Our two prior blogposts explored the need for regular and ongoing trust-owned policy reviews and examined methods of valuing underperforming, at-risk policies. This third post explores a potential option when a policy review uncovers a poorly drafted or obsolete irrevocable trust.
“Predictions are hard,” said former NY Yankee Hall of Famer Yogi Berra. “Especially about the future.”
Yet somehow clients, their financial advisors and estate attorneys are supposed to gaze into the future and know how newborns will turn out, what legislative, tax and carrier changes will take place, and whether a couple will stay together or divorce, remarry and potentially start second or third families. Based on this perfect seer-like wisdom, all-knowing advisors must create Irrevocable Life Insurance Trusts (ILITs) that can never be altered in any way, shape or form. Challenging? Certainly. But it’s been the status quo for years. Until now.
Twenty-eight states have either passed or are considering legislation that would allow clients to revoke (“decant”) an irrevocable trust. Even California recently conceded the wisdom of former Carmel resident Doris Day’s 1956 hit song “Que Sera Sera”1 and passed the Uniform Trust Decanting Act in 2018.
California’s new law allows trustees to modify the terms of a trust (with some limitations) without court approval or the consent of beneficiaries’ non-judicial modification). In addition, trustees can always go to court to modify an existing agreement (non-judicial modification).
Policy Reviews and the Irrevocable Trust
Trustees have a fiduciary responsibility to manage assets for the benefit of trust beneficiaries. Yet life insurance is often viewed as a passive asset by trustees. ILITs, in fact, need constant performance monitoring to ensure sufficiency of current premium payments and whether any withdrawals or loans outstanding have affected the policy over time. Failure to do so could subject trustees to an unintended breach of fiduciary duties and legal liability.