Podcast Summary: A Trustee's Perspective on Trust-Owned Life Insurance

Podcast: ACTEC Trust & Estate Talk
Episode Air Date: November 12, 2025
Host: John Challis, ACTEC Fellow, St. Louis, Missouri
Guest: Andrea Shimakis, Fiduciary Counsel Fellow, Charlotte, North Carolina

Overview

This episode offers a deep dive into the trustee’s role in managing trust-owned life insurance, focusing on irrevocable life insurance trusts (ILITs), often called "eyelets." Andrea Shimakis brings both practical and legal insights for estate planning attorneys and trustees, balancing tax considerations, fiduciary duties, and the complexities of policy administration.

Key Discussion Points & Insights

1. ILITs as Grantor vs. Non-Grantor Trusts

(Timestamp: 01:21 - 03:30)

• Decision Point: The first critical question in drafting an ILIT is whether the trust will be a grantor or non-grantor trust for income tax purposes.
  • Grantor Trusts: Typically preferred, especially when trust income (interest/dividends) is used to pay premiums. These are subject to IRC §677.
  • Key Benefits: Transactions between the insured, policy owner, and the trust are disregarded for tax; minimal to no income tax consequences if the trust only holds life insurance.
  • Non-Grantor Trusts: May be used if the trust owns other income-producing assets.
    • Trustees must track premium payments (principal vs. income).
    • Tax returns and compliance with IRC §101 (transfer of value rules) become more complex.
• Memorable Thought:

  “If the trust only holds a life insurance policy, then there is a nominal, if any, income tax consequences to the grantor. So the decision is really inconsequential.”
  — Andrea Shimakis (02:51)

2. Crummey Withdrawal Rights: Critical Provisions

(Timestamp: 03:30 - 06:55)

• Purpose: To ensure gifts to the ILIT qualify for the annual gift tax exclusion, not the grantor’s lifetime exemption.
  • Trustees must give beneficiaries the right to withdraw annual gifts.
• Cautions for Practitioners:
  • Beneficiary Class: Carefully decide who receives withdrawal rights—sometimes expanding beyond immediate family may be considered, but this must be analyzed for IRS/fiduciary risk.
  • Structure: Should the withdrawal rights be a “hot class” (all descendants) or tiered by generation? Tiered is often preferable for easier administration.
  • Chronology: Trustees must track whether other gifts have been made earlier in the year, complicating the application of annual exclusions.
• Practical Insight:

  “Maybe look at whether or not there's any risk there from the IRS perspective or from a fiduciary perspective.”
  — Andrea Shimakis (05:09)

3. The Challenge of Hanging Withdrawal Rights

(Timestamp: 06:55 - 10:25)

• Technical Complexity:
  • If a beneficiary’s withdrawal right (general power of appointment) lapses, it may be treated as a taxable gift unless it’s less than the greater of $5,000 or 5% of trust value.
  • The “hang”—the excess amount over this threshold—is carried forward, requiring annual calculation and tracking.
• Practical Administration:
  • The value of the ILIT’s life insurance policy is key in all calculations.
  • Reference made to foundational literature (Lou Harrison’s article, 1990s) —still relevant today.
  • Accurate tracking of compounded hangs is necessary.
• Notable Quote:

  “How do you calculate that hanging withdrawal right? ... the beneficiary continues to have the right to withdraw the amount of that hang ... for succeeding years until such time as it is exhausted.”
  — Andrea Shimakis (08:33)

4. Trustee’s Fiduciary Duties and Policy Valuation

(Timestamp: 10:25 - 12:35)

• Investment Responsibilities:
  • The life insurance policy is an asset, triggering duties under the Uniform Prudent Investor Act (UPIA)—especially diversification.
    • Does the trust instrument expressly waive the diversification duty?
    • UPIA allows for exceptions if the asset relates specifically to the trust’s purpose.
  • Trustees must ensure:
    • The policy’s suitability
    • Performance monitoring (compare to illustrations, policy options, etc.)
    • Due diligence with term and universal life products
• Annual Policy Reviews:
  • Standard practice involves engaging professionals for annual reviews and valuation.
  • The trustee must not simply file away the results—must address concerns, consider notifications to beneficiaries, and meet accounting/reporting obligations.
• Insightful Point:

  “Do you just put it in a drawer and ignore it? Do you address any concerns ... or do you update ... information ... to beneficiaries?”
  — Andrea Shimakis (12:24)

5. Termination of ILITs: End-of-Life Issues

(Timestamp: 12:35 - 14:45)

• ILITs typically end via:
  1. The insured’s death (policy matures): Trustees must check directives for using proceeds, with duty owed to ILIT—not the estate’s—beneficiaries.
  2. Policy Lapse or Surrender: Proactive communication with beneficiaries is crucial; explore options like premium financing, loans, etc., to prevent unwanted lapses.
• Trustee Communication:
  • Transparency and timely updates safeguard both trustee liability and beneficiary interests.
• Final Advice:

  “Letting them know what's going on to protect and preserve your interests as a trustee of the trust is going to be critical as those things are coming to fruition.”
  — Andrea Shimakis (14:14)

Memorable Moments & Further Resources

• White Paper: Andrea Shimakis references an accompanying white paper for deeper dives into the nuanced issues discussed (not included in transcript but noted for listener reference).
• Recommended Reading:
  • Lou Harrison’s article on hanging withdrawal rights for historical and technical background.

Notable Quotes with Timestamps

• On Life Insurance as an Asset:

  “Life insurance is not just a product. It is a valuable asset to both the insured and the insured's beneficiaries.”
  — John Challis (00:38)

• On the Complexity of ILIT Administration:

  “The devil is always in the details ... particularly when it comes to an islet.”
  — Andrea Shimakis (04:22)

• On Keeping Beneficiaries Informed:

  “Communicating with the beneficiary, letting them know what's going on ... is going to be critical as those things are coming to fruition.”
  — Andrea Shimakis (14:14)

Timestamps for Important Segments

• 00:38: Introduction – Why life insurance in trusts matters
• 01:21 - 03:30: Grantor vs. non-grantor trust considerations
• 03:30 - 06:55: Crummey withdrawal rights—how and why
• 06:55 - 10:25: Hanging withdrawal rights—technical pitfalls
• 10:25 - 12:35: Valuation, diversification, and fiduciary duties
• 12:35 - 14:45: ILIT Termination and communication best practices

Tone and Style

The episode is practical, detailed, and occasionally witty, with Andrea Shimakis weaving in approachable analogies (“nothing is certain but death and taxes... and maybe life insurance!”) and urging practitioners to “look out for the details” while offering clear, actionable steps for both drafting attorneys and acting trustees.

This summary covers the practical wisdom, technical depth, and best practices presented in the episode, offering wealth planning professionals and trustees clear guidance on the nuances of administering trust-owned life insurance.