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 ILIT Liability  Irrevocable Life Insurance Trust (ILIT) management necessitates proper attention to potential risks. It is well known that many fiduciaries limit their activities to paying annual premiums and sending out Crummey1 letters . However, this increasingly common approach is contradictory to the standards as outlined in the Uniform Prudent Investor Act (UPIA). Similarly, many fiduciaries do not meet the criteria for suitability  of ILIT policy holdings as per the UPIA. In order to appropriately mitigate the risk associated with ILIT management, fiduciaries need to take the necessary steps to either maintain staff and expertise in house or to make the decision to divest this liability fully. The ultimate objective in making this decision is to remain current with updated regulations and policy changes, as well as effectively manage the liability associated with ILITs.Compliance with the UPIA is a function of adhering to the outlined process. The implementation of all the various administrative duties associated with a prudent ILIT management process is a requirement of the trustee. As UPIA standards require that trustees become increasingly proactive, the responsibilities of a fiduciary now extend well beyond paying annual premiums and sending Crummey notices. Trustees are typically responsible for the following activities:
The Uniform Prudent Investor Act (UPIA) sets the guidelines for holding a suitable insurance policy in trust. According to the UPIA, "A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution." Policy performance and policy expense are two points of reference to ascertain whether the trustee is investing with prudence. Policy performance can be measured by the performance of invested assets underlying policy cash values. Measuring policy performance reduces asymmetric information problems that otherwise would have permitted the trustee to invest with an inappropriate risk level. Poorly managed risk may result in low death benefits and an increased risk of policy lapse. Policy expense is the other benchmark for ILIT suitability. According to Section 7 of the UPIA "a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee." Therefore trustees may only incur reasonably sized expenses that are relevant to the trust investment program. Similar to measuring policy performance, these restrictions eliminate the asymmetric information problem between the trustee and the grantor therefore ensuring that the trustee will invest with due caution. As per the current UPIA standards, the trustee may be held liable for exceeding appropriate policy expenses. Given the standards delineated by the UPIA, proper ILIT management involves extensive resources. Prudent ILIT management necessitates maintaining a staff that has the capacity to complete the requisite administrative functions as well as the expertise to manage the ILITs and adapt to the dynamic regulatory environment. Sustaining such a staff generates a sizable expense which will reduce net profit, and may not completely diminish the risk-liability factor. Alternatively, maintaining a smaller staff could be costly as well in terms of the heightened risk of an oversight of a routine administrative function, for example forgetting to pay a premium payment or to send a Crummey notice. Neither alternative appears optimal for fiduciaries who must decide between either committing a significant amount of resources to maintain an appropriate ILIT administration staff or sustaining a smaller staff with a heightened risk factor. Citadel Trust Company offers a solution that can decrease expenses and reduce liability. Citadel Trust operates by acting as successor trustee to manage existing ILITs currently held in trust by the bank. We have a staff committed to ILIT management, oversight, analysis, recommendations and support. Our staff includes trust officers, attorneys, a team of life insurance experts, and trust administration experts. Together we offer expertise in the review, transfer, and ongoing administration of ILITs. These services eliminate the high opportunity costs to fiduciaries in terms of time and resource allocation in managing ILITs. Most importantly, Citadel Trust assumes future liability for all transferred ILITs thereby eliminating the high risk factor associated with ILIT administration. 1Notification of withdrawal rights letter to beneficiaries upon a gift to a trust when the trust contains withdrawal rights. |
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   A Letter to Welcome You...
8630 Delmar Blvd. Suite 110 St. Louis, MO 63124 Phone: 314-997-1110 Toll Free: 800-332-2963 Fax: 314-442-0070 info@citadeltrust.com  |
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