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Beneficiary limited access trust (BLAT)

Protect estates and provide for heirs

High net worth clients who need liquidity outside of their estate may have estates valued high enough to be subject to estate taxes — and they wish to protect those assets for the benefit of their children. A BLAT can help such clients.

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What is a BLAT?

A beneficiary limited access trust (BLAT) is a flexible irrevocable life insurance trust (ILIT) that provides lifetime access to cash values for a child (or other beneficiary), while keeping the policy outside the client’s and child’s estate.

Benefits of a BLAT

If properly administered and drafted, a BLAT:

  • Provides the policy’s death benefit free of income and estate taxes
  • Allows the child’s estate or financial guardian tax-advantaged access to the policy cash value, as long as an independent trustee is used
  • Enables the trustee to make distributions for supplemental retirement income for the child through policy loans and withdrawals
  • Is an irrevocable trust that can protect assets from beneficiaries’ creditors
  • Allows an independent trustee (such as a corporate trustee) absolute discretion to make distributions to the beneficiaries

Considerations of a BLAT

  • Transfers are irrevocable and may only be used for the benefit of trust beneficiaries.
  • Withdrawals and loans may reduce the policy’s death benefit and cash value, and could cause it to lapse.
  • Depending on the life insurance policy’s performance, the available cash value may be worth more or less than the original premium paid.
  • Loans and withdrawals from policies classified as modified endowment contracts may be subject to a federal tax penalty if taken prior to age 59 1⁄2.
  • The trust beneficiary can’t contribute to the BLAT because of incidents of ownership and creditor protection issues.

Target client

Business owner(s) who desire control over how the child will access the gift, want asset protection for the gifted amounts, and looking for a potential dynastic gift for future generations. They may:

  • Be married with a desire to access cash value inside an ILIT
  • Have or will have a federal or state estate tax liability
  • Wish to protect and grow assets outside of their estate
  • Want to protect the management of assets and ensure responsible behavior of minor beneficiaries, those receiving government aid, or someone who demonstrates less responsible behaviors
  • Want to protect assets from creditors
  • Want to control the distribution of assets to the beneficiaries

Additional estate planning strategies

BOLD highlights several different estate planning strategies to fit your clients needs.

View all strategies

How a BLAT works

  • Parent(s) establish a trust for the benefit of one of their children.
  • A trustee is hired to make distributions to the child based upon the guidelines the parents put into the trust. The parents have a great deal of flexibility on the distribution guidelines.
  • On behalf of the trust, the trustee purchases a single-life policy on the child, a single-life policy on one of the parents, or a survivorship policy on both parents.
  • The parent(s) gift premium payments to the trust, using either the parents’ annual gift tax exclusion or the lifetime gift tax exemption.
  • The trust guidelines may allow the child to receive distributions during his or her lifetime and/or create a potential dynastic gift for future generations.

Child Grantor(s) (partners) Funding the trust: BLAT Distributions with Trustee’s discretion during child’s lifetime Trustee must be an independent third party (if life insurance is involved) 1. Annual exclusion is involved2. Lifetime exemption Child Grantor(s) (partners) Funding the trust: BLAT Distributions with Trustee’s discretion during child’s lifetime Trustee must be an independent third party (if life insurance is involved) 1. Annual exclusion is involved 2. Lifetime exemption

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Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.    

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any way where it would be accessible to the general public.

DOFU 10-2022

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