Metz Lewis Brodman Must O'Keefe

Metz Lewis Brodman Must O'Keefe

Posted on June 19, 2015

Irrevocable life insurance trusts (ILITs) are designed to keep life insurance from being subject to estate tax in the insured’s estate.  However, the trust must be precisely drafted and administered to be successful.

Clients, scriveners, and trustees who are not familiar with life insurance trust drafting can unwittingly trigger taxation of the trust assets at the client’s death or other problems with the trust.  What follows are seemingly innocent maneuvers that can result in negative outcomes.  A solution to each situation is also offered.

Not Regularly Conducting Policy Reviews

As we live longer, life expectancy tables have been tilted in favor of the living. As a result, an old policy can often be exchanged for a newer, “cheaper” policy.  This means that absent a change in health, the same death benefit costs less for a new policy than an old policy.

On the other hand, many Variable Universal Life policies were established during rosier economic times.  Due to the Great Recession and lackluster investment performance, these policies can be in danger of lapsing unless substantial additional premiums are used to shore up the policy.

Solution:  Have your agent obtain a policy review of the trust policies at least every few years.  Proactively identifying insurance issues makes them easier to manage  and avoids surprises.  It’s also a best practice for the trustee of the ILIT to follow.  Best yet, these periodic reviews can lead to discoveries of less expensive coverage.

Not Calendaring Term Conversion Deadlines

Many quality term policies have a feature allowing the policy to be converted to a permanent policy.  This allows the insured to “lock in” a good health history at a low cost early in life.  Then, the policy can be converted to a permanent policy using the prior health history.  This is great protection against an intervening health event.  However, the timeframe to convert the policy may lapse sooner than the term of the policy.

Solution:  The trustee should note the term conversion deadline and begin an analysis a few months in advance to decide whether converting is worthwhile as is no guarantee that the insurance carrier may not give notification of the deadline.  Failure to do so could lead to more expensive, or even worse, total loss of insurance in the event of a health.  A periodic policy review should also identify any imminent conversion deadlines.

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