I do not know of any occupation that has as many negative jokes targeted at them as the legal profession. I am not exactly sure why this is, but even if you dislike attorneys in general (apologies to any attorneys reading this), you love your own attorney. And this is certainly true if you are managing a TOLI policy. A case in point….
I was recently asked to review a situation on a “one off” case brought to us from a trustee who was not an ITM client. The trustee had a situation where a policy that was moving from her care to a non-corporate trustee had a $30,000 premium payment due that was missed. The policy, a whole life contract, had an automatic premium loan feature (see When Is An Automatic Premium Loan Not Automatic?) so the premium was paid, but by an internal policy loan. The non-corporate trustee was attempting to argue that the trustee was responsible for the $30k premium payment and should make that contribution to the policy. As we mentioned in our earlier post, a policy loan is like taking money from one pocket and putting it into another and if you know anything about whole life policies you know that even if the trustee were “liable” the most they should be liable for is the interest on the loan. This was our view and the analysis that I provided illustrated from a “numerical perspective” why this was the case.
But here is the real story……I sent the trust document to our attorney Tom Meyers and guess what? The document actually limited the trustee’s responsibility with respect to life insurance to the payment of premiums. That responsibility was further limited by the availability of trust assets available to make such premium payments. The document stated that if the grantor failed to advance sufficient funds to pay any premiums, then the trustee may borrow against the policy to make premium payments. So, given the limited responsibility as expressed in the trust document, the trustee acted within her appropriate powers to borrow against the policy to pay the premium at issue and was not responsible for the loan principal. Tom further felt that the trustee could also argue that she is not responsible for any policy loan interest, because borrowing from the policy is expressly stated as an appropriate action by the trustee in the trust document.
The key here is that a full review of the trust document would have changed the dynamics of the entire situation and perhaps put the trustee at ease much earlier. Your responsibilities as trustee are often defined in the trust document. If you are managing a trust policy you need to have a good attorney to interpret the trust document. In this case I was glad we at ITM did.