Trust-Owned Life Insurance: The CPA's Role: Exposures Related to Serving as a Trustee
EXECUTIVE SUMMARY * CPAs with specific training and understanding of life insurance in estate planning sometimes are trustees of trust-owned life insurance (TOLI). With the complexity of many policies, responsibilities of annual policy review and fiduciary duties under the Uniform Prudent Investor Act, however, many may decide to serve their clients by helping them select a trust company to handle TOLI management and then continue to advise the grantor and monitor the trust's performance. * Whether the trustee is a CPA or other professional, the trustee should ensure premiums are sufficient to cover any decrease in interest rate for universal life policies or investment subaccount results for variable universal life. Shortfalls may result in a loan that in the case of a policy lapse could cause cancellation-of-debt taxable income to the client. * The annual policy review should also check for proper crediting of premiums and titling of ownership and beneficiaries, and evaluate the performance of the insurance carrier and the policy, using an in-force reprojection. If the policy is under performing, options may include replacing the policy or selling it in a life settlement. ********** Many CPAs recommend that their high-net-worth clients use trust-owned life insurance (TOLI) as the cornerstone of their estate plan. In addition, many CPAs choose to serve as trustees of such trusts. CPAs who are considering accepting a trustee designation should be well aware of the hazards inherent to the task and make sure they have the skills and knowledge to take on the challenge, which will usually involve some specific training in life insurance. [ILLUSTRATION OMITTED] Even if they shun this weighty responsibility, CPAs can still serve critical client needs in this area. This article is designed to help CPAs decide whether to accept the trustee designation. If they do accept it or are already a trustee, they can assess their approach against fiduciary requirements and best practices. With the passage of the Uniform Prudent Investor Act in the mid1990s, trustees' fiduciary duties are held to a higher standard than under previous law. Many of those practices, however, also apply to life insurance generally, whether or not a trust is involved. As trusted advisers, CPAs have an obligation to educate their clients about the pending crisis in TOLI. A real problem looms on the horizon. Certain studies have shown that more than 25% of nonguaranteed flexible TOLI policies will lapse during the insured's lifetime ("TOLI Risk Management at Litigation Crossroads," Steve Leimberg's Estate Planning Email Newsletter, no. 1110, April 12, 2007). You should take the opportunity to work with a competent insurance professional to protect your clients' plans and assist your clients in developing a best-practices review for their TOLI. In many cases, CPAs can best serve their clients by assisting them with obtaining a competent corporate fiduciary, or trust company, to serve as trustee. CPAs should also advise clients against choosing as the trustee a family member who knows nothing about life insurance. Ed Linsley, senior vice president and manager of personal trust at Reliance Trust Co., recommends evaluating a trust company by how long it has been in business, how much in assets it manages, whether it has local representation to serve the client, and whether its fees are reasonable. Also, inquire whether the trust company does business in irrevocable life insurance trusts (ILITs). If so, how many trusts does it administer and does it audit them? THE POLICY Permanent life insurance policies sold over the last 25 years have typically been whole life or flexible premium nonguaranteed policies (universal, variable universal and adjustable life products) or a blend of each with term insurance. Whole life contracts provide for a guaranteed fixed premium, death benefit and cash surrender value. …