Insurance Curator Irrevocable Life Insurance Trusts (ILITs) are a cornerstone strategy for high-net-worth (HNW) estate planning in the United States—especially in wealth centers such as New York City, Los Angeles, Chicago, Houston, and Miami. Well-governed ILITs keep large life insurance policies out of the insured’s taxable estate, enable controlled liquidity for estate taxes and legacy planning, and reduce family friction when the insured dies. This article provides an actionable governance blueprint covering trustee selection, distribution rules, and ongoing policy management for advisers and fiduciaries working with HNW clients.
Why governance matters for ILITs
Strong ILIT governance aligns tax, fiduciary, and family objectives:
- Reduces estate inclusion and gift-tax risk by keeping premium funding, Crummey notice procedures, and ownership structure consistent with legal best practices.
- Protects beneficiaries through well-defined distribution standards and successor trustee plans.
- Preserves policy value by monitoring premium payment sources, contestability issues, and corporate actions (e.g., policy loans or surrenders).
See foundational design and funding mechanics in ILITs Explained: A Step-by-Step Guide for High Net Worth Estate Planning.
Trustee selection: primary considerations
Choosing the right trustee is the most consequential ILIT governance decision. Consider these dimensions:
1. Trustee type: individual vs. corporate vs. professional
- Individual (family member, trusted friend)
- Pros: low cost, intimate knowledge of family dynamics, flexible.
- Cons: potential conflict of interest, limited expertise with insurance and tax filings, succession risk.
- Professional (attorney, CPA, family office)
- Pros: technical competence, can coordinate tax filings (Form 706, gift tax returns), fiduciary experience.
- Cons: hourly or flat fees, potential conflicts if also counsel to grantor.
- Corporate trustee (bank trust department, national trust company)
- Pros: continuity, compliance controls, investment and administrative infrastructure.
- Cons: higher recurring fees, less personal touch.
Table: Trustee types, pros/cons, and typical U.S. fee ranges
| Trustee Type | Typical Annual Fees (U.S.) | Pros | Cons |
|---|---|---|---|
| Individual | Often unpaid or $0–$5,000 (expense reimbursement) | Low cost, flexible | Limited expertise, succession risk |
| Professional (attorney/CPA/family office) | $2,000–$10,000 (flat) or $200–$600/hr | Technical expertise, advisory | Costs may be significant over time |
| Corporate Trustee (e.g., Fidelity, Northern Trust, BNY Mellon) | 0.5%–1.5% of trust assets or $2,000–$25,000+ | Continuity, infrastructure, compliance | Higher cost; minimums apply |
Sources: trustee fee industry overviews and guidance on trustee compensation (e.g., Nolo's practice guidance on trustee fees). See “How Much Is a Trustee Paid?” for industry ranges: https://www.nolo.com/legal-encyclopedia/how-much-trustee-paid.html
2. Expertise required
For ILITs funding large permanent policies or premium-financed structures, prefer trustees with:
- Life insurance policy administration experience
- Familiarity with Crummey notice mechanics and annual exclusion gifting
- Ability to coordinate with the grantor’s life insurance carrier, broker, and tax counsel
- Access to trust accounting systems and timely tax return preparation
For premium-financed ILITs, see governance nuances in ILIT Design for Premium-Financed Policies: Compliance and Estate Inclusion Risks.
3. Conflicts & independence
- Avoid appointing the grantor's primary financial adviser as sole trustee unless clear disclosure and conflict mitigation exist.
- For clients in high litigation jurisdictions (e.g., Florida, California, Texas, New York), consider corporate trustees to minimize insider disputes.
Distribution rules: drafting clear standards
Well-drafted distribution provisions reduce ambiguity and postmortem litigation.
Key drafting principles
- Define distribution objectives: liquidity (taxes, debts), family support, charitable gifts, generation-skipping.
- Use objective standards when possible: e.g., “for payment of federal and state estate taxes, administration expenses, and debts” followed by discretionary amounts for health, education, maintenance, and support (HEMS) or for specified percentages.
- Layer mandatory vs. discretionary distributions:
- Mandatory: immediate funds to pay estate taxes and administration expenses.
- Discretionary: trustee power to distribute for HEMS, extraordinary medical costs, or business succession.
- Include successor trustee mechanisms and tie-breakers if the primary trustee is incapacitated or resigns.
Sample distribution clause structure
- Section A: Mandatory distributions for taxes, debts, and funeral.
