Over the last 30 years, large numbers of irrevocable life insurance trusts have been implemented by wealthy estate owners to finance the transfer of their estates in a financially efficient manner.
While in some cases individuals are designated as trustees, at other times financial institutions assume this role. Usually, the insurance premiums have been gifted to the trust in a way to qualify for the gift tax annual exclusion by using what is called a “Crummey” withdrawal power.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
In the past, many trustees simply paid the premium and then promptly forgot about the financial underpinnings of the policy, assuming that as long as the premiums were paid, the policy would take care of itself. However, economic changes in the last three decades have had a dramatic effect on the financial services industry and on existing life insurance policies.
Trustees have a fiduciary responsibility to the beneficiaries of a life insurance trust. As such, they must manage all the assets in the trust as a prudent investor would manage them. And in addition to a continuing responsibility for oversight of the existing policies in the trust, the trustee must manage any new policies purchased by the trust. Any breach of fiduciary responsibility runs the risk of a lawsuit by the trust beneficiaries.
Over the last few years, a number of states, including Rhode Island and Massachusetts, have enacted the Uniform Prudent Investor Act, which sets specific due-diligence standards for trustees to follow for both existing as well as for new trusts. Some of these standards are particularly applicable to life insurance policies:
• Assessing risk tolerance by reviewing the purposes of the trust and the relevant circumstances of the trust beneficiaries.
• Taking into consideration general economic conditions and expected tax consequences of investment decisions or strategies.
• Adequately diversifying the trust assets.
• Considering an asset’s special relationship or value, if any, to the purposes of the trust.
In the event of mismanagement, a trustee could potentially be sued for failures in the active supervision of trust-owned policies. Among the grounds for a suit:
• Negligence in maintaining the life insurance policy.
• Poor life insurance design or improper policy.
• Low financial ratings of insurance carrier.
• Policies not performing as illustrated.
• Not exploring newer insurance products that are more cost-efficient or offer better guarantees.
Life insurance professionals are in a unique position to help trustees with due diligence and recommend ways to maintain the financial health of insurance owned by the trust.
They can help the trustee decide whether to surrender the policy, assign the ownership of the policy to a different trust, execute a Section 1035 exchange of the policy to a new carrier, sell the policy to a life settlement company, keep an existing policy in force, pay off loans on an existing policy, convert a term policy to a permanent policy, or take a reduced paid-up option on an existing policy.
Qualified life insurance professionals can help both individual trustees and institutional trustees to perform a policy review to make sure the trustee owns a policy that is suitable and meets the current needs of the trust and its beneficiaries. The review is an ideal occasion to discuss how current policies are performing and the impact of changes in client circumstances – and economic conditions – on their life insurance needs.
Unfortunately, while many people today review their investments on a regular basis, they often do not see an insurance policy or program in the same light, as something that must be reviewed at least every two to five years, depending on the client and the policy.
But clients and their trustees deserve life insurance programs that are tailored to their individual estate planning circumstances and financial objectives.
The good news is that products can be recommended with predictable costs and guaranteed benefits that will never lapse. One such option is a guaranteed death benefit universal life policy. This product guarantees a full death benefit at a low and very competitive price, rather than requiring a high premium every year until age 100, as is the case with whole life.
Of course, whole life has a role in many situations, but having guaranteed death benefit universal life can help remove doubts and fears about a policy lapsing.
The policy review process is an opportunity for clients and trustees to make a clear-headed assessment of their financial and estate objectives and to identify the role life insurance should play in the overall plan. Among a number of questions, they should want to answer the following:
• What are the insurance carrier’s current ratings for financial strength?
• Are the premiums competitive?
• Is the client receiving a competitive rate of return?
• Is the face amount adequate based on current needs?
• How are regulatory and tax changes affecting policies?
• Is the death benefit guaranteed, and for how long?
• Can additional guaranteed coverage be provided at little or no additional cost?
While the UPIA puts trustees on notice that due diligence is critical, the policy review process can give assurance to individual or institutional trustees that they are managing the trust in the most prudent way for its beneficiaries. •
Russell E. Towers is vice president of business and estate planning at Brokers’ Service Marketing Group. He has 30 years’ experience as an advanced estate planning attorney.
