Trust Owned Life Insurance (TOLI) is insurance that resides inside a trust. It enables the trust to provide money for survivors to cover estate tax planning and distribute inheritances among heirs. As with any trust, there must be a trustee who is responsible for managing the trust’s assets and ensuring its continued vitality.`
In the case of a TOLI, a trustee is usually one of the following:
- adult children of elderly parents
- parents of minor children
- a spouse
One of the fiduciary responsibilities of a trustee is to review all assets within the trust including any life insurance policies. Unfortunately, many trustees, particularly those family members who are not legal or financial professionals, lack the acumen and resources to complete these types of needed reviews. This can be a big problem for several reasons.
If the trustee is not performing his or her fiduciary responsibilities, the assets within the trust may not be well-maintained or managed, and may not be performing as well as they could be. There could even be legal recourse against a trustee if the fiduciary responsibilities go unfulfilled.
In order to avoid this situation, the trustee needs to be reviewing (or having a financial professional review) all insurance policies within the trust at a minimum of every 3-4 years, and asking the following questions:
1. Does the trust meet the beneficiary’s needs and objectives?
2. Is the policy benefit-driven or cash-value-driven?
When we review these types of trusts, we often use in-force illustrations to see whether the trust’s policies are matching or exceeding expected market performance. We assess changes in the health of all relevant parties, and review the current and likely future strength of the carrier of a policy.
We also look at the potential of a policy to lapse prematurely and confirm that the premium schedule is on track. We review all of the trust documents and provide a full analysis to make it easy for a trustee to understand exactly where things stand.
When working with RIAs , we return a very concise report that outlines any potential problems with the the trust and provides recommendations on any opportunities to improve its financial performance. This guidance is included in our service model for RIAs; we have an expert team of estate planning attorneys that we coordinate with to provide a full suite of services around trust owned policies. It is critical that these policies not go ignored or overlooked simply because many trustees are confused about, or ignorant of, their responsibilities.