Trustee, Fiduciaries and Grantors

Trust-owned life insurance has long been a popular estate-planning tool. It can provide income and estate-tax-free dollars to one's heirs at death to replace assets lost to estate taxes, it can balance inheritable assets for heirs and, or, it can be part of charitable strategies. However, life insurance is a unique asset and, as such, typically has been poorly managed by the fiduciaries, who are personally liable, and advisors involved.

To give an idea of the magnitude of the potential problems, it should be noted that life insurance death benefits stood at $21 trillion in 2009 as compared to $15 trillion for retirement plan assets. While much has been written on fiduciary duties for retirement plan assets which are technically in ERISA trusts, little has been written on fiduciary duties of life insurance trusts.

ERISA has long required annual fiduciary reviews for qualified retirement plans but, until recently, nothing compelled the trustee/fiduciary an ILIT to go through an annual review process. Annual fiduciary reviews or audits for TOLI are the only method of navigating the myriad of changes taking place. These changes are coming from improvements via better life insurance products, favorable re-pricing, volatile investment markets and changes outside the life insurance policy, such as lowered mortality expense.

Studies conducted by several national accounting firms - as well as trust administrators of TOLI - have found that beneficiaries are either receiving too little, and/or, are paying too much for the life insurance death benefit. One study found that up to 85 percent of the TOLI policies could be restructured to provide more value - at least 40 percent more death benefit for the same premium, or the same death benefit for at least a 40 percent lower premium.  In today’s economic environment reducing annual premium costs can be a tremendous and welcome aid to the grantors.  A trustee/fiduciary should also explore the possibility of seeking the availability of better insurance rates due to changes in health, non-smoking status or changes in underwriting rules by insurance companies.  Many insurance companies now offer "preferred" and "ultra-preferred" mortality rates for those over age 70 in good health, where only a few years ago "standard" was the best available to those over age 70. As an example, one client, a 85 year-old female, had a lapsing policy because of a large loan balance.  If the policy were to lapse it would result in an income tax liability of several hundred thousand dollars.  After the fiduciary review, the annual life insurance premium drop from $62,000 to $30,000 for the same death benefit and with a 10 year no lapse guarantee.

The review process' purpose is not only the cost efficiency of the trust asset but involves many other important issues.  Such as the following:
  • Define the duties and responsibilities of fiduciaries according to the Uniform Prudent Investors Act (UPIA)
  • Provide a “Prudent Process” and periodic fiduciary reviews, with corresponding documentation to mitigate trustee personal risk
  • Prudent selection and/or monitoring of insurance policy performance, stability and endurance.
  • Consult with attorney to compile all legal documents necessary for process and compliance. (Crummey notices, waivers, etc.)
  • Consult with CPA to assemble any necessary gift tax returns
  • Provide the trustee with single-point storage of required documents, including trust documents, insurance statements, bank records, tax returns and investment policy statement (IPS)
A fiduciary review of TOLI should deliver better value for all involved, as well as uncover issues that can have unintended results. Perhaps the most important benefit will be the confirmation that the sometimes intricate estate strategies that have been implemented will not be destroyed by the collapse of an essential part of the plan, keeping in mind the adage “a chain is only as strong as its weakest link”.  The end result will be peace of mind for the fiduciary and the assurance from due diligence that all of the estate planning provided to clients will perform as expected.
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