Case Scenario
Jack and Diane are a married couple and have an estate tax issue. After speaking with their financial professional, it was recommended that they purchase whole life insurance on Jack’s life to provide liquidity to pay estate taxes. Additionally, their financial professional suggested that an irrevocable life insurance trust (ILIT) be used to own the policy so as to avoid the death benefit being included in Jack and Diane’s taxable estate.
Jack and Diane know the value of whole life insurance and the potential for cash value growth that can be used to supplement their retirement. However, they are reluctant to have this new policy owned by an ILIT, since they would not be able to access1 the cash value should they need it.
Their Goals
- Purchase whole life insurance to provide liquidity for estate taxes.
- Create a trust to keep the death benefit outside Jack’s taxable estate and provide for Diane and their children.
- Access1 cash value built up inside the whole life insurance policy for supplemental retirement income.
your spouse but not included
in your estate.
A Possible Solution
A potential solution for Jack and Diane is to have the life insurance on Jack’s life owned in a spousal lifetime access trust (SLAT) with the SLAT as the beneficiary. A SLAT is an irrevocable trust that allows access1 to life insurance cash values by Diane while keeping the life insurance proceeds out of Jack’s taxable estate.
Under this type of trust, the trustee may take policy withdrawals or loans1 and distribute them to Diane. If Diane is the trustee, then the distributions have to be for her health, education, maintenance, or support. An independent trustee provides more flexibility in that distributions can be made to Diane for any reason.
When Jack dies, the policy death benefit will be paid to the SLAT, estate and income tax free. It can then be used to loan money to the estate to pay estate taxes, or distributions can be made to Diane and their children. When Diane dies, the remaining SLAT assets will pass estate tax free to their children. A SLAT allows Jack and Diane the best of both worlds: access1 to cash value while Jack is alive and the death benefit excluded from Jack’s estate when he dies.
- 1Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty.
Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
Participating whole life insurance policies are issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
