Irrevocable Life Insurance Trusts (ILITs) are often designed with the assumption that the grantor will continue gifting funds to the trust to pay life insurance premiums annually. But life doesn’t always go according to plan and needs can change.
Whether due to a financial downturn, cognitive decline, a change in estate planning priorities, or a strained family relationship, