A powerful estate planning tool in today’s uncertain world 

“Having your cake and eating it too” is usually beyond what we can deliver in wealth advisory.  That has been especially true when making gifts to reduce one’s estate size and subsequent taxes.  Reducing the size of your estate can lower the tax against assets (estate tax) and, possibly, the tax on the income those assets produce (income tax).  Many clients who are comfortable making gifts frequently choose to use an Irrevocable Life Insurance Trust (ILIT).  An ILIT, as the name implies, is an irrevocable trust that allows clients to remove assets from their taxable estate.  Although other assets may be used, life insurance is often purchased to benefit from the leverage it provides, e.g., a dollar of premium typically buys many more dollars of insurance (depending on the insured’s age, health, etc.). Unfortunately the ILIT is frequently seen as akin to a “locked safe” because of its rigidity and inflexibility.  Hence some clients may be somewhat reluctant to make substantial gifts despite the obvious benefits to heirs such as wealth preservation.

An attractive alternative can be found in the Spousal Lifetime Access Trust or “SLAT.”  Therein one spouse makes a gift and the Trustee has the right to make distributions to the other spouse. Thus the SLAT can be used to provide the other spouse with access to a potential cash flow (from cash values within the trust) while the insured (or insureds) remains alive. What makes this discussion so timely? There have been frequent changes to not only one current lifetime gift exemption but also to the top estate tax rate. Depending on what changes may be pending, acting sooner rather than later could help preserve an estate from greater estate taxes.

To illustrate, let’s assume we establish an ILIT and make an irrevocable gift. That removes the gift from the donor’s estate so it is not subject to estate tax at death.  Since this arrangement is irrevocable, the grantor is restricted from altering, cancelling or amending trust terms (however a third party trustee can with appropriate rights as provided within the trust document).  ILIT cannot be altered, cancelled or amended.  Likewise any life insurance policy within the ILIT usually cannot be accessed until the insured’s passing.  Once death occurs, the insurance proceeds are received into the trust (tax-free), where they are available to pay any remaining estate taxes or for distribution to the trust’s beneficiaries free of both income and estate taxes.  The heirs get liquidity so assets need not be “fire saled” and help offset estate costs like taxes (if applicable). 

A  Spousal Lifetime Access Trust (or SLAT) operates in the same manner except with one significant difference; the trustee is allowed to make distributions to the non-grantor spouse for the spouse’s health, education, maintenance and support.  The potential benefit of this distribution strategy cannot be overemphasized.  That one is able to make the gift(s) and thereby remove that amount from the couple’s potentially taxable estate and still derive some future cash flow benefit for the other spouse, is nothing short of remarkable.



There are three SLAT strategies to consider:

  1. Single: The most basic approach, wherein one establish a SLAT which purchase insurance on his or her life. The other spouse may be the trustee and beneficiary.
  2. Joint: This approach, also known as second to die, differs only in that the insurance policy’s death benefit would be payable upon the death of the second spouse.3
  3. Dual Spousal: The ultimate hybrid strategy which has each spouse create a SLAT for the other’s benefit with similar (but not identical) features. This strategy helps retain the most flexibility in both estate and cash flow planning.

When implementing any of these SLAT strategies, several points should be considered:

  1. INDIVIDUAL GIFT: It is important that the gift be made from each grantor’s separate property so to minimize the risk of the SLAT assets being included in the spouse/beneficiary’s gross estate (IRC Sec. 2036).4 For residents of community property states, the gift should be formally separated first. One way is to fund the SLATs from individually titled accounts.
  2. INSURED SHOULD NOT SERVE AS TRUSTEE: At the very least, the trustee could be the grantor’s spouse. Legal experts will often recommend that an independent third party be the trustee or at least serve as co-trustee.
  3. PROHIBITED DISTRIBUTIONS: Distributions cannot be made to the grantor’s spouse as part of the grantor’s legal support obligation.
  4. RECIPROCAL TRUST DOCTRINE: The IRS has ruled that when two SLATs of substantially identical nature are created, there is an incidence of “consideration” that can serve as a basis to “uncross” the trusts and include its proceeds in the decedent grantor’s estate.5 Some estate planning attorneys argue that if the terms of each SLAT are not identical, this can be prevented.6

SLAT’s like many estate planning strategies have their drawbacks.  Key among these is that the grantor has only indirect access to the trust property through his or her spouse.  So a divorce or the death of the non-grantor spouse will terminate this limited access.  If this is a concern, the dual trust strategy could provide a valuable solution.  Keep in mind that all estate planning strategies (particularly advanced ones such as these) should be carefully drafted by qualified legal experts to avoid inadvertent estate tax inclusion.

Again, lifetime gifting is highly advisable– sooner rather than later. The bottom line, for those who hesitate to gift for one reason or another: The Spousal Lifetime Access Trust can help you reduce your taxable estate and provide future cash flow during your retirement.  It is truly a potential for “having our cake and eating it too!”

Uncertainty over the economy and financial markets has many people concerned about their financial futures.  For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth advisory practice like ours—one that delivers services according to the needs and perspectives of its clients. 

This information is not considered a recommendation to buy or sell any investment or insurance and is being provided for information purposes only and is not a complete description, nor is it a recommendation.  We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation. 

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent.  He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara.

For more information, visit www.kwmwealthadvisory.com or call (866) 467-8981.  Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  KWM Wealth Advisory is a separate entity from WFAFN.

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