Irrevocable life insurance trusts (ILITs) serve a multitude of significant estate planning and asset protection objectives. To effectuate these goals, proper administration of such trusts is required. This can be challenging today especially in light of the complexity of the tax laws and the wide variety of insurance products available. Below is a checklist of items for a Trustee to consider incorporating into his or her administration of an ILIT:
Be Cognizant of Fiduciary Duty. The Trustee must be cognizant at all times of his or her fiduciary duty to the beneficiaries. This means that, under the law, he or she must administer the trust solely in the best interests of the beneficiaries and in accordance with the provisions of the governing Trust instrument.
Keep ILIT Property Separate. The Trustee must keep the ILIT property separate from his or her own personal property. A separate bank account for the ILIT is required. The trustee may wish to consider documenting all deposits made to the ILIT and all expenses paid by the ILIT and keeping copies of all checks and/or wires retained.
Manage and Monitor Trust Investments. The Trustee must, in order to fulfill his or her fiduciary duty, regularly evaluate and document the trust’s insurance investments and their performance as part of the trust’s administrative protocol. Life insurance producers can provide additional value to clients and trustees by offering to monitor trust-owned life insurance policies, provide annual reviews to the ILIT trustee and secure in-force ledgers. A producer could provide this policy information to the ILIT trustee as part of an annual policy report. There are also independent companies that will review the performance of life insurance policies at a nominal cost. In light of the complexity of many of the existing life insurance products today, it is important to conduct annual reviews. Clear documentation of all deliberations and decisions made by the Trustee and detailed records of all such documents and reviews can also be helpful.
Safeguard Originals of Policies. The Trustee is obligated to safeguard the original of all life insurance policies owned by the Trust.
Confirm ILIT as Owner and Beneficiary of Policies. It can be important for the Trustee to have written confirmation from each life insurance company that the ILIT is designated as the owner and beneficiary of all policies owned by it.
Communications with Insurance Companies. Consider ensuring that all communications with the life insurance companies with regard to any policy owned by the ILIT is addressed only to the Trustee at his or her designated mailing address.
Payment of Premiums. The timely payment of life insurance premiums is important. While this may seem obvious, relying on the policy’s grace period (if any) may prove problematic for many reasons including that the performance of many of today’s life insurance products are negatively impacted by a late payment.
If it is anticipated that the premiums will be paid by transfers made to the ILIT by others (as opposed to from the Trust property), additional planning may be required by the Trustee to satisfy the requirements of any “Crummey” provisions in the governing Trust instrument. It is important for a Trustee to review and understand Crummey provisions. Crummey Notices are generally included in ILITS to ensure that transfers made to the ILIT by an individual will qualify for the annual exclusion from the Federal gift tax (which amount is $14,000 per donor per donee in 2017) as opposed to using such person’s available credit amount (which amount is $5,490,000 in 2017). The Trustee may want to consider having sample Crummey Notices which conform to the provisions of the governing Trust instrument, which he or she can consistently use over the course of the administration of the Trust.
Additionally, keeping copies of all correspondence relating to the Trust, including all Crummey Notices, can be helpful.
Split-Dollar Arrangements. The Trustee is obligated to manage any split-dollar arrangements used to fund a policy and track the annual economic benefit costs or split-dollar loan payments.
Annual Accounts, Reports and Returns. The Trustee is obligated to prepare annual accounts and reports for the Trust beneficiaries as required by the governing Trust instrument and file the Trust’s annual income tax and/or informational returns.
Regular Compliance Audits. Regular compliance audits (e.g., every 2-5 years) are helpful to ensure compliance with the unique administrative requirements of the governing Trust instrument. This may require the assistance of outside legal counsel.