Trust-owned life insurance, when properly designed to meet trust objectives and risk suitability parameters of the grantor/insured, carries the benefit of excluding the proceeds from the taxable estate of the insured. Like any other asset however, the life insurance trust is not self-managing and requires periodic review and evaluation to minimize the risk of loss to the beneficiaries and subsequent litigation risk to the trustee.
The popularity of life insurance trusts is primarily due to the estate tax benefits (exclusion of policy proceeds from the insured’s taxable estate). The flip side of this estate tax benefit is the loss of control by the trust grantor/insured. The grantor must relinquish all incidents of policy ownership including the right to own, manage, or change beneficiary. An Irrevocable Life Insurance Trust (ILIT) is drafted to own the policy. The asset purchased by the ILIT and managed by a trustee (either a professional or non-professional such as a family member) is a life insurance policy to meet the objectives of the trust. The trust objectives are often to replace assets leaving the estate to pay estate taxes or donations to charity.
ILIT trustees have many duties and responsibilities with respect to trust administration and asset management. Among these (but not limited to) are the payment of premium in a timely manner, “Crummey” notices to beneficiaries (allowing periodic access to trust assets), grantor gift notices, and policy management. Policy management responsibilities require periodic review and analysis of the policy structure including a premium adequacy evaluation, an analysis of cash values, crediting rates, cost of insurance and other policy expenses, and an evaluation of carrier stability and changes in the health of the insured. Best practices dictate that periodic market comparisons be made to newer products that will add economic value in the form of lower premium or higher benefit. Many trustees decide to eliminate the risk of policy lapse by purchasing a policy with a “no lapse guaranteed death benefit”.
A frequently under-utilized management tool is the trust investment policy statement or IPS. This non-legal document is a guide for the trustee to perform specific administrative and management functions. It summarizes trust provisions including trust purpose and objectives. It also documents estimated duration and policy funding requirements, beneficiary and or spousal considerations, grantor health updates, carrier in-force illustrations, and policy review and evaluation procedures. The IPS documents a legally defensible TOLI risk management process. Unfortunately, it is estimated that 95% of all life insurance trusts do not utilize an IPS. A good question to ask a trustee is whether or not they typically draft an IPS.
If the risk profile of the grantor/insured permits the acquisition of a variable life insurance policy, special fiduciary care is required to manage the side accounts subject to market fluctuation. Negative market fluctuation will require additional premium to meet the cost of insurance and other policy expense obligations. Crediting rate risk has now been transferred back to the insured from the carrier and exposes another layer of risk assumed by the trustee. The problem arises when the grantor/insured is unable or unwilling to make additional premium contributions to the trust and the declining cash values are unable to support the death benefit to maturity. Result: The policy lapses at a time when the insured may no longer be insurable.
The life insurance contract is very complex and few trustees have the necessary background and experience to make a proper evaluation. Again “best practice” would dictate delegating this responsibility to an experienced and qualified life insurance advisor. The advisor would perform this review and evaluation no less than every 2 years and communicate findings to both trustee and beneficiary. The advisor’s report should address possible replacement options for the existing policy and disposal options including the secondary market when appropriate. Ideally, the advisor will have a relationship with a life settlement broker to obtain secondary market pricing on the replaced policy
The goal of a TOLI trustee is to maximize the chance of a favorable outcome to the beneficiaries. This is accomplished by utilizing tools that minimize the risk of policy lapse or burdensome restorative action and by delegating responsibility for asset review and evaluation.
Located in Manhattan Beach, California, Opulen Capital is a specialized financial services firm focusing on products and services tailored for senior citizens. Opulen Capital is one of the leading firms offering Life Settlement opportunities for high net worth clientele. We leverage unrivaled experience and exclusive relationships in the life settlement marketplace to structure, obtain, and sell life insurance products to maximize cash profits for our valued clients. Opulen Capital’s mission is to continue to provide the best solutions for our clients through the highest level of integrity and service. For more information, visit our website at http://www.OpulenCapital.com or call Opulen at 877-OPULEN-1 (877-678-5361)
