Situation: Today, moderately wealthy couples are increasingly worried about the future lower Federal exemption amount. To keep the life insurance proceeds outside their estate, we often suggest that their life insurance be owned by an irrevocable life insurance trust (ILIT). Many of those clients purchase life insurance because of the long-term care or chronic illness riders. We often find that these couples want to include provisions in their ILITs that make the trust assets “accessible” while removing the policy proceeds from their estates – so called Spousal Limited Access Trusts or SLATs.
Arguably, it’s possible to give the non-insured spouse a limited beneficial interest and the children the ultimate remainder beneficiaries, while still excluding the policy from the couple’s estate. However, the law regarding the use of SLATs as well as the choice of long-term care rider is still developing, so there is a tax risk of estate inclusion. Clients must consider the tax risks, along with what should happen in the event of divorce or premature death of the noninsured spouse. Furthermore, a question that inevitably comes up is, “If one spouse can do this, can both spouses create trusts with substantially similar provisions?” Specifically, can the wife and children be the beneficiaries of a trust with the husband as the insured, while the husband and the children are the beneficiaries of a trust with the wife as the insured?
This Counselor’s Corner sheds light on this question.
Read the print-friendly PDF here.