234 / Who should serve as trustee of an ILIT and what role does the trustee play?
The role of a trustee is extremely critical in an ILIT if the tax advantages of the structure are to be realized. The integrity of the individual or the institution must be a primary priority because of their role as fiduciary and controller of the trust. The trustee can be the trust creator or family members, unrelated person(s), an institutional or corporate trustee such as a trust department of a banking institution or any combination of the these options. When choosing a trustee, it is important to consider the experience, knowledge and expertise of the trustee.
The trustee should be one with the experience and capacity to handle the types of investments contained in the trust, and must have the necessary skills to sufficiently administer the trust for the benefit of the trust beneficiaries.
Choosing the appropriate trustee also dictates whether the income from the trust will be treated as taxable income to the grantor. This can occur because the trustee has a relationship with the grantor that is prohibited by statute or because the trustee administers the trust in a way designed to circumvent tax regulation and benefit the grantor.1 This problem will occur if the trustee is considered to be related or a subordinate party to the grantor.2 However, this problem will not occur if the related or subordinate party is also considered to be an adverse party. An adverse party is one that has a beneficial interest in the trust, one who has the power of appointment over trust assets or one whose interest would be adversely affected by the exercise or the non-exercise of a power held by the non-adverse party.3
1. IRC § 671(a), Rev. Rul. 2004-64, 2004-2 CB 7.