Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a married wealthy client who is purchasing permanent insurance on his life.  He wants the insurance to be excluded from his taxable estate, but also wants access to the policy’s cash values during lifetime.  Is it possible to do both?

Answer: Normally, if the insured wants to exclude the death benefit of an insurance policy on his life from his taxable estate, the insured must give up ownership rights in the policy in favor of a third party.  Commonly used third parties are adult children or irrevocable life insurance trusts (ILITs).

If the insured creates an ILIT to own life insurance for the purpose of estate tax avoidance, the trust must not give the insured any right to reach in and enjoy the assets during the insured’s lifetime.  Since that’s the case, the insured normally can’t achieve both estate tax exclusion and lifetime access to a policy’s cash value.

However, if the insured is in a stable marriage, access may be achieved indirectly through the insured’s spouse.  So, for example, if the insured creates an ILIT to own a permanent life policy, the ILIT may allow the insured’s spouse to have some access to the policy’s cash value during the lifetimes of the insured and the insured’s spouse.  This kind of ILIT is sometimes referred to as a spousal lifetime access trusts (SLAT).

The technique has some drawbacks.  The trust needs to be carefully drafted and funded to avoid inadvertent inclusion of the life proceeds in the estate of the insured.  Also, if the couple gets divorced or if the spouse dies before the insured, access to the policy’s cash values may be lost.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.