As financial advisors or estate planning attorneys, you may often encounter clients who have established Irrevocable Life Insurance Trusts (ILITs) and named friends or family members as trustees. While this may seem like a reasonable choice, the role of an ILIT trustee is complex, and many individual trustees find themselves overwhelmed by the demands, including financial professionals. For these reasons, corporate trustees have become an increasingly popular option. This guide will explore the key considerations when choosing a corporate trustee for ILITs and why this might be the best decision for your clients.
The Role of a Trustee in an ILIT
The trustee of an ILIT is responsible for a range of duties, including managing premiums, ensuring policies are adequately funded, and staying compliant with the trust’s terms. Moreover, they must monitor the performance of life insurance policies—an asset class that requires specialized knowledge—and handle the ongoing administrative tasks such as Crummey notices and premium payments.
In some cases, trustees also play a role in evaluating whether the current policy is still in line with the grantor’s objectives and whether changes should be made. With such a wide range of responsibilities, the job can quickly become overwhelming for an individual trustee, especially a friend or family member with little experience in the financial or legal complexities of trusts.
Read More: The Many Duties and Responsibilities of ILIT Trustees
Why Consider a Corporate Trustee?
There are several key reasons to recommend a corporate trustee to your clients, especially those with large or complex ILITs:
1. Specialized Expertise
Corporate trustees, like Life Insurance Trust Company, are experts in managing trust-owned life insurance (TOLI). They not only handle the day-to-day administrative responsibilities but also bring specialized knowledge of life insurance products, ensuring that the policies within the trust perform as expected. Their professional oversight can help prevent the costly mistakes that can occur when policies lapse, premiums are missed, or Crummey notices are not sent.
2. Objectivity and Impartiality
Unlike a family member or friend who may have personal biases, a corporate trustee acts as an impartial third party, making decisions that are strictly in the best interest of the beneficiaries. This reduces the potential for conflicts of interest and ensures a more objective approach to trust management. Corporate trustees also have established processes to handle disputes among beneficiaries, providing a buffer that can prevent family conflicts from escalating.
3. Eliminating Costs, Liability, and Workload for Advisors and Attorneys
When financial advisors or estate planning attorneys take on the role of trustee, they are not only adding to their workload but also exposing themselves to significant liability. Trustees are legally responsible for the proper management of the trust, and mistakes can lead to personal liability for losses. Additionally, the administrative burden—such as monitoring life insurance policies, managing Crummey notices, and staying compliant with changing laws—can be overwhelming. By recommending a corporate trustee, you can eliminate this workload and reduce potential legal risks for yourself or your firm. This allows you to focus on advising your clients, without the added stress and responsibility of managing an ILIT.
4. Long-term Stability
A corporate trustee offers continuity and stability over the long term. Individual trustees, especially friends or family members, may no longer be available due to age, illness, or other personal circumstances. Corporate trustees, on the other hand, offer perpetual existence, meaning that the trust will always have a reliable entity managing it. This is particularly important for ILITs that may last for decades or involve significant wealth transfers to future generations.
5. Compliance and Regulation
ILITs come with regulatory and tax obligations that require careful attention. Corporate trustees are not only aware of the latest changes in tax law and regulation, but they also have systems in place to ensure that the trust is fully compliant at all times. This reduces the risk of errors that could lead to tax penalties or other legal complications.
6. Enhanced Policy Performance Monitoring
An often-overlooked aspect of being an ILIT trustee is the need to monitor the performance of life insurance policies. As policies age, premiums can increase, coverage may become insufficient, or new products may become available that better serve the needs of the trust. A corporate trustee has the expertise and resources to perform regular policy reviews, ensuring that the life insurance policy within the ILIT remains in line with the grantor’s goals and continues to perform optimally.
How to Choose the Right Corporate Trustee
When selecting a corporate trustee for your clients’ ILITs, it’s important to consider the following factors:
1. Experience with Trust-Owned Life Insurance (TOLI)
Choose a trustee who specializes in managing TOLI. Not all corporate trustees have experience with the intricacies of life insurance policies, so it’s essential to select one that has a proven track record in this area. Life Insurance Trust Company, for instance, focuses exclusively on managing ILITs and has deep expertise in life insurance asset management.
2. Fiduciary Duty
Ensure that the corporate trustee will act as a fiduciary, meaning that they are legally obligated to act in the best interest of the trust and its beneficiaries. This ensures that the trustee will prioritize the grantor’s and beneficiaries’ needs above their own financial interests.
3. Fees
While corporate trustees do charge fees for their services, these costs should be weighed against the risks of mismanagement and the complexity of administering an ILIT. Transparent, fair pricing structures can help clients feel confident in the long-term benefits of appointing a corporate trustee.
4. Reputation and Resources
It’s also important to evaluate the reputation and resources of the corporate trustee. A well-established company will have the staff, expertise, and infrastructure to manage even the most complex trusts effectively. Look for a trustee with a strong industry presence and a history of managing trusts like the ones your clients are dealing with.
Conclusion
Appointing a corporate trustee for an ILIT provides a layer of expertise, objectivity, and long-term stability that many individual trustees cannot offer. As financial advisors or estate planning attorneys, you are in a unique position to guide your clients toward the best possible choice for managing their ILITs. By recommending a corporate trustee, you help ensure that your clients’ life insurance policies are properly managed and that their long-term estate planning goals are met.
For more information on corporate trustees or to discuss how Life Insurance Trust Company can support your clients’ needs, contact us today.
