For financial advisors and estate planning attorneys managing Irrevocable Life Insurance Trusts (ILITs), handling trust-held life insurance policies can quickly become a complex and time-consuming burden. Unlike traditional assets, life insurance policies involve intricate terms, ongoing management, and the potential for significant risks if not properly maintained. Let’s break down what makes Trust Owned Life Insurance (TOLI) unique and why even professionals may want to consider a corporate successor trustee for managing these policies.
Why Is Trust-Owned Life Insurance So Challenging to Manage?
Many financial professionals and estate planners mistakenly assume that life insurance policies are static assets that need little attention once they’re in place. However, these policies require consistent reviews and management to ensure they align with the grantor’s original estate plan. Without regular monitoring, policies may lapse, underperform, or fail to provide the expected benefits at the time of the insured’s death.
For ILITs, the complexity is compounded by the fact that the trust—not an individual—is the policy owner, and it’s the trustee’s responsibility to ensure the policy is properly managed. Given the fiduciary duties involved, trustees must remain vigilant to avoid exposure to potential risks or litigation that could arise from failing to manage the policy effectively.
Read More: Life Insurance Trust Management: Challenges and Strategies
Essential Duties and Responsibilities of a Trustee for Life Insurance Trusts
Managing life insurance policies within an ILIT is far more than just paying premiums. Below are some of the critical duties trustees must handle to ensure these policies remain beneficial for the trust’s beneficiaries:
Clarifying Trust Goals and Objectives
- Ensure the life insurance policy aligns with the grantor’s original intent and objectives for the ILIT.
- Regularly verify that the policy remains relevant to the trust’s goals and beneficiaries’ needs.
Managing Premium Payments
- Notify the grantor of premium due dates, collect payments, and ensure timely submission to the insurance carrier.
- Confirm premiums are properly applied to the policy to avoid lapses or coverage issues.
Monitoring Policy Performance
- Conduct regular reviews of policy performance, including reviewing quarterly and annual statements to verify the policy’s value.
- Keep track of the insurer’s financial strength and any significant changes in its structure, which could affect the policy.
Ensuring Beneficiary Awareness and Communication
- Notify beneficiaries of their rights under the trust (such as their ability to withdraw gifts) and document such communications via “Crummey” notices.
- Resolve any issues that arise if beneficiaries exercise their rights under the trust.
Handling Taxation and Compliance
- Ensure the trust complies with all necessary tax filings, including preparing and submitting annual returns on time.
- Monitor any changes in tax laws that may affect the policy or the trust itself and adapt management strategies as needed.
Providing Ongoing Policy Management and Optimization
- Regularly evaluate the policy’s cost structure and performance relative to market trends to ensure it meets the ILIT’s long-term needs.
- Review supplementary benefits and riders and apply for any that may provide additional benefits based on changing circumstances.
- Consider policy replacements or adjustments if newer insurance products could better serve the trust’s objectives.
Maintaining Insurance Expertise
- Stay informed about new life insurance products and market trends to ensure the policy remains suitable for the trust.
- Assess guarantees, evaluate the risks they present to the trust, and ensure the policy continues to perform as expected.
Why Consider a Corporate Trustee?
As a financial advisor or estate planning attorney, managing life insurance within an ILIT can be a burdensome and high-risk responsibility, taking significant time and expertise away from your core services. The complexities of life insurance policy management—along with the potential for liability—often lead professionals to seek a corporate trustee to handle these duties.
Life Insurance Trust Company is the largest corporate trustee and manager of ILITs in the nation, offering unparalleled experience and knowledge in managing trust-held life insurance policies. Our team handles the administrative workload associated with ILITs, from premium payments to policy monitoring, tax compliance, and beneficiary communications.
If you find managing ILIT-related responsibilities too time-consuming or want to eliminate the liability associated with acting as a trustee, request a consultation with our team. Our successor trustee services can seamlessly transition management of your clients’ ILITs, freeing you to focus on other aspects of their estate planning while ensuring their trusts are expertly managed for the benefit of their beneficiaries.