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Financial Planning > Trusts and Estates > Estate Planning

Flexibility in estate planning

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In today’s uncertain estate tax planning environment, life insurance trusts can offer choices for couples looking for flexibility in their financial planning. The single-life spousal irrevocable life insurance trust can provide financial flexibility not available in a traditional ILIT.

If you aren’t familiar with the single-life spousal ILIT, here’s a brief introduction of how one works:

  • The grantor-spouse gifts assets to the single-life spousal ILIT to fund the life insurance premiums.
  • The trustee of the single-life spousal ILIT purchases a life insurance policy on the life of the grantor-spouse. The trust is the owner and beneficiary of the policy.
  • The non-grantor spouse is the trust beneficiary and may receive distributions from the trust for health, education, maintenance and support (HEMS), subject to the “ascertainable standard” while the insured is alive, as well as after the insured’s death.
  • Upon the death of both spouses, the trust assets may pass on to their heirs.

As long as the grantor-spouse does not retain any interest in the ILIT, the death benefit should not be included in his estate. Specifically, the grantor-spouse cannot have the ability to exercise any power the IRS has defined as an incident of ownership. The non-grantor spouse or children of the grantor may also serve as trustee or co-trustees, as long as the trust is properly drafted.

If the couple lives in a community property state or own jointly held property, the grantor-spouse should use separate property to make gifts to the ILIT. This will keep the non-insured spouse from being considered a grantor. To avoid this potential problem, the couple can use separate property agreements and have some property individually titled.

Upon the death of the grantor-spouse, the single-life spousal ILIT will receive a tax-free death benefit. The non-grantor spouse may remain as a beneficiary of the trust until her death. At that time, the trust can be used for estate liquidity or it can terminate by distributing the remaining assets to the surviving heirs. The single-life spousal ILIT can be an effective hedge against future federal tax law changes due to the non-grantor spouse’s access to trust assets during the grantor’s life through the HEMS power.

This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. The accuracy of the information is not guaranteed and is provided with the understanding that The Principal is not rendering legal, accounting or tax advice. While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is not a marketing opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements.


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