loans if needed during your lifetime.
- Flexibility and Control: Although SLATs are irrevocable trusts, they can still provide flexibility and control over the trust assets. You can determine the terms of the trust, including how distributions are made and under what circumstances. This allows you to tailor the trust to your specific needs and goals while ensuring the financial security of your spouse.
- Spousal Lifetime Access Trusts (SLATs) provide a valuable estate planning strategy for married couples. By incorporating life insurance, individuals can enhance the benefits of SLATs, ensuring financial security for their spouse and optimizing wealth transfer to future generations.
Here’s an Example of How a SLAT and Life Insurance Work Together
John and Sarah Miller, both in their early 50s, have accumulated significant wealth over the years. They have two children and are concerned about minimizing estate taxes and protecting their assets for future generations. After consulting with an estate planning attorney, they decide to establish individual SLATs.
John creates a SLAT for Sarah, and Sarah creates a SLAT for John.
By using their individual lifetime federal estate and gift tax exemption ($12.92 million in 2023) to make tax-free transfers, each SLAT is funded with $10 million worth of assets, such as cash, marketable securities, and real estate.
By transferring these assets into the SLATs, John and Sarah successfully remove them from their taxable estate.
To enhance the benefits of the SLATs, their individual SLATs each purchase a life insurance policy on the other spouse. The policies are structured to provide an initial death benefit of $ 12.9M with the death benefit increasing so that the financial needs of the remaining spouse and the children are met, and any estate taxes can be paid. The individual policies are owned by the individual SLATs, with the owning SLAT also serving as the beneficiary.
The SLAT established by John for the benefit of Sarah and their children pays annual premiums during John’s life. Similarly, the SLAT established by Sarah for the benefit of John and their children pays annual premiums on insurance during Sarah’s life.
Over the years, the cash value within the life insurance policies grows tax-deferred, providing a source of liquidity to the SLATs. In the event of John or Sarah’s death, the corresponding SLAT receives the life insurance proceeds, which can be used to pay estate taxes, provide income for the surviving spouse, and distribute assets to future generations.
The SLATs provide asset protection. As the assets are held within an irrevocable trust, they may be shielded from potential creditors’ claims, ensuring that the wealth is preserved for the benefit of their family.
By establishing SLATs and combining them with life insurance, John and Sarah have effectively reduced their estate tax exposure, provided for the financial security of their spouse, protected their assets, and ensured a smooth transfer of wealth to future generations.
Optifino Can Help
Spousal Lifetime Access Trusts (SLATs) provide a valuable estate planning strategy for married couples. Our licensed concierges can help incorporate life insurance, enhancing the benefits of SLATs. Optifino ensures financial security for your spouse and optimizes wealth transfer to future generations.