The accumulation SLAT: Flexibility for changing times

An accumulation spousal limited access trust offers Gen Xers the tax advantages of an irrevocable trust along with the added benefit of more options.

An irrevocable life insurance trust (ILIT) is a common estate planning technique created to own life insurance outside an estate in an irrevocable trust. However, with the ever changing nature of federal estate taxes, some married clients desire a more flexible estate planning solution. One option is an accumulation spousal limited access trust (SLAT).

A SLAT makes a traditional ILIT more flexible by providing lifetime access by the other spouse to the life insurance policy’s cash value. 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. The life insurance policy also may be protected from a client’s future creditors because it is outside of the estate.

An accumulation SLAT is designed for lifetime accumulation and estate planning flexibility in a life insurance policy outside the client’s estate. The basis of this strategy is for the clients to fund an indexed universal life insurance policy for a number of years until they reach a predetermined decision point, often the onset of retirement. Once the clients reach the decision point, they can choose to leave the policy alone for the death benefit, start taking annual distributions for supplemental retirement income or leave it as a source of funds for expenses.

Consider a hypothetical Gen X client. John, age 45, is married to June, and they have a growing estate worth $4 million. He is a successful physician, and she is a successful small-business owner. The Smiths have three children. Currently, their financial objectives are to accumulate for retirement, replace John’s income should he die prematurely and plan for potential future estate taxes. The Smiths are interested in irrevocable trusts because they place assets outside the transfer tax system and provide possible creditor protection. After being introduced to irrevocable life insurance trust strategies, they are interested in a spousal limited access trust. It provides lifetime access to cash values for June (the non-grantor spouse) and the children, while keeping the death benefit outside of the estate and providing creditor protection for June and their children.

Their financial advisor recommends purchasing an indexed universal life insurance policy with an initial death benefit of $1.1 million. The SLAT will own the life insurance policy upon issue of the contract, and June will act as trustee. As trustee, she may distribute funds from the trust to herself or the children for their health, education, maintenance and support.

John will fund the policy at $50,000 annually for 20 years until he retires. John and June “gift split” money to the SLAT in the amount of the annual premium, allowing it to be covered by their annual exclusion amounts. June can’t make direct gifts to the trust without creating an incident of ownership.

The Smith’s decision point is when John retires at age 65. At that point, they have three choices: 1) take distributions annually from the policy for the health, education, maintenance or support of the spouse and children; 2) take no annual distributions and use the cash value for future expenses; or 3) take no distributions from the policy and use the death benefit for estate tax purposes.

The accumulation SLAT can create flexibility for clients given the eventual life changes married couples face. It can create liquidity for estate tax purposes, a source of supplemental retirement income, or a source of funds for unexpected or expected expenses.

By Channing T. Schmidt, J.D., CFP for August 2012 of Life Insurance Selling Magazine. Channing T. Schmidt, J.D., CFP, is advanced marketing counsel at Minnesota Life and Securian Financial Group

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