Trust-Owned Life Insurance (TOLI) Policy Audit and Review

The most important tool for maintaining a viable trust-owned life insurance policy is the annual policy review. If the trustee is a national bank, under 12 CFR (Code of Federal Regulations) 9.6, the Office of the Comptroller of the Currency mandated that national banks have written documentation of annual reviews of trust assets. Often, the life insurance policy is a significant and sometimes sole asset of trusts. A recent survey indicated that 83% of professional trustees (banks, attorneys, accountants and estate planners) have no guidelines or procedures for handling trust-owned life insurance. Furthermore, of the same group, 95% have no policy statement on how to handle life insurance investments.

Studies have shown that a sizeable portion of trustees are non-professionals, such as family members and friends. The same study revealed that non-professional (family and friends) trustees fared worse in their fiduciary performance. Over 70% of the non-professional trustees have not reviewed their trusts' life insurance policies in the last five years. In addition, over 90% have no policy statement on how to handle life insurance investments.

In addition to rules under 12 CFR 9.6, the Uniform Prudent Investor Act (UPIA) requires that trustees act in a fiduciary capacity. In this capacity, the trust requires the trustee to carry out the objectives of the trust for the sole benefit of the trust beneficiaries. The importance of this cannot be overstated; it is for the sole benefit of the beneficiaries, not the insured. The trustee is to act as a fiduciary for the beneficiaries alone.

Whether a professional trustee or not, there are fiduciary liabilities imposed on all trustees as a result of the UPIA. Trustees are required to maintain an active involvement in the management of the trusts they are overseeing under UPIA. The beneficiaries can hold both professional and non-professional trustees liable for damages if they perform in a substandard manner. While a professional trust constructor may have an idea of the duties required, consider a non-professional trustee who must follow the rules of a trust they did not write and may not have read. The trustee has to manage life insurance policies they had no part in selecting and probably have not read. In addition, the trustee must come up with the funds to make the premium payments on the life insurance.