1. Having a Non-professional Serve as Trustee:
The easiest choice is often not the best choice, for example naming a non-professional – a friend or family member of the grantor – trustee of the ILIT you just wrote. Life insurance is not an asset to be managed by a novice. A simple mistake can cost the trust hundreds of thousands, maybe millions of dollars. One could argue that taking on the responsibility yourself without considerable outside help is also a Top 5 mistake. How is the policy reviewed? Is there a non-biased expert in charge of monitoring policy performance?
2. Administrative miscues:
In our decade-plus serving the TOLI field we have found the simplest things – sending the Crummey letters on time, making sure the premium is paid – can trip up even the most competent professional trustees. The problem is exacerbated when a non-professional or someone whose business model is not focused on TOLI administration is responsible.
3. Trustee succession planning:
Even in the best situations – when a non-corporate trustee does a sufficient job, the issue arises when the trustee moves on – retires or passes away. What happens to the ILIT? Is the transfer of responsibilities seamless? A corporate trustee solves the problem and will outlive the ILIT.
4. Not valuing the role of a fiduciary:
While a non-professional may be held to a lower standard, there still are fiduciary responsibilities that must be upheld. Does a family member or friend even understand that? If you are the trustee, do you realize the level of responsibility that you have taken on? Is the fee you collect worth the possible liability?
5. Lack of life insurance knowledge or expertise:
Certainly, a non-professional serving as a favor to the grantor cannot be expected to understand the nuances of increasingly sophisticated life insurance policies. Even a professional, such as yourself, who may have an understanding of life insurance, cannot be an expert in managing these assets worth millions. Life insurance takes care and tracking – and the management of specialists in order to maximize its value to the beneficiaries.