Trust-owned life insurance is designed to hold your policy.
Estate planning and life insurance often have similar goals.
They help individuals provide for and protect their loved ones when they die.
Trusts are estate planning tools used to efficiently distribute assess to heirs while reducing estate taxes by removing assets from your estate, if the trusts are irrevocable.
This means more of your wealth will be benefit your loved ones rather than be lost to the government in taxes.
What do trusts and life insurance policies have to do with each other?
According to a recent Investopedia article titled “Can You Trust Your Trustee?,” your estate plan could include trust-owned life insurance (TOLI).
What is this?
The trust-owned life insurance functions similarly to a company-owned or bank-owned policy.
The life insurance policy is held within the trust.
The trustee is tasked with the fiduciary responsibility to manage the trust in the best interest of the beneficiary and according to the instructions of the trust.
Maximizing wealth received is the usual desired result for beneficiaries.
What does this mean for trustees?
Trustees of trust-owned life insurance must be active in managing the policy (or policies).
They should regularly review the policy to determine whether it is performing in accordance with the projections of the original life insurance illustration.
If alternative policies align better with the goals of the beneficiaries, then the trustee needs to adjust accordingly.
Older policies may become obsolete when new life insurance products are introduced.
Trustees may need to replace under performing life insurance policies.
What steps can trustees take to ensure they are managing the trust-owned life insurance well?
The trustee should be compare expectations of the policy to its actual performance.
The trustee should keep a record of each time he or she reviews the policy.
What should be reviewed?
Trustees should look at whether policy was issued by an insurance company whose credit rating as decreased.
They should check to see if the allocation of the sub-accounts still aligns with the investment policy statement.
Managing trust-owned life insurance as a trustee is a significant role and requires the trustee to have both the bandwidth and knowledge to serve as a fiduciary.
A strong relationship with a life insurance professional is a must.
Reference: Investopedia (June 25, 2019) “Can You Trust Your Trustee?”