By J. Brendan Ryan
Enquirer contributor

I am a firm believer in irrevocable life insurance trusts. But people need to know that they need care and feeding.

Such a trust is set up by a person or the grantor, who then makes gifts of assets to the trust. The trustee chosen by the grantor is charged with the fiduciary duty of investing the assets in the manner permitted by the grantor through the trust document. The grantor cannot personally benefit from the trust nor receive back any assets from the trust. Ultimately, the assets are distributed to the trust beneficiaries.

Why would anyone do this? One reason is to remove the gifted property from personal ownership, reducing anticipated estate taxation. Another reason is to reduce income taxes on the income generated by those assets. Moreover, the assets in irrevocable trusts are not subject to claims of the grantor's creditors and are not subject to probate. Therefore, neither probate costs will be incurred nor will the assets be subject to any will contest nor open to public scrutiny.

Many people set up these trusts to hold life insurance intended to pay estate taxes or for other purposes. This can allow a possibly huge growth in the amount of assets passed on to heirs without first being subject to estate tax.

Alternatively, it provides cash to pay the estate tax so that assets do not have to be sold at fire-sale prices to raise money to pay the tax.

So, what are the potential problems?

One is that trustees are charged with the responsibility of managing trust assets, but most do not have the tools or the knowledge to review trust-owned policies to keep them in tune. At a time when investment markets are volatile and interest rates move to extreme levels, this could have devastating effects.

The agent who wrote the policy should stay in touch and help the trustee. But for a variety of reasons, among them the death, retirement or relocation of the agent, most trustees do not have agents advising them. It has been reported that more than 70 percent of professional trustees have no guidance from an agent.

One trustee recently addressed this problem by insisting that the grantor name an insurance agent as "trust advisor." This provision says that the trust will follow the agent's advice on the type and amount of life insurance held by the trust (The grantor has the right to veto any piece of such advice). In this way, it is clear that the choice of the type and amount of life insurance is outside the trustee's responsibility.

In this case the agent had written the original policy for the trust and was serving as advisor without fee. When the writing agent is not available or no longer trusted, the trust should hire an insurance consultant (probably an agent who will charge a fee for the service) to periodically review the arrangements and suggest any improvements.

This appears to be the best way to keep the trust operating in an economical and otherwise appropriate manner.

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J. Brendan Ryan is a Cincinnati insurance agent. His column appears every other Saturday. Contact him at 2212 Victory Parkway, Cincinnati 45206; 221-1454; fax 221-3447; or e-mail ryanatpineridge@aol.com