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[ Music ]
Welcome to Sound Insights from Prudential,
where you'll hear from thought leaders
and industry experts discussing life insurance
industry's most relevant topics and trends.
Today you'll hear from Brett
Berg and Donna Scalaro,
two experts with Prudential's
Advanced Markets team.
[ Music ]
> Welcome and thank you for
joining us on Sound Insights today.
I'm Brett Berg, and with me today
is my colleague Donna Scalaro,
and we're going to be talking about the
topic of spousal lifetime access trusts,
why they're important, how they work,
and how this type of trust planning
can be an effective strategy
when it comes to transferring wealth.
We get so many questions about life insurance
and estate planning today, and the benefits
and advantages of flexibility in planning
that one of the most popular ideas
in that category happens to be
spousal lifetime access trusts.
And what we're talking about today are some of
those frequently asked questions you and I get
over the phone and talk about daily, and so
I'm looking forward to this conversation,
and I know you have a list of questions
to kind of guide our discussion.
Please fire away.
> Okay, great.
Thank you, Brett.
Before we get into the details, though,
of a spousal lifetime access trust,
an we call that a LAT, and we'll probably
refer to it as such throughout this podcast,
why is incorporating permanent life insurance
an appealing strategy for transferring wealth?
> Life insurance as a product as we know offers
many advantages and can offer many advantages.
Depending upon the client's situation,
some of the more common advantages are
really four that I can think of, Donna.
First that it provides that
liquidity exactly when it's needed.
It provides cash when the person passes away.
This is the death benefit that
we talk about in our business,
which is really the number one reason
why life insurance is purchased.
But in addition to that, secondly,
while the insured is living,
the growth in the policy
is generally tax-deferred.
And so long as that policy does
not lapse or is surrendered,
withdraws and loans may be taken
without any current taxation.
Now, I point out that my caveat there is
so long as it's not lapsed or surrendered.
This requires a lot of monitoring by a
financial advisor to make sure it works.
But that's a second advantage.
Third, life insurance proceeds at
death are typically income tax-free.
And fourth, properly structured life
insurance can be outside the estate and,
thus, estate tax-free.
> Okay, great.
But, now, you talk on that fourth bullet,
you said that life insurance can be
outside the estate for estate tax purposes,
so can you expand upon that a little?
Because isn't there a tax problem
when I die if I am the owner
of a life insurance policy on my life?
> Absolutely correct.
If a person dies while being
the owner of a policy,
then the entire death benefit is
includable in that person's estate,
potentially subjecting it to estate taxes.
Now, from a federal estate tax perspective,
this may not be a problem for many people
under current law; $5.45 million is
exempt from federal estate taxes in 2016,
and for married couples, that's $10.9
million exempt from federal estate tax.
Now, state laws vary.
And the exemption can be much lower
for state estate tax purposes.
But from a federal estate tax standpoint,
it may not be a problem for many people.
For those people who are concerned about the
inclusion of death proceeds in the estate,
either from a federal estate tax
perspective or from a state law perspective,
usually life insurance is owned by
what we call an irrevocable trust.
Actually we call it an irrevocable
life insurance trust.
Sometimes we give it the acronym, ILIT, and what
happens there is the person goes to an attorney,
establishes the irrevocable
trust for the benefit of his
or her heirs, then gifts money to that trust.
The irrevocable trust then purchases life
insurance with the money that was gifted
by the person who established it.
Now, when that person dies, the trustee
collects the life insurance proceeds
and then the trustee distributes the money
in accordance with the terms of the trust
to effectuate the intention of the
person who established the trust.
So the trustee distributes the money
to the client's heirs, for example.
That's what we call an irrevocable life
insurance trust, and that's how that problem
of inclusion in the estate
is often solved by attorneys
who are consulting directly with their clients.
> But Brett, an ILIT is irrevocable,
you said that, and it's even in the term:
irrevocable life insurance trust.
so to me that sounds like giving up control
and that its terms can't be changed.
So what happens if circumstances
change and the clients need access
to some of the funds in the ILIT?
Is that where an ILIT drafted as a LAT can help?
> Absolutely.
And That's exactly where
a so-called spousal access
or spousal lifetime access trust is often
used because, as you point out, Donna,
irrevocable means irrevocable, not changeable,
and so what needs to happen is certain
provisions have to be drafted within the trust
to anticipate future needs and to
adapt to changing circumstances.
> Great, so can you describe
exactly now, what a SLAT is,
and then the typical client
profile for this type of strategy?
> Sure. A spousal lifetime access trust is
really just a name or a [inaudible] that is used
for one type of irrevocable trust with
special provisions, as I noted before,
drafted to permit the trustee to distribute
money to what we call the non-grantor spouse.
So here's an example.
Say we have a married couple, Harry and Wilma.
And Harry, the husband, would ask
the attorney to draft Harry's trust.
Harry would then make gifts to that
trust out of his own separate property.
And Harry would be what we call in
this area of the law the grantor.
