Settling A Life Policy That's Held In A Trust

Selling a life insurance policy on the secondary market can be a complex transaction with many factors playing a role in determining what a policy is worth. However, whether or not the policy has been held in a trust is not one of those factors, according to industry experts.

“The form of ownership doesn’t really matter” in terms of the sale price itself, said Michael Bonasera, an attorney specializing in trusts and estates in the Columbus, Ohio office of the law firm Buckingham, Doolittle & Burroughs, LLP. “It really doesn’t make a difference to the market.”

The use of trusts in keeping life insurance policies is a “very common planning tool,” particularly among high net worth individuals who would expect to be facing estate tax issues, according to Bonasera.

While the end result may be largely unchanged, selling a policy held in trust can add work to the process of bringing a policy to the secondary market.

“There are some issues,” although in general “the answer is different depending on the trust,” said George Sanders, co-founder of Murray, Utah-based Safe Haven Financial Center, Inc. However, many of those differences, he said, are in the dealings with the trust, as the transaction itself wouldn’t be any different.

According to Bonasera, a major factor can be if the trust was set up as a revocable or an irrevocable trust. If the trust is revocable, and the grantor is also the trustee, he said, selling a policy would be “no big deal” because the beneficiaries in a revocable trust do not have a vested interest and the trustee has no duty to them. However, in an irrevocable trust the vested interest does exist, creating a fiduciary duty to the policy beneficiaries for the trustee. Those beneficiaries, Bonasera said, might prefer to collect larger death benefit than whatever the policy could garner on the secondary market. “You’re going to need to get their consent,” he added.

Sometimes, however, the management of a trust, or mistakes therein, can lead to the decision to sell. Under an irrevocable life insurance trust, Sanders noted, whenever funds are gifted into the trust, such as for paying premiums, the trustee is required to notify the beneficiaries of the new funds. These letters, often referred to as “Crummey letters” after the court case that established the principle, are designed to notify the beneficiaries of their option to simply take their share of the new funds or keep it in the trust.

This requirement, Sanders said, has been at the root of many “irreparably compromised” trusts. In these cases, by failing to send the letters, the trust is compromised and the face value of the policy would then be calculated as part of the estate upon the insured’s demise. “Often we’ve seen life insurance trusts where there’s not been a single letter,” he said. “Sometimes it’s cleaner to sell the policies in the trust” and start anew.

Once the decision to sell a trust-held policy has been made, the most important thing an agent bringing the policy to a life settlement broker or provider can do is to provide them with the documentation relating to the trust as well as the policy.

William Scott Page, president and CEO of the Lifeline Program, an Atlanta-based life settlement broker, said that while providing trust documentation may sound like a basic requirement, it is often among the most problematic of the process.

“It always seems to be a nightmare” to get trust documents, he said. “It seems people are more willing to give out their Social Security numbers and medical records.”

Going over trust documents makes for a “much more labor intensive” due diligence process, he said, but doing so is crucial to ensure that the transaction does not run into any roadblocks.

“They identify who’s authorized to act and make decisions regarding the trust,” he said. “Do they have the authority to sell an asset, and is an insurance policy one of the assets they can sell?”