What are the Trustee’s Responsibilities in Administering an Irrevocable Life Insurance Trust in Virginia?

Irrevocable Life Insurance Trusts may seem like an obscure concept, but they are actually commonly used in estate planning to remove life insurance proceeds from the insured person’s taxable estate.  Even though these types of trusts are commonly used in estate planning, the technical aspects of administering an irrevocable life insurance trust are often misunderstood.  However, it is extremely important that irrevocable life insurance trusts are properly administered because if it is done incorrectly, there can be adverse tax consequences to the grantor and to the beneficiaries.  Therefore, it is important to pay attention to the following issues if you are administering an irrevocable life insurance trust.

 

Open a Separate Bank Account and Pay Insurance Premiums

            The trustee should immediately open a separate bank account for the trust.  This account should be used for the annual gifts made to the Irrevocable Life Insurance Trust.  Additionally, these gifts should be deposited from the grantor’s individual bank account into the trust account at least 30 days before the premium due date in order to allow the trust beneficiaries the ability to exercise their “Crummey” rights of withdrawal under the trust agreement. 

            In most cases, funds will only be held in the account for a short period of time, so a non-interest bearing account may help simplify tax matters. 

 

Give Notice to the Beneficiary About “Crummey” Withdrawal Rights

            First, it is important to explain what “Crummey” rights are.  Usually, the amounts gifted to a trust are taxable gifts.  In order to qualify gifts to an Irrevocable Life Insurance Trust for the annual exclusion, the trust agreement will often give some, or even all, of the beneficiaries the right to withdraw certain amounts each year.  This set amount of withdrawal amounts is referred to as the “Crummey” rights of withdrawal. 

            The trustee should notify any beneficiary who has Crummey withdrawal rights whenever the grantor makes any gifts to the Irrevocable Life Insurance Trust.  The notice should always be in writing and given immediately after the gift is made.  Further, the notice should contain a specific description of the gifted property and give a time period in which the beneficiary has a right to exercise his or her power of withdrawal.  If the trustee does not provide this notice at the same time that the grantor makes a gift, it could result in adverse tax consequences. 

 

Recordkeeping:

            The trustee should create and maintain a permanent file to keep important trust documents safe.  These documents should include the trust agreement, insurance policies, assignments of insurance policies, and valuations (if there are any), copies of all notice letters sent to general beneficiaries and Crummey beneficiaries.  Additionally, the trustee should make sure to keep records of all trust activity, which can include things such as receipts of deposits and payments of insurance premiums. 

 

Monitor and Review Insurance Policy and Company

            Trustees have a very important fiduciary duty to make smart investment decisions about the trust assets – including decisions about life insurance policies.  Because of this, the trustee should monitor and review the performance of the policies and the financial health of the insurance carrier. 

 

Collect Insurance Proceeds

            When the insured person dies, the trustee has the obligation to collect the life insurance policy proceeds that were held by the Irrevocable Life Insurance Trust.  Then, it is necessary for the trustee to distribute the proceeds in accordance with the trust agreement. 

Clearly, Irrevocable Life Insurance Trusts can be complicated to manage.  While they are great estate planning tools for many people, even minor mistakes can cause the IRS to challenge the trust.  Therefore, it is necessary to have an attorney help you create this type of trust as well as an attorney to help you manage this type of trust.  Call the experienced attorneys of Smith Strong at (804) 325-1245 or (757) 941- 4298 today.