Spousal lifetime access trusts funded with indexed whole life insurance

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Many individuals facing potential estate tax exposure choose to create an ILIT – an irrevocable life insurance trust – to hold an insurance policy that will one day be used to pay such taxes. One trade-off is that the insured usually lacks access to the cash value of the policy. However, a spousal lifetime access trust (SLAT), funded with Ohio National’s Prestige Indexed 10 Pay may be an excellent alternative to an ILIT.

What is a SLAT?

This type of irrevocable life insurance trust allows the trustee to access the policy for the benefit of a third party, usually the non-grantor spouse, while still providing an income-tax free death benefit that might be excluded from both the grantor and non-grantor’s taxable estates, when structured properly.

How does it work?

A married individual establishes a SLAT and gifts amounts to the trust. The trustee then purchases a permanent life insurance policy on the individual and uses the gifted amounts to pay the policy premiums. The trustee may also make distributions of the policy’s accumulated cash value for the health, education, maintenance and support of the spouse, as outlined in the trust.

Why is indexed whole life an excellent funding mechanism?

Ohio National’s indexed whole life insurance provides the excellent cash accumulation potential available with indexed universal life, blended with the guarantees and stability of whole life insurance to meet all the trust’s objectives. And the product’s guaranteed paid-up, predictable 10-pay design affords estate planning certainties and reliable death benefit protection with the potential for strong long-term cash values. The cash accumulation upside is similar to that of indexed universal life but with a minimum guaranteed cash value. The cash value of the policy may be accessed on a tax-preferred basis through surrenders to basis and/or policy loans.

Image of tax advantages and flexibility with IWL and SLAT

The benefits

Unlike a traditional ILIT, the life insurance cash value is accessible for the health, education, maintenance and support of the non-grantor spouse, as outlined in the trust, and an indexed whole life product can provide the cash accumulation possibilities inherent in indexed universal life.
No matter how the related market index performs over time, the guaranteed cash accumulation feature, together with the 10-pay design, provides certainty that assets will be available, exactly as planned for and needed.
Neither the death benefit nor the assets gifted to the SLAT are included in the grantor’s estate for estate tax purposes.
The death benefit is also income-tax free and can be used to pay estate taxes, make loans to the estate or in several other ways.

Additional considerations

Even though the policy is not owned by the insured or either spouse, the optional Accelerated Benefit Rider can provide additional cash, should the insured become chronically or terminally ill, that can be accessed to benefit the non-spouse grantor.
If the trust creator is able to access the cash value of the policy in the trust, or if the cash value is used to discharge any of such person’s financial obligations, the policy value may be included in that person’s taxable estate.
Many SLATs contain provisions terminating access to cash value at divorce or death of the non-grantor spouse, although the trust creator may choose to name successor beneficiaries in both situations.
When the grantor spouse dies first, the trust may receive the death benefit and then the trust property may pour into a family trust, depending on the particular estate plan.
An experienced estate planning attorney should be used in all steps of designing and implementing the estate plan, including the use of a SLAT or any other type of trust.

DOWNLOAD IWL AND SLAT SALES IDEA

If tax-free loans are taken and the policy lapses, a taxable event may occur. Withdrawals (partial surrenders) and loans from life insurance policies classified as modified endowment contracts may be subject to tax at the time the withdrawal or loan is taken and, if taken prior to age 59½, a 10% federal tax penalty may apply. Withdrawals and loans reduce the death benefit and cash surrender value.

The potential for additional credited interest is based, in part, upon market index performance, which is subject to any then-applicable caps, spreads and participation rates.

The optional Accelerated Benefit Rider provides for a partial acceleration of the policy death benefit in the event that the base policy insured is certified by a licensed physician as being chronically ill or terminally ill. By taking an accelerated death benefit payment, a lien is created against the policy death benefit. The lien accrues carrying charges at an adjustable rate we declare.

The lien, including the lien carrying charges, will be deducted from the total death benefit otherwise payable to the policy beneficiary(ies) and will reduce the cash value available for policy loans, surrenders, or the exercise of any non-forfeiture option. The required premium for the policy must still be paid even if an accelerated death benefit is taken. If an accelerated benefit is taken and the policy lapses or otherwise terminates, a taxable event may occur. Any death benefit provided by an optional Accidental Death Benefit Rider is not available for acceleration under this rider.

Any accelerated benefit taken under this rider may be taxable. Clients should consult their tax advisor on all tax matters. Adding the rider to a life insurance policy or the taking of rider benefits may affect eligibility for certain public assistance programs and government benefits.

The Accelerated Benefit Rider is not designed to be a substitute for long-term care insurance, health insurance, or nursing home insurance. Rider benefits and features may vary by state.

Indexed whole life insurance is issued by Ohio National Life Assurance Corporation. Guarantees are based upon the claims-paying ability of the issuer. Policy, policy features and rider availability vary by state. Issuer not licensed to conduct business in NY. ©2022 Ohio National Financial Services, Inc.

FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. D-828101 8-22