As a trustee, are you able to answer “yes” to the following questions?
- Are all the policies under your care financially sound?
- Are you able to assure the grantor(s) that his/her estate and financial planning expectations will be met?
- Are you familiar with the myriad of issues that could negatively affect the trust’s policies?
- Do you have the necessary knowledge of life insurance to perform the needed evaluations?
- How effective are your current risk management strategies?
- Are you doing your best to protect the value of the trust?
- If continued premiums are required and the grantor fails to make additional gifts, are you prepared to make an informed decision regarding what to do with the policy?
- Are you aware of all of your policy management options, including the use of “life settlements?”
- How do you manage your trust held life insurance policies?
- Are you consistent in your administration and management of all the policies in your custody?
As illustrated, a trust held life insurance policy, by its very nature, can present the trustee with a number of unique challenges and could potentially expose the trustee to additional liability. The potential for liability is compounded if the trustee fails to communicate in a timely manner with the grantor about the status and performance of trust held life insurance policies, especially when relatively small steps can be taken to correct a policy’s performance with early detection. Many times, however, due to lack of appropriate policy management practices, the problems are either not detected or are not addressed until the policy is close to lapsing or requires significant remedial action to correct its performance.
Additional liability exposure can be encountered when the trustee fails to stay current with the insured’s and/or grantor’s circumstances that directly affect the life insurance policy management. This includes financial and/or medical conditions, such as health and current tobacco usage. In our proprietary universe of policies reviewed, we have documented cases where poor policy management allowed a health change to go unnoticed. As a result, benefits under Waiver of Premium riders and other supplementary benefits were not applied for in a timely manner, resulting in significant losses to the trust and the grantor.
The potential for liability further increases if the trustee does not stay current on the more cost effective and efficient life insurance products being introduced today and fails to explore whether replacing older policies with these newer plans would be advantageous to the trust. New products combined with refinements in the underwriting process and risk classes, can provide options for even those insureds with less than optimal health. There may be opportunities for enhanced policy values by combining a life settlement with the purchase of a newer, more efficient product design.
The risks associated with trust held life insurance policies can be mitigated by adopting a sound program for active management. The historical administration of trust owned life insurance policies has been the basis for most of the fiduciary and risk management problems facing trustees today.
Download the TOLI Handbook for valuable insight on how to successfully manage life insurance trusts.