Hidden Factors Could Cost Your Life Trust Client Money

We are still working to assess the paper trail, but with limited digital records it makes everything more difficult to uncover. This is a perfect example of why it's essential for your client to have a trusted partner that will continue to monitor policies far beyond the time commissions are paid.

Although there was good intent for setting up these policies within an ILIT, the niece and nephew in this scenario will be the ones who will suffer from a lack of proper monitoring and due diligence along the way – something over which they had no control over.

While situations vary, milestones should be set in place for routine, on-going policy review. These policies ran into issues within the first couple of years affecting taxation of withdrawals and conversions, but the sub-par smoker rates were never updated at the age of 18 thereby creating additional wasted costs. The policies have lost years of compound interest crediting, which could be withdrawn tax-free for future use by the niece and nephew, if the policies had not fallen into MEC status during the first few years.

Additional Variables to Consider

Other factors, such as a low interest rate environment could also trigger the need for a policy review. Lower interest rates mean that the policy is receiving lower crediting rates, which could require additional premiums to be paid in order to keep the policy performing as intended. Different types of policies available today offer flexibility, and premiums are often not fixed or guaranteed, and amounts could fluctuate.

Trustees in this situation are expected to act as a fiduciary, even though they are often not involved in the initial portfolio or life insurance policy selection process. In fact, once the trustee accepts appointment responsibility, they are expected to manage the life insurance portfolio to minimize risk to the beneficiaries. However, according to an article that appeared in an American Bar Association publication, "several states have enacted statutes that relieve an ILIT trustee of liability in managing life insurance as an investment." In those states, the trustee is treated more like a custodian than a fiduciary from a liability standpoint. Therefore, it is important to appoint an individual or professional organization as trustee who is willing to communicate with the advisory team implementing the policy.

Your Client's Plan is a Plan for a Reason

Performing consistent reviews is essential to ensure implemented structures are still meeting the intended goals and maintaining competitive pricing. Insurance products evolve, tax laws change, and there is a constant need to make sure your client's financial plan is providing the right assets to the right beneficiaries, in the correct way at the proper time.

— Read Tax Overhaul Gave Clients With Irrevocable Life Trusts Work to Do, on ThinkAdvisor.

Scott Diamond is a wealth advisor at Schechter, a wealth advisory and financial services firm based in Birmingham, Michigan. He can be reached at (248) 731-9500.