Before selecting a family member to serve as the trustee of an irrevocable life insurance trust, there are critical nontax and tax concerns to consider. There are benefits to selecting a family member trustee, though flexibility and cost savings are not necessarily givens.
Let’s explore some of the issues you’ll want to weigh carefully when selecting a trustee for an irrevocable life insurance trust.
Taking Tax Out of the Decision
First, take some time to do some soul searching about the potential family member trustee’s expertise and commitment. Does the family member have the experience (and desire) to steer the trust? How might the selection of a family member trustee create a conflict of interest? How could this decision affect the overall family dynamic (for better, or for worse)?
Meanwhile, trust size does matter in this decision. In many cases, a smaller trust is more suited to a family member trustee. Larger trust funds require more services and administrative responsibilities that a family member trustee may not be able to fulfill.
Most of all, grantors may lean toward naming a family member as a trustee because they have more confidence in family members to carry out the terms, the relationship is more personal, and family will be more in tune than an outsider with the family dynamics of the trust.
That said, family might not have the experience, background or time to manage the investment or the knowledge to handle tax planning, accounting and other administrative duties. Plus, there are fiduciary responsibilities to the trust and its beneficiaries that must be understood. And, in event of negligence, the family member might not have deep pockets to recover damages.
A Tax Perspective
If a grantor decides to appoint a family member as a trustee, certain tax ramifications must be addressed. Here are some concerns:
- Will a trustee be considered to be making a taxable gift by the exercise of discretionary powers?
- Will the existence of certain power bring the entire trust property back into the trustee’s estate?
- Will the trustee be taxed on trust income?
- What tax consequences may result from appointing a grantor’s spouse, child or grandchild to serve as trustee of the irrevocable trust?
- What gift, estate and income tax implications could result from naming a family member trustee?
- If life insurance proceeds are to be excluded from the grantor-insured’s estate, the insured should not be the trustee of the life insurance trust.
- If the trustee holds survivorship insurance and proceeds are to be excluded from the insured’s estate, neither insured should be the trustee.
Co-Trustees: A Beneficial Balance
If a grantor wishes to name a family member as trustee, but there are concerns about this member’s experience or ability to fulfill administrative duties, the grantor may choose to name an outside co-trustee who is a professional. And, a grantor can delegate certain technical and administrative responsibilities to appropriate advisers.
Marsh & McLennan Agency formerly Benefits Resource Group understands the significant liability that trustees face if they fail to exercise due diligence in the selection and monitoring of irrevocable life insurance trust policies. We’re here to protect your assets and help your family plan for the future.
Let’s talk more about choosing a trustee for an irrevocable life insurance trust. We encourage you to contact Charles J. Farro. Chuck is the president and co-founder of Marsh & McLennan Agency formerly Benefits Resource Group. You can contact Chuck by phone at 216-393-1818 or by email at firstname.lastname@example.org.