Tuesday, March 1, 2011

Irrevocable Life Insurance Trusts: Choosing Trustees*

Trustees for Irrevocable Life Insurance Trusts (ILITs) must be selected with special care because the consequences for not following the instructions in the trust can be serious.  The trustmaker is not permitted to act as a trustee of an ILIT.  Doing so would give the trustmaker too much control, and the value of the life insurance proceeds would be includable in his or her estate.  If the trust owns a second-to-die policy, neither trustmaker can be the trustee.

During the lifetime of the client, the family CPA may be the best choice.  Accountants are a good choice primarily because of their attention to detail.  An ILIT requires close attention for accounting, notification to beneficiaries, payment of premiums, and follow-up.  Since administration of an ILIT during the trustmaker's life is mostly ministerial, the accountant can be relied upon to meticulously follow the correct procedures.  After the death of the trustmaker, other trustees (including the client's children) can either replace the accountant or can be added.  At that point, we recommend appointing ILIT trustees consistent with those found in the trustmaker's Revocable Living Trust.

A bank trust department is another good candidate for the position of the initial ILIT trustee.  Like accountants, bank trust departments can be relied upon to carefully perform the business of administering the ILIT.  That is their primary business after all, and they typically use reliable and experienced professional trust officers.

Generally, if the ILIT holds only life insurance policies and a nominal amount of cash, the fee charged by most banks trust departments is reasonable for the tasks performed.  Recently however, bank fees have been escalating due to perceived liability, and many banks will only serve as trustee when there is a significant banking relationship.  On the other hand, accountants usually charge an hourly rate, and annual administration of an ILIT is often not terribly time-consuming.

Other advisors can make good trustees, too.  However, it is important that an advisor be detail-oriented and equipped to administer the ILIT properly.  Desire is not enough.  Attention to detail, good bookkeeping practices, good follow-up, and existing systems and procedures are absolute requirements for an advisor who takes on the job of ILIT trustee.  Attorneys and other advisors usually are not covered by malpractice insurance for work performed as a trustee and will usually turn it down.

If a trustmaker feels uncomfortable naming a bank or an accountant as sole trustee, or insists on naming a friend, a relative, or an inexperienced advisor, it is almost always better to add an accountant or a bank trust department as a co-trustee.  Two heads are better than one, and that is especially true in trusteeship.

The client may reserve the right to remove the trustee and (with certain limitations) to replace him if the arrangement later proves to be unsatisfactory.

*Adapted from the Planning Partners Press.

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