Trusts have long played an essential role in estate planning for many individuals and families. The assets held in trust can vary from real estate to stocks, bonds, insurance policies, jewelry, and other collectibles. This deep-dive will focus on trust held life insurance policies, which can be considered a special asset class. For some, trust held life insurance has become a black box full of mysteries and administrative nightmares.
Why Are Trust Held Life Insurance Policies so Difficult to Manage
Life insurance policies are complex and often misunderstood financial instruments that require active management by the policy owners. These same individuals have plans for reviewing and managing other types of assets, such as stocks, bonds and real estate, but rarely have a review plan or conduct proper management of life insurance. Unfortunately, many people have the mistaken belief that life insurance policies are static financial instruments with guaranteed benefits that will continue until they are needed (whenever that may be) and can just be filed away without further review or consideration. Thus, they are surprised to learn their policies are lapsing due to insufficient policy values to continue coverage without additional premium payments or the benefit at the time of claim is significantly less than was projected at issue.
Differing from most other life insurance instruments, the policy owner of a trust held life insurance policy is the trust. Also, it is administered by a trustee named by the grantor at the time the trust is established or amended.
A trustee may be an individual or an institution who serves in a fiduciary capacity. Their primary responsibility is to protect the interests of the trust’s beneficiaries and manage the trust assets for their benefit.
The Duties and Responsibilities for a Trustee
- Review and discuss the goals and objectives of the grantor and ascertain that they remain aligned with the terms of the trust.
- Ensure trust assets are aligned with the goals, objectives and risk tolerance level of the trust and the grantors.
- Manage premiums.
- Notify the grantor of the premiums before they are due.
- Monitor and collect the required premium payments.
- Submit the premium payments in a timely manner to the insurance carrier.
- Verify the premiums have been received and applied to the policy.
- Interact with trust beneficiaries.
- Notify the trust beneficiaries, if required, of their rights with regard to each gift the grantor makes to the trust and maintain records of such “Crummey” Notices.
- Work with the grantor to resolve any special issues that may arise with respect to trust beneficiaries, especially should the trust beneficiaries elect to exercise any of their rights.
- Administer the distribution of trust assets in accordance with the terms of the trust.
- Address taxation issues.
- Determine if annual tax returns are required for the trust. If so, file them in a timely manner.
- Review all tax law changes on both a State and Federal level.
- Consider all private letter rulings, which may impact the grantor’s plan.
- Keep current with estate planning techniques, which may be of benefit to the grantor and/or trust.
- Manage trust assets.
- Perform annual reviews of all trust assets. For life insurance policies, this includes:
- Review quarterly and annual statements to verify policy values are being maintained.
- Monitor insurance carriers (financial strength, changes to corporate structure, mergers, acquisitions and other key factors).
- Verify continuation of coverage.
- Ensure key policy relationships have not been modified in error by the carriers.
- Provide ongoing policy management.
- Evaluate policy in terms of cost structure and performance relative to the rest of the insurance industry.
- Identify each policy’s supplementary benefits and riders and apply for and collect any benefits that may be due as dictated by the insured’s / grantor’s circumstances.
- Review and justify the relevance and continuation of supplementary benefits and riders.
- Evaluate the policy’s suitability for its intended purpose within the trust.
- Monitor the continued performance of the life insurance policy.
- Explore and implement corrective actions to restore the policy’s performance, if needed.
- Explore other opportunities presented by the life insurance policy and their benefits to the trust. Implement as appropriate.
- Review policy features, including guarantees, evaluating the risks they present to the trust.
- Maintain an awareness of the insured’s insurability.
- Keep current with new product introductions in the life insurance industry and evaluate whether a responsible replacement would provide any additional advantages to the trust.
As shown, the role of a trustee is not an easy one. It requires special skills and significant knowledge of trust assets, which are diverse and complex. The inability to properly manage these assets can expose the trustee to litigation for losses suffered by the grantor(s) and beneficiaries.
Check out the TOLI Handbook for valuable insight on how to successfully manage life insurance trusts: tolihandbook.com