Risks & Obligations involved with managing an ILIT

Insurance trusts are very unique and useful instruments, however they can pose significant challenges to corporate fiduciaries, especially those who are still practicing passive management. Practices that had once been considered acceptable, are no longer. It is important to realize that fiduciary risk is real and will be experienced if you fail to meet the following standards:

  • Fully understand how Life Insurance policies work and be able to identify if a policy is at risk
  • Review the policy on an annual basis and know whether its performance is adequate?
  • Know when it’s time to look at replacement opportunities with new policies that have improved efficiencies?
  • Keep track of the administrative tasks so that they are done timely and documented properly in case of an IRS audit?
  • If the trust is being funded by using the annual gift tax exclusion, the trustee is required to send timely notices to the beneficiaries of their withdrawal rights.
  • Manage the day-to-day trust administration, including sending reminder letter for premium payments, Crummey letters to the beneficiaries and collecting/paying insurance premiums

  • 23% of life insurance policies will lapse prior to maturity
  • 86% of policy owners have experienced changes in health, wealth and personal circumstances since the inception of the trust
  • 31% of life insurance policies are outdated and no longer competitive with new plans of insurance
  • Many trust beneficiaries (your legal clients) will be dissatisified with the handling of their trust; some may file complaints or pursue litigation against the trustee
  • ILITs are a direct indication of wealth, yet few policies ever meet the initial projections