- Section B: Discretionary distributions for HEMS subject to a “prudent person” standard.
- Section C: Percentage cap per beneficiary per year (commonly 5–10% of policy proceeds or trust principal).
- Section D: Charitable remainder/additional bequests directed by the trustee with written beneficiary consent or by 2/3 beneficiary majority.
Protecting against estate inclusion risks
- Avoid grantor-directed distributions that could be read as retained incidents of ownership. Do not empower the grantor to change beneficiaries, revoke the trust, or borrow from the trust. For more on grantor status and tax consequences, review Grantor vs Non-Grantor ILITs: Tax Implications and Best Practices for HNW Clients.
Policy management: monitoring and compliance
Active policy oversight preserves value and prevents costly mistakes.
Ongoing tasks for trustees
- Confirm ownership, beneficiary listing, and premium notice flow with the insurer annually.
- Maintain strict annual-exclusion gifting and Crummey notice process for premium funding (see Crummey Powers and Annual Exclusion Gifting: Making ILIT Contributions IRS-Proof).
- Track contestability and suicide clauses (generally first 2 years) and ensure premiums are paid from trust funds — not the insured.
- Monitor policy illustrations, interest-crediting rates (for IUL or universal life), and corporate actions such as policy loans.
- Re-evaluate insurer credit strength and transfer or replace policies if necessary (with careful estate inclusion analysis).
Practical checklists
- Quarterly: confirm premium payments, insurer statements, and trust cash position.
- Annually: send Crummey notices; prepare trustee report to beneficiaries; review policy performance vs. projections.
- Upon life-event (illness, divorce, significant asset changes): consult tax counsel before changing ownership or beneficiaries.
Cost considerations: insurance and trustee pricing examples
High-net-worth clients in New York or California commonly buy large policies (e.g., $5M–$50M). Typical cost components:
- Life insurance premium: depends on age, health, policy type. For term insurance, sample market estimates are available from consumer research sites; see Policygenius for current sample premiums and comparisons: https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/
- Trustee/administration fees: expect corporate trustees to charge roughly 0.5%–1.5% of trust assets annually (or flat fees starting ~$2,000–$5,000/year), while professional trustees (attorneys/accounting firms) often charge hourly or set annual retainers. See industry ranges: https://www.nolo.com/legal-encyclopedia/how-much-trustee-paid.html
- Policy replacement and advisory costs: if advisors place or change policies, expect quoted commissions and fees from carriers/brokers; large cases may involve negotiated underwriting credits or MIB underwriting services (costs vary widely).
Example: HNW client in Manhattan purchasing a $10M universal life policy at age 55 may face first-year premiums from tens of thousands to several hundred thousand dollars depending on underwriting class and policy design. Trustees should budget for ongoing administration fees (e.g., $5,000–$20,000/year) and contingency liquidity to pay premiums for multiple years if funding freezes.
Governance best practices & escalation framework
- Create a written ILIT governance policy that includes:
- Trustee succession plan and emergency contacts
- Investment policy for trust treasury
- Annual review calendar (insurance statements, tax filings)
- Dispute resolution clause (mediation/arbitration) to limit litigation
- Require an annual trustee report to beneficiaries summarizing policy performance, account activity, and projected premium needs.
- For complex designs (premium-financing, corporate-owned life, multi-policy portfolios), mandate quarterly advisor committee reviews (insurance broker, trust counsel, tax counsel, trustee).
For implementation pitfalls to avoid, see Common ILIT Implementation Mistakes and How HNW Advisors Avoid Them.
Conclusion
ILIT governance is a blend of legal drafting precision, disciplined trustee selection, and proactive policy administration. High-net-worth clients in major U.S. markets require trustees who understand life insurance mechanics, tax risk, and family dynamics. Good governance reduces estate-inclusion risk, ensures liquidity at the time of death, and preserves intended legacies.
Further reading on funding mechanics and premium strategies is available in Funding Strategies for ILITs: Premium Payments, Gifts, and Trust Treasury Options and in the practical administration guide After the Insured’s Death: ILIT Administration, Tax Filings, and Beneficiary Coordination.
References
- IRS — Estate Tax overview: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
- Policygenius — Life insurance cost guide: https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/
- Nolo — How much is a trustee paid (industry fee guidance): https://www.nolo.com/legal-encyclopedia/how-much-trustee-paid.html