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“I’m no insurance expert,” claimed Sam Macinaw. "I’m an estate planner who found these life insurance trusts lumped into the assets of two new clients. When I brought it to their attention, they went and named me trustee. Happened a dozen years ago. The policies looked okay to me. I wrote the Crummey letters when I was supposed to in order to qualify the annual premiums as a current gift to the beneficiaries. How was I to know the policies changed?”
The law says Mac should have known—or at least been monitoring the policy performance and taken action when needed. Now the policies’ cash value no longer supports the intended death benefit. Substantial premium payment additions must be made. Mac’s client will likely sue him and win.
Insurance trusts require hands-on monitoring
Creating Irrevocable Life Insurance Trusts (ILITs) is a popular estate planning technique to keep policy benefits—when paid—out of the insured’s taxable estate. Equally as popular is naming a trusted advisor as the trustee. This responsibility often falls on the estate planner, family attorney or trusted accountant. If you are a trustee of an insurance trust, take heed. Your responsibilities are significant and more complex than those of a regular trust without insurance.
The Uniform Prudent Investor Act (UPIA) requires trustees to act in a fiduciary capacity. As such, the trust charges them with carrying out the trust’s objectives for its beneficiaries. The operative word for a life insurance trust is beneficiaries, not the insured. Even though the insured may have established the trust, purchased the policies and appointed the trustee, the trustee must act as a fiduciary for the beneficiaries alone.
What can go wrong?
Causes for underperforming policies
There are many reasons for insurance policies underperforming their targets. One of the most common is the assumptions used in the premium payment patterns. The policy cash value needs to be sufficient to support a specific death benefit. If premium payments fall below that level, then there’s a problem.
A second common cause for underperformance comes when the policy’s actual performance lags that which was originally illustrated and modeled. If policy performance is monitored regularly, a small correction may be all that is required. On the other hand, if many years have elapsed, the monetary shortfall could be enormous.
Reconcile the trust’s intent with current performance
Action items for trustees
Checklist of actions
The author is happy to provide a checklist for trustees working with insurance trusts. Please contact me at the email address or phone number shown below.
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