Estate Planning: SLATs and ILITs

Understand the concept. See the risk. Run the numbers

By Richard L. Harris

Key Takeaways:

  • Spousal Lifetime Access Trusts (SLATs) allow clients to make gifts and still have access to the assets in the other spouse’s trust.
  • When one spouse dies, the access to one trust ends.
  • Life insurance creates an asset that comes into existence when one spouse dies.
  • Irrevocable Life Insurance Trusts (ILITs) can be used to avoid the taxing of life insurance proceeds at death.

This is the first of a series of articles about estate planning concepts and their ramifications. Even though a client may have done serious and comprehensive estate planning, that does not mean that his or her estate planning is complete. Every concept used by planners has consequences. If you understand the concept, see the risk and run the numbers—in effect, create a “before and after” scenario—you are doing your client a valuable service.

The concepts most commonly used by estate planners today include Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), Sales to Intentionally Defective Grantor Trusts (IDGTs), Irrevocable Life Insurance Trusts (ILITs), Charitable Lead Annuity Trusts (CLATs) and Self Cancelling Installment Notes (SCINs). In future articles we’ll walk you through each concept, why it’s used, what it does not accomplish, and the risks.

Post-election tax planning

Because of the re-election of President Barack Obama and the result that estate taxes will be here for the foreseeable future, this is viewed as probably the last year that each donor will be able to give away $5.12 million ($10.24 million for husband and wife) without paying gift or generation-skipping transfer taxes (GSTT). Many very wealthy clients are beating down their planners’ doors to take advantage of this opportunity before year-end.

If you had a $25 million estate (don’t we wish we all did!) and wanted to take advantage of the gifting, it would be with great hesitation. For whatever reason, you would like to continue to have income from the asset but not have it included in your estate. Suppose the client thinks likewise. The estate planner suggests your client and the client’s spouse set up SLATs. Basically, a SLAT gives the other spouse the income from the trust for life, the trustee has the power to make distributions at the trustee’s discretion and the remainder goes to heirs. Whatever remains at the spouse’s death is out of the estate.

That sounds good. My client can give an asset away for estate tax purposes but still get to use it for himself or herself. What about the risks? What happens if one spouse dies? The trust the survivor set up for the deceased spouse now belongs to the heirs. The surviving spouse can’t get access to her own trust. That means that whatever money was being obtained from that trust ceases. The spouse still gets the income from the other spouse’s trust because the income was for the survivor’s lifetime.

Run the numbers

Now let’s do the numbers. First of all, the taxable estate is $15 million after planning. The tax on that, if the rate is 35 percent and the couple lives in a state that does not have its own tax, is $5.2 million.

More important, how much money will the surviving spouse want in addition to the income she already has? If she wants $500,000 a year and her trust was giving her spouse $200,000 of that, she suddenly finds she’s short $200,000 in annual income. Oops! What can be done to prevent that from taking place?


You suggest a solution that only life insurance can provide. Let’s assume all along you were part of the estate planning team (the best way to work in this market). You suggest that each spouse considers setting up an ILIT. By having their assets in an ILIT, any proceeds that are left can be used to fund the estate tax liability. The spouses would decide how much they need to continue their lifestyle. The amount of insurance would have three characteristics:

  1. There is a source of premiums.
  2. The premiums are affordable.
  3. The premiums are spent to accomplish as much of the goal as the client wishes.

Although this looks like a permanent need, don’t discount term insurance. That premium may be all the clients are willing to pay. If a term policy is used, it should have as liberal a conversion option as can be gotten. If there is a need to make the insurance permanent, it will present itself over time. With this approach, you have made a sale and have a client to go back to.

Again, the most important points to remember are:

  • SLATs allow clients to make a gift and still have access to the assets in the other spouse’s trust.
  • When one spouse dies, the income from the surviving spouse’s trust is not available to the survivor. There may not be enough in assets to support the survivor’s lifestyle.
  • There is still a taxable estate to be dealt with.
  • Life insurance creates an asset that can be used to replace the lost income when one spouse dies.
  • Because the insurance is in an ILIT, it is not part of the survivor’s estate. To the extent that the survivor does not exhaust the ILIT, the remainder is available to be used to pay estate taxes.

About the Author

Richard L. Harris specializes in life insurance sales and consulting for high-net-worth individuals and their advisors. For more than four decades, he has been a trusted expert for accountants, attorneys and trust officers. A life insurance agent, he holds the professional designations of Chartered Life Underwriter, Registered Trust and Estates Practitioner, and Accredited Estate Planner. He may be reached at Richard@rlharrisllc.com or 973-470-5151.