A spousal lifetime access trust (SLAT) is a type of irrevocable life insurance trust (ILIT) that allows one spouse to transfer assets into the trust for the benefit of the other spouse. It is a popular estate planning tool married couples use to pass wealth to future generations while minimizing their potential tax liability and still providing some access to the assets in the SLAT.  

How is a SLAT formed?

1. Establishment: One spouse (the grantor) creates an irrevocable trust and transfers assets, such as cash, stocks, real estate, or other investments, into the trust. Care should be taken only to transfer assets owned by the grantor (and not owned jointly), so the gift is not considered as made by both spouses. Otherwise, this may negate the benefits of the SLAT. 
2. Beneficiary: The primary beneficiary of the SLAT is the other spouse (the non-grantor spouse). The non-grantor spouse can receive distributions from the trust during their lifetime for living expenses, healthcare, education, maintenance, and support.
3. Tax benefits: Since the trust is irrevocable, the assets are no longer considered part of the grantor's estate and are excluded from their taxable estate. This can help reduce potential estate taxes due when the grantor passes away.
4. Funding considerations: Funding a SLAT involves making a gift to the trust, either a lump sum or ongoing annual gifts. The gift is generally not taxable, assuming the grantor uses their available annual and/or lifetime gift exemption.
5. Spousal access: The SLAT allows the non-grantor spouse access to the trust's assets during their lifetime, providing financial security while maintaining some level of control over the assets. The trustee manages the trust according to the terms laid out in the trust document.

It's important to note that SLATs can be complex legal instruments and must be drafted by an attorney. In addition, a SLAT must have a trustee who manages the trust. This could be the non-grantor spouse, an attorney, or a trust company. If the non-grantor spouse is a trustee, the power to make distributions to themselves should be somewhat limited to avoid including the trust assets in the couple’s taxable estate.  

Life insurance and SLATs

Incorporating life insurance into a SLAT can enhance the overall financial security and legacy planning for both spouses and other beneficiaries like children. Here's how life insurance can play a role in a SLAT:

• Death benefit: Since the SLAT is the beneficiary of the life insurance policy, the death benefit is paid into the trust when the grantor/insured passes away. This cash infusion can help ensure the non-grantor spouse's financial security and provide liquidity to the trust. In some cases, children can also be made beneficiaries of the trust and would ultimately receive any remaining death benefit proceeds as well.  
• Equalizing inheritance: Life insurance can be used to equalize inheritances among the couple's children or beneficiaries. For instance, if one spouse has more assets outside the SLAT, the life insurance death benefit can help balance the inheritances between the beneficiaries.
• Flexibility: Life insurance policies offer flexibility in choosing policy amounts and beneficiaries. The policy can be tailored to align with the specific objectives of the SLAT and the grantor's overall estate planning goals.

The best life insurance policies for a SLAT would be permanent policies that accumulate cash value. They provide a death benefit and a savings or investment component that allows the policy to build cash value over time. Cash value grows tax-deferred and can be accessed by the policyholder through policy loans or withdrawals, providing added financial flexibility in the SLAT. Here are some examples of different permanent policies:

• Whole life: Whole life insurance that provides lifelong coverage and a guaranteed death benefit. Premiums for whole life policies are typically higher than other forms of permanent insurance but remain level throughout the policyholder's life. Part of each premium payment goes towards the death benefit, and the remainder accumulates as cash value. 
• Universal life: Universal life insurance offers flexible premium payments and death benefit amounts. Policyholders can adjust the death benefit and vary the premium payments (within certain limits) based on their changing needs. Universal life policies have the potential to accumulate cash value based on interest rates and policy performance.
• Indexed universal life: Indexed universal life insurance is a variation of universal life insurance. The cash value growth is tied to the performance of a selected stock market index, such as the S&P 500. It offers the potential for higher cash value growth than traditional universal life policies, but there may also be a cap or limit on the potential gains.
• Variable universal life: This combines elements of universal life insurance with investment options. Policyholders can allocate their premiums among various investment sub-accounts, such as stocks and bonds. The cash value fluctuates based on the performance of these investments. 

Ideal client profile

SLATs are designed for married couples, typically high-net-worth individuals who want to plan for the future while minimizing estate tax burdens and maintaining flexibility over their assets. 

Civil unions and domestic partnerships

Domestic partnerships or civil unions may not be treated like legal marriages regarding tax and estate planning matters.

However, laws and regulations regarding domestic partnerships can vary significantly from one state to another. Some states may extend legal rights and benefits to domestic partners similar to those granted to married couples. In such cases, a SLAT-like structure could be created. 

Divorce

Keep in mind that a SLAT is a legally binding agreement. In the event of a divorce, the non-grantor spouse would still continue to benefit from the trust as the beneficiary, while the grantor spouse loses indirect access to the trust assets. Terminating the non-grantor spouse’s beneficial interest in the trust is possible in the event of a divorce.  

Death of non-grantor

In the event of the death of the non-grantor, the donor spouse no longer has indirect access to the trust assets. At that point, the trust may terminate and be distributed or continue for the benefit of the donor’s children or other family members. 

Case study

Bob and Jane, aged 50 and in good health, have approximately $40 million in total assets and all of their available lifetime gift exclusions remaining. After some planning and consideration, Bob transfers $10 million of his assets to a SLAT to benefit Jane and their two children. They feel comfortable that their remaining assets of $30 million will be more than enough to support their lifestyle. They decide to have Jane be the trustee of the SLAT.

The SLAT will apply for and own a life insurance policy on Bob and will use the $10 million of gifted assets to pay for the life insurance premium over a number of years. The policy will accumulate cash value on a tax-deferred basis, and the SLAT can access the cash value tax-free if structured properly. Generally, that means as long as the policy is not a Modified Endowment Contract (MEC). Jane can then make distributions from the SLAT using the policy cash value or trust assets as trustee. While Jane has the ability to make broad distributions, care should be taken so as not to exceed the ascertainable standard of health, education, maintenance, and support.  

If Bob dies before Jane, she would continue to be the beneficiary of the SLAT until her death and could still access the trust assets. If Jane does not have a need for them, the assets will remain in the SLAT for the ultimate benefit of their two children. 

If Jane dies before Bob, Bob would no longer have indirect access to the trust assets, but he would feel secure with the remaining assets in his estate to maintain his lifestyle comfortably. Further, the trust assets would eventually be distributed to their two children, including the death benefit proceeds when Bob passes.