With the economic and legal turmoil of the past decade, numerous advisors have encountered clients with the following unfortunate story:

Martha is 76 years old. Her husband of 50 years, Frank, passed away six months ago. Eleven years ago, Frank and Martha created an irrevocable life insurance trust (ILIT) which purchased a $2 million survivorship universal life insurance policy. Martha has just been notified by the trustee that the annual premium of $30,000 is due.

The policy has almost no cash value. If the premium is not paid in a timely manner, the policy will lapse. In 2002, when the trust was created, the unified credit for estate taxes was $1 million per individual, and this same unified credit level was scheduled to apply from 2011 forward after sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

In 2002, Frank and Martha’s combined net worth was nearly $4 million and growing. However, the couple lost a substantial portion of their net worth during the market collapse of 2008 and the following recession. Additionally, Frank’s end of life medical care resulted in large medical bills. Martha is now in a dramatically different financial position than she and her husband were in 2002. Also, the unified credit is now $5.34 million per person (2014) and $10.68 million per couple. Hence, exposure to federal estate taxes is no longer an issue for Martha.

See also: How the permanent estate tax will impact life insurance ownership

Martha is considering discontinuing the annual gift to the trust to pay the premium. Martha is concerned about maintaining her standard of living, and without a need for liquidity to pay estate taxes she sees little point in continuing the policy. She iss frustrated that more than a quarter of a million dollars has been paid for a policy that may lapse, and she is distressed that the planned legacy for her family will be diminished.

The story of Martha and Frank is not unlike the story of many couples who try to gauge their exposure to estate taxes. They understand that the federal exemption to the tax has been, and will continue to be, a moving target. Additionally, they know that for a middle aged healthy couple there is a good chance that at least one of them will still be living decades from now.

Placing substantial funds in an irrevocable technique for what may be a long period of time is understandably bothersome to many couples. For such clients, a technique has been developed that allows for the delay of irrevocable decision-making until the first of their deaths. This technique involves the purchase of survivor purchase options (or SPOs) as riders on permanent cash-value, single-life policies. 

A SPO provides that, upon the death of the primary insured, the surviving beneficiary (the insured beneficiary) has the option at that time to purchase life insurance without evidence of insurability. In addition to the primary insured, the insured beneficiary is also underwritten at issue of the original policy. 

If the primary insured dies before the insured beneficiary, the insured beneficiary can:

  1. Receive the policy death benefit and spend the money as her or she pleases, or
  2. Partially or fully use the policy death benefit to exercise one of the following guaranteed options to purchase insurance on the insured beneficiary’s life:
  • a whole life policy at the attained age with ongoing premiums;
  • a single-pay, paid-up whole life policy at the attained age; or
  • a whole life policy at the original issue age when the SPO rider was purchased. The new policy will have values as if it had been in force since the original issue age. In order to activate this option, the premium rate based on the original issue age and underwriting class must be paid. The cash value effective the anniversary following the primary insured’s death must also be paid. This cash value is known as point-in-scale cash value.

Under each option and regardless of how much time has elapsed, the insured beneficiary receives the same rating classification determined at policy issue. A change in health conditions cannot adversely affect premium amounts due.

One technique used with SPOs in estate planning is to purchase an original policy on each spouse with an SPO rider in favor of the other spouse on each policy. The policy owner names the spouse as the primary beneficiary and an ILIT as the contingent beneficiary of the policy.  Because the insured is the owner of the policy on the insured’s life, the insured can change the primary and/or contingent beneficiary of the policy any time prior to death. Thus, if circumstances change (as they did for Frank and Martha), the insured has flexibility in being able to make changes not ordinarily available with traditional irrevocable survivorship policy planning. 

See also: 3 ways survivorship life can help younger clients

At the policy owner’s death, the surviving spouse beneficiary may disclaim some or all of the policy death proceeds. The surviving spouse may also disclaim the SPO purchase right. Any disclaimed proceeds and the disclaimed SPO purchase right then devolve to the ILIT. This arrangement permits the surviving spouse to decide at the insured’s death how much, if any, of the death proceeds the surviving spouse needs. The ILIT trustee can decide how much, if any, of the SPO rider to exercise.

Editor’s Note: All names and examples are hypothetical and have been used for explanatory analytical purposes only.

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