Planning with Spousal Lifetime Access Trusts

Welcome to Talking T&E for Advisors, where Trusts & Estates Editor in Chief Susan Lipp and Jamie Hopkins, chief wealth officer at Bryn Mawr Trust, take seemingly complex estate planning issues and break them down for financial advisors. 

In this video, they discuss the complex giving strategy known as SLATs.

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Read the full raw transcript below: 

Susan Lipp

Hello, I’m Susan Lipp, editor-in-chief of Trusts & Estates, and I’m speaking with Jamie Hopkins, CEO of Bryn Mawr Trust Advisors, LLC, and Chief Wealth Officer at Bryn Mawr Trust. Today we’ll be discussing life insurance planning with spousal lifetime access trusts. We had an article on this topic in the April issue of Trust and Estates written by Robert Finnegan. So let’s start by understanding a complex giving strategy known as SLATs, which as I mentioned stands for Spousal Lifetime Access Trusts, that can be helpful for spouses and the next generation. Jamie, can you just briefly walk us through what are SLATs?

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Jamie Hopkins

It’s great to see you, and yeah, we’ll start off with just this brief understanding of what SLATs are. I think, you know, our industry likes a lot of, you know, different abbreviations of words and 3-letter, letter acronyms, and this is one. So as you mentioned, the spousal lifetime access trust, often we’re seeing dual. So you’re often going to see one for the husband, one for the wife, or the two spouses in the situation. But this is really an irrevocable trust in which one spouse will transfer their assets into it. Usually we’re talking about people with millions and millions of dollars, and they will use up essentially their lifetime exemption amount. Help reduce estate taxes in these situations, move it out of their estate. But the other spouse is the beneficiary. So can indirectly— they still have access to these assets, but appreciation and their lifetime exemption amounts have been kind of removed from the estate. So just backing big picture, using a trust where your spouse is the beneficiary, removing these assets from your estate, that’s the starting point here. And most of the times we are talking about ultra-high net worth individuals, meaning somebody that might be running into actual state tax payments in the future.

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Susan Lipp

Clients often hesitate to pull the trigger and finalize gifting or transfers of assets, which makes sense because they’re worried about their own future too. How can SLATs help with that?

Jamie Hopkins

Probably every advisor that will watch this and every attorney has had that situation where we talk to the client, we say, here’s a good strategy. But it does mean giving up some control, some ownership. And as you said, it makes sense because they’re thinking about their own retirement, their own future. So giving up control can feel scary. This is one of the reasons there’s been kind of a big drive into SLATs over the last decade. We see it a lot in Delaware and Nevada because there is this indirect control still that you love your spouse, you trust them, they’re the beneficiary. There’s some access to these funds there. And it’s not the same as when we just put it out there in the world and maybe it’s for our grandkids, which we probably don’t feel like we have very much control. Or if we give to a charity, it’s truly gone. We’re not getting it back. So this gives us a little bit more certainty about our own financial security. Um, for married clients, not super valuable for those that aren’t, but for married clients, very, uh, good way to do some of the estate planning, but still have some access and control of the gifted assets while we’re still alive.

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They don’t receive all the benefits as some of the other strategies might if you truly give up control on both spouses, but this is kind of a nice middle ground. Mm-hmm.

Susan Lipp

Well, moving on to life insurance, what role does that have with SLATs?

Jamie Hopkins

Yeah, and sometimes people are a little surprised that life insurance gets brought into the SLAT conversation because Usually we’re not super concerned about life insurance if set up properly with an ILIT already, an irrevocable life insurance trust, about having the death benefits in the estate. Lots of techniques to already handle that. So usually this is another way to do that. The article that you mentioned earlier goes through a couple of different scenarios on how to leverage life insurance as part of the SLAT and overall estate planning process. Mentioning that overall estate planning process here is really important because typically you’re thinking about leveraging life insurance with a SLAT potentially to pay additional estate taxes, to pay liquidity for the estate that it might need to purchase some asset or provide ongoing liquidity without selling off maybe hard-to-sell assets or property that might be sitting inside of these SLATs that you don’t want to have liquidated. In some cases too, you will actually use the existing SLAT, that trust, to pay for the life insurance. There’s a couple examples in the article that drives through that to create this additional transfer of wealth, because life insurance can be a good way to build up wealth for a transfer, doing it outside the estate and then providing liquidity.

So it kind of becomes an additional funding source and lever you can layer on to the SLAT. It’s not needed to do SLATs. You don’t have to have it as part of this. But when you start thinking about a really complex, high-net-worth client trying to create liquidity, tax advantages, control, transfer to spouses, the life insurance conversation does come in as a potential way to help fund some of these taxes and liquidity. It is mentioned in the article, it’s not always economically feasible and a good strategy if you’re doing this with clients in their late 70s or 80s. Life insurance might just not be a functional vehicle anymore if it wasn’t already set up. So the cost associated, the ability to be insured are all factors to consider.

Susan Lipp

Why is life insurance so popular inside of trusts overall?

Jamie Hopkins

Yeah, a couple different things. First of all, the rules, the tax rules around life insurance still make this a very popular transfer vehicle. Because trusts are often holding illiquid assets or multigenerational assets. Liquidity does become a concern, especially at the death perhaps of the, the second spouse, where all of a sudden there’s a full transfer of assets. There could be estate taxes, there could be liquidity needs for beneficiaries. And that death benefit provides this almost immediate liquidity. So that often is a popular reason because we might not have the ability to liquidate the whole trust. So we have to come up with liquid assets elsewhere. If it’s holding a family business, the family is going to continue to run. We might owe estate taxes with no way to fund those estate taxes outside of life insurance or borrowing. So to keep the business running without this liquidity crunch, life insurance really comes into play there. Life insurance is also popular in trust because we’re usually talking about a trust as an estate planning vehicle, which means somebody is dying. Life insurance pays money when somebody dies. So they all kind of mesh up well just from a timing perspective.

It’s why life insurance fits with estate planning. It’s one of the main functions of life insurance. The last thing is it does provide certainty around the dollars that we can’t get with almost any other vehicle, uh, borrowing, lines of credit, business ownerships, real estate, equity markets do not provide us the certainty of a dollar amount at a specific moment in time. Well, we don’t know when that moment is going to occur. Life insurance is really the only asset that can tell us that you will have $5 million at this unknown moment in time. And so it’s unique in that it can provide a lot of certainty to this transfer and trust planning vehicles.

Susan Lipp

What’s the big picture benefit of combining SLATs and life insurance?

Jamie Hopkins

Yeah, so the big picture and kind of wrap up from the article too is that SLATs offer our high net worth clients who are married this kind of ability to remove assets from their taxable estate, but still providing access and control of those transfer assets to their surviving spouse. Life insurance comes in and enhances this overall SLAT and estate planning process by providing the cash and liquidity to pay estate taxes or other costs. So when you think about the two coming together, one is about tax mitigation, transfer, and control. The other one, life insurance, is about cash and certainty. So by putting them together, you can give clients a good sense of what’s going to happen to their long-term wealth and transfer.

Susan Lipp

All right. Well, thank you so much for your insights on this. Um, and we’ll— I’ll see you next time.

Jamie Hopkins

Thank you, everyone.