Trustee of ILIT or Irrevocable Life Insurance Trust -How to Choose one?

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Who Serves as Trustee of ILIT or Irrevocable Life Insurance Trust?

To avoid “incidents of ownership,” and thereby pull the insurance proceeds back into your estate for federal estate tax purposes, the Trustee should be someone other than you.

A family member may be named as the sole Trustee of the ILIT, but it is usually better to name a professional Trustee, such as an accountant or institutional Trustee familiar with the administration of ILITs. The corporate trustee can act as a sole trustee, or as a co-trustee with the family member.

Professional trustees are accustomed to maintaining adequate records, handling notifications of demand rights to beneficiaries, filing any necessary tax returns, reviewing insurance policies for performance, and furnishing periodic accountings and information to the beneficiaries. All of these operational steps in the ILIT are crucial to maintain its federal estate tax-exempt status. Moreover, when the Trustee collects the death benefits from the insurance policy, a professional Trustee may be able to provide better asset protection from the beneficiaries’ creditors or “predators” who would seek to take advantage of them.

A Trustee of ILIT Have Many Duties

  • Review and discuss the goals and objectives of the grantor and ascertain that they remain aligned with the terms of the trust.
  • Ensure trust assets are aligned with the goals, objectives and risk tolerance level of the trust and the grantors.
  • Manage premiums.
    • Notify the grantor of the premiums before they are due.
    • Monitor and collect the required premium payments.
    • Submit the premium payments in a timely manner to the insurance carrier.
    • Verify the premiums have been received and applied to the policy.
  • Interact with trust beneficiaries.
    • Notify the trust beneficiaries, if required, of their rights with regard to each gift the grantor makes to the trust and maintain records of such “Crummey” Notices.
    • Work with the grantor to resolve any special issues that may arise with respect to trust beneficiaries, especially should the trust beneficiaries elect to exercise any of their rights.
    • Administer the distribution of trust assets in accordance with the terms of the trust.
  • Address taxation issues.
    • Determine if annual tax returns are required for the trust. If so, file them in a timely manner.
    • Review all tax law changes on both a State and Federal level.
    • Consider all private letter rulings, which may impact the grantor’s plan.
    • Keep current with estate planning techniques, which may be of benefit to the grantor and/or trust.
  • Manage trust assets.
    • Perform annual reviews of all trust assets. For life insurance policies, this includes:
      -Review quarterly and annual statements to verify policy values are being maintained.
      -Monitor insurance carriers (financial strength, changes to corporate structure, mergers, acquisitions and other key factors).
      -Verify continuation of coverage.
      -Ensure key policy relationships have not been modified in error by the carriers.
    • Provide ongoing policy management.
      -Evaluate policy in terms of cost structure and performance relative to the rest of the insurance industry.
      -Identify each policy’s supplementary benefits and riders and apply for and collect any benefits that may be due as dictated by the insured’s / grantor’s circumstances.
      -Review and justify the relevance and continuation of supplementary benefits and riders.
      -Evaluate the policy’s suitability for its intended purpose within the trust.
      -Monitor the continued performance of the life insurance policy.
      -Explore other opportunities presented by the life insurance policy and their benefits to the trust. Implement as appropriate.
      -Review policy features, including guarantees, evaluating the risks they present to the trust.
      -Maintain an awareness of the insured’s insurability.
      -Keep current with new product introductions in the life insurance industry and evaluate whether a responsible replacement would provide any additional advantages to the trust.