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Obscure Trusts: Irrevocable Life Insurance Trusts

Kathryn Van Eeuwen

September 17, 2020

There are many reasons why grantors decide they no longer want to fund the life insurance within their trust. Sometimes the grantor’s financial circumstances change, and the premiums are no longer affordable. At other times, family situations may change, and the intended beneficiaries may no longer need or be alive to receive the funds.  And sometimes, as in recent years, the tax laws change and those creating the trust may no longer need to plan for estate tax liability following death. 

In those cases, what should the trustee do? 

  • Analyze the circumstances of the grantor and beneficiaries. The trustee should review in totality the financial, tax, insurability and any other relevant facts. 
  • Review the Insurance Policy to determine the various payment options available including reduced premiums; using built up cash value to cover the premium; doing a conversion or exchange for revised coverage or premiums; or surrendering of the policy completely.   
  • Analyze the provisions within the trust to determine what options are available for distributions or even premature termination of the trust. If no provisions are presently in the document, consideration can be given to reforming the document under a nonjudicial settlement agreement with virtual representation or even court modification. 

No matter what the decision, the trustee needs to ensure that the file is properly documented to show that the grantor no longer intends to fund the policy by making additional payments and that the considerations outlined above were fully considered. 

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