Trusts are frequently used in the estate planning process. They help with in the distribution of assets, making certain that everything is distributed to the right people and entities. A trust can also reduce estate taxes, because it lets you remove assets from your estate, so more wealth can be passed to beneficiaries. Many people don’t know that you can even place a life insurance policy within a trust. Investopedia’s recent article entitled “Can You Trust Your Trustee?” explains that life insurance in a trust is called trust-owned life insurance (TOLI). A TOLI is like bank-owned and company-owned life insurance. Trustees often do a good job of completing basic tasks, but conflicts and problems can pop up when trustees don't understand where their loyalties should be and how to deal with complex financial issues.
A trustee has a fiduciary responsibility to the beneficiaries of a trust. The trustee is required to manage the trust assets pursuant to the instructions of the trust for the beneficiaries.
TOLI beneficiaries usually have a desire to maximize the amount of wealth they will receive, when the trust assets are distributed. The trustee must, therefore, actively manage the insurance policy, or policies, that are owned by the trust. This includes determining if the policy is performing up to the projections reflected in the original life insurance illustration. It also requires the trustee to try to identify alternative policies that may be more in line with the desires of the beneficiaries. New life insurance products have made some policies sold in the past obsolete. An old under-performing policy can often be replaced. However, some trustees don’t possess the skills necessary to oversee trust-owned life insurance. A trustee should understand and be aware of:
- The policy’s performance relative to expectations
- The last time the life insurance policy was reviewed
- If there are other policies that may do a better job of meeting wishes and stipulations expressed in the trust document
- Whether the credit rating of the insurance company that issued the policy has decreased and
- If the allocation of the sub-accounts is still aligned with the investment policy statement.
Trust-owned life insurance can have an important role in the estate plans of many people, but not all trustees have the bandwidth when it comes to insurance and estate planning to fulfill their fiduciary responsibilities. Ask an experienced, Jupiter, Florida estate planning attorney for assistance.
Reference: Investopedia (June 25, 2019) “Can You Trust Your Trustee?”