And to make this irrevocable
trust a spousal access trust,
the attorney would include some provisions
permitting the trustee to distribute some money
to Wilma, the wife, under particular sets of
circumstances that differ from case to case.
But that's essentially what a
spousal lifetime access trust is.
It's one type of irrevocable trust with
special provisions to permit the trustee
to distribute money to the non-grantor spouse.
Now, the client profile for this
is usually a married couple.
Usually they are in a stage of life where
they are thinking about estate planning,
so from an age perspective we
usually look at 45 or older.
They have an estate that may potentially
be subject to the federal estate tax.
And maybe not.
But they want flexibility in their planning no
matter if they think they're going to be subject
to the federal estate taxes
or whatever the case may be.
> Is a spousal lifetime
access trust, as you described,
something relatively new in trust drafting?
And does the client have to go to their
own attorney to actually have one drafted?
> Let me take the second part first.
The client absolutely should go to an
attorney to have one of these trusts drafted.
The client should do that in any case
involving any kind of estate planning.
They should go to the attorney.
As far as the SLAT or the spousal
lifetime access trust being something new,
no, it really is nothing new.
It's just [inaudible] on an added
importance today because of the need
for flexibility in planning for most people.
And, again, as I said, as is true with
all matters of financial estate planning,
they should go to an attorney
to draft this type of trust.
> So a SLAT can own insurance and I think
can probably own other types of assets,
but when we talk about insurance, is it just
a single-life policy that a SLAT [inaudible]
and that insures just one life, or can a
survivorship policy, which insures two lives
and pays the death benefit at that
second death, also be owned by a SLAT?
> Either type of policy may
be owned by this type of trust.
The strategy and the actual trust provisions may
be drafted differently depending upon what type
of policy is owned and so forth.
> So if you can, Brett, let's discuss a SLAT
owning a single-life policy, and if you could,
can you describe in a little
more detail how that works?
Who owns the policy?
Who is the trustee?
Who pays the premium, and who has access?
> Sure. If the trust is a single-life
[inaudible] a single-life policy,
a policy on one of the clients, then
one spouse establishes the trust.
So let's take our previous example.
Harry, the husband, asks the
attorney to draft Harry's trust.
The trust will usually have
children as beneficiaries,
and then the attorney, in this type of
a trust, would also make the spouse,
Wilma, a current beneficiary as well.
And then Harry will gift premium amounts
to the trust in the trustee, in turn,
will pay the premiums to
the life insurance company.
Now, Wilma, the wife, is the
non-grantor in this situation.
She doesn't make any gifts to the trust.
And she would have access, because the trustee
would be able to take withdrawals and loans
from the policy and then
distribute the monies to Wilma.
The trustee is usually an
independent trustee, like a bank.
But under certain circumstances Wilma may
actually serve as trustee if her power
to distribute is limited so as to avoid
inclusion of the trust assets in her estate.
That's a very complicated matter, and
if she is going to be the trustee,
or if the non-grantor spouse is going to be the
trustee, the lawyer has to pay special attention
to limiting the non-grantor or
spouse's power, Wilma's power.
And it has to be confined to
distributions or health, education,
maintenance and support, for example.
It's limiting the trustee's power.
So because of that we often see independent
trustees, banks, private trust companies.
Even sometimes law firms that have that service
available act as trustees in these cases.
> So that does sound like
a pretty flexible strategy.
So in the event the insured spouse dies,
the SLAT would receive that death benefit,
free of estate tax, and then those funds could
be used to provide things like income protection
and wealth transfer to that non-insured
spouse and to other beneficiaries.
And yet during the life of the insured,
the non-insured spouse can have access
to any policy cash value or other
assets that may be in that SLAT
through the trustee and their power.
So let's now look at a SLAT
owning a survivorship policy.
So again, can you describe in a little more
detail how that works, who owns the policy,
who's the trustee, who pays
the premium and who has access?
> Sure. It works very similar to the
situation involving the single-life policy,
except the non-grantor spouse
cannot serve as trustee, okay?
By the way, the grantor can never serve as
trustee on either one of these examples.
But the non-grantor spouse
cannot serve as trustee in a case
where the survivorship policy is used.
So, in our previous example, the grantor
spouse, Harry, establishes a trust.
Same would be true here.
Harry makes gifts out of his
separate property to that trust.
The trust then uses that money that Harry
gifted to pay premiums on a survivorship or,
as you mentioned, Donna, second-to-die
policy insuring both insureds.
And during the lifetime of really either spouse
now, the trustee may take withdrawals and loans
from the policy to distribute to the
non-grantor, Wilma, in our example,
or any other beneficiaries that
are entitled to distributions.
The trustee must be an independent
trustee, in this case, though.
Where survivorship policy is used, it must
be an independent trustee, like a bank,
or it could be a lawyer or
a private trust company.
> So that sounds like a flexible strategy
too, but I do see some issues there.
What happens in a situation where that spousal
lifetime access trust owns a survivorship policy
and the spouse who is the beneficiary
of that SLAT dies before the spouse
who is the grantor of the trust?
What happens to the access?
> So in our example, Wilma, for
example, she's the non-grantor.