The value of trust reviews

The value of trust reviews

Trusts are created to reach the immediate goals of the grantor and the future needs of their beneficiaries. But without regular reviews, a trust may not be as successful as it could be. So, when do trusts need to be reviewed? Let’s find out.

Viewing trusts as an asset

Many trusts have investment assets that can include stocks, bonds, mutual funds and private equity. The trustee is responsible for the performance of these assets by managing the trust’s investment risk. Trustees who don’t have expertise in this arena hire financial professionals to help with this management.

Some trusts not only include the assets mentioned above but also own life insurance contracts on the grantor(s). Other trusts include only the life insurance policies. The Uniform Prudent Investor Act establishes standards for trustees, including reasonable care, skill and caution that must be applied to not only traditional assets – like stocks, bonds, mutual funds, and real estate – but to all portfolio assets including life insurance policies. We generally think of insurance as addressing mortality risk, however, once purchased the trustee is managing lapse risk.


Click here for questions to consider when reviewing trusts from an asset angle
  • Has the carrier increased the cost of insurance charges?
  • How much increased funding is required to maintain coverage for a desired period and how does this funding work with the limitations of annual exclusion gifting? 
  • With the annual exclusion increasing from $15,000 to $16,000 on January 1, 2022, if funding exceeds the annual exclusion, should the client invade his or her applicable exemption if available?
  • If the trust holds a Universal Life contract purchased years ago, has the policy been reviewed given the significant interest crediting rate reductions?
  • If the trust holds an Indexed Universal Life contract, how has reduced cap rates effected expected performance?
  • If the policy includes a term rider whose funding is provided by the dividends which have been reduced, should the term rider be examined for reduction?
  • Can the term rider be converted?
  • Has the original insurance company been purchased by new firm with ratings much lower than the original company?
  • If the trust holds a Variable Universal Life contract, how have the separate accounts performed against expectations?
  • If the trust owns a Whole Life contract, have dividends met expectations?
  • What is the life expectancy of the insured or insureds? Does the policy lapse prior to this?


Looking at a trust’s structure

During the past year, changes were proposed regarding defective grantor trusts, such as the intent to include future trust’s assets in the estate of the grantor. Although this legislative change seems improbable at the time of this writing, our clients face legislative risk with each election cycle. Defective grantor trusts are powerful tools in the hands of a skilled estate planner.

For business owners, the defective grantor trust is a staple of asset transfer. In addition to gifts of private equity, selling a minority interest in one’s business to one’s own trust is an extremely efficient way to move the growth of assets outside the taxable estate. If the growth and income rate of the assets is significantly greater than the loan rate, leverage is created. The spread remains in the trust tax free as the grantor pays any income or capital gains for the trust (estate reduction). Although the grantor pays the income and capital gains tax on trust income, these tax payments are not considered gifts to the trust. 

You may be wondering: if the original goals of a grantor and his or her beneficiaries have changed such that the trust is no longer appropriate, should the trust be terminated? Assuming the grantor now wishes to own the life insurance policy currently in the trust, perhaps the grantor can swap cash for the policy. Alternatively, if the policy is not needed by the grantor nor the beneficiaries and the policy is in a loss position (measured as the cost basis being significantly greater than the account value) the trustee might consider executing a 1035 to a deferred annuity allowing the account value to grow to the cost basis thus recovering the loss tax free. This would require the trust to remain in existence.

Expertise matters to your clients

Offering life insurance policy reviews to trustees is a valuable service that protects the trustee from an underperforming contract that could result in a lapse. E. Randolph Whitelaw and Henry Montag noted in their book “The Life Insurance Policy Crisis” published in 2017 by the American Bar Association that 90% of ILIT’s are managed by trustees with no skill to manage life insurance. You should encourage your clients to review their trusts with their own legal or tax advisor. Further, offering your clients periodic reviews of their life insurance policies helps them avoid negative impacts such as lapse.

Partner with us

Clients’ trusts and life policies need your attention, especially before any changes in their health or needs occur. Lincoln is happy to help support you as you help your clients reach their financial goals.

Connect with your Lincoln Life Wholesaler or call us at 866-247-1604.

Kevin W Cox

Kevin W. Cox, CLU®, ChFC®, CFP®, MSFS is an Advanced Sales Consultant for Lincoln Financial Distributors who has worked 40 years with financial professionals and their clients on life insurance and annuity concepts.

Kevin is a member of the Association for Advanced Life Underwriting, the Washington, D.C. Estate Planning Council, and the National Capital Chapter of the Financial Planning Association. Among his many speaking engagements, Kevin addressed the pros and cons of Variable Universal Life at the Maryland Life Underwriters convention and addressed the merits of life insurance in a financial planning practice at the Chicago Financial Planning Association.