Wealth Advisor Resources

TOLI Trustees: Don’t Throw That Life Insurance Policy Away!

Michael Brohawn CFP®, CLU®, CAP®
Your Life Insurance Solutions

Oct 21, 2020

The Tax Cuts and Jobs Act Of 2017 signed into law by President Trump drastically limited the number of estates affected by federal estate taxes through raising the federal estate tax exemption from $5.49 million to $11.18 million.  With the higher exemption it has been estimated that less than one in every 1,000 estates are now affected by federal estate taxes. During the decade-plus I spent managing life insurance policies for trustees across the country, I came across many instances where trust-owned life insurance (TOLI) trustees simply surrendered a policy because the grantor said they no longer needed it.  No analysis, no other options reviewed.  This is a recipe for disaster (and litigation you will surely lose.) Life insurance is a vital financial tool and remains one of the most versatile and practical means of creating and protecting an estate, even if it is no longer needed to pay estate taxes.  The next time a grantor tells you they no longer need their policy, take the time to point out the following:

  • Just because the life insurance is not needed to pay estate taxes, does not mean it is not worthwhile. In fact, the death benefit in the trust is even more valuable now because all of the death benefit can flow directly to the beneficiaries, with none going to pay taxes.

 

  • Since your client will be passing on a larger (tax-free) financial legacy to their beneficiaries they are free to use more of their other assets to enjoy life, without worrying whether enough is left behind.

 

  • Even if the grantor wishes to suspend gifting to the trust, the policy can still stay in force. Ask the carrier for an in-force ledger showing the death benefit that can be maintained with only the current cash value in the policy.  The death benefit may be lowered but the policy will still remain in the trust to be passed on.

 

  • Some of your clients can repurpose their policy to solve other goals. In today’s market there are policies that can provide long-term care benefits during their lifetime, with the balance of the policy’s value passed on at death.  The policy that was designed to protect against taxes can now be used to protect against unforeseen

 

  • And lastly, before surrendering any policy, see if the client would be interested in selling the policy in the secondary market. The life settlement market may be able to provide the trust with much more than the surrender value in the policy and it is still your responsibility to maximize its value.  I am convinced that this will be an area of litigation going forward for those trustees who do not explore the option before surrendering a policy.

The TOLI world changed dramatically with the passage of the Tax Cuts and Jobs Act Of 2017.  With change comes opportunity – opportunity to provide your clients with great service.

Free Book For Wealth Advisors

Michael put the knowledge gained from working with Fiduciaries and Wealth Advisors on thousands of life insurance policies into his first book, The Wealth Advisors Guide to Life Insurance.

An easy to read book, it provides Wealth Advisors with a background in life insurance and outlines the process for the proper selection, use, and management of life insurance.

If you are a Trustee, Attorney, CPA, Family Office or Fee-Based Advisor, Michael is offering you a free copy of the book for a limited time.

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