Trust Owned Life Insurance: Asset or Liability

Trust-owned life insurance policies for individuals with considerable estates are set up with the best of intentions.  The allure of protecting wealth from the Estate Tax and providing beneficiaries with a substantial death benefit is appealing to planners.  Done correctly, trust-owned life insurance can be a perfect remedy to tax and privacy burdens associated with large estates.  However, all too often, these trusts create problems, headaches, and even legal nightmares for the trustee.  They are neglected or unmanaged to the point of becoming unmanageable leaving a mess for the trustee and beneficiaries.  It could be said that a trust-owned life insurance policy in your client’s portfolio is a time bomb waiting to disrupt the best-laid plans.  

The problems we see with irrevocable life insurance trusts are a lack of time and attention

One of the main concerns with an irrevocable life insurance trust is that trustees may ignore the policy over time.  The reality is that many of these policies were put into a trust years and decades before.  Depending on who is managing the trust, this creates a major issue with neglect and ignorance of what is happening to the policy.  An ILIT left unmanaged or undermanaged can result in greater tax liability for the estate, underfunded life insurance policies, and even lawsuits that burden the trustee.  

The trustee is responsible for maintaining the trust and the policy.  If the trustee is a family member who is not skilled at policy maintenance then the advantages of placing the policy into a trust may become compromised.   For example, changes in interest rates may have shortened the length of the policy thereby leaving the trustee liable to the beneficiaries for any monies lost in the process.    

Fiduciary duty should extend to the trustee

It is important to stay in contact with the trustee assigned to your client’s policy.  More and more, the conversation surrounding ILIT’s necessitates the trustee’s understanding of both the language of the trust and their fiduciary responsibilities of keeping it in order.  This does not come naturally to many friends and family members who may be assigned as trustees.  This is where they will rely on your expertise and guidance.  

In fairness, there are many brokers who take the client through the process of establishing the trust only to fall out of communication over the years.  The result can be an inherited quagmire of risk and lost liquidity.  The reality is that people are often unaware of the breadth of their exposure when they are acting trustees.  By the time the policyholder passes away, the fiduciary story of the trust is too often left unfinished with missing pages.  A conversation with these clients today can help clear their legacy of unforeseen obstacles down the road.  

A trust-owned life insurance policy is a house in need of upkeep

Just as a house will fall into disrepair over time if left untended, a trust-owned life insurance policy is not immune to entropy.  Negligence in homeownership costs more money and time than regular upkeep.  The trustee, in this sense, is a homeowner responsible for the regular maintenance and upkeep of the policy in the trust.  

As an advisor, regular policy reviews on trust-owned life insurance can help the trustee keep everything in order with considerably less trouble and effort in the long run. This is where the advisor’s focus on fiduciary duty can help carry the original client’s wishes through to fruition.  

The ancillary benefit of helping the trustee in order to maintain the estate’s legacy through an ILIT is a strengthening of the client relationship and the extended relationships of those who will one day be in charge of administering the policies benefits.  

Mettle is here to help 

We have extensive experience in sorting out and helping to guide the maintenance of ILITs.  Let us know how we can help you best serve your clients and their trustees so that the legacy they leave behind best benefits the ones they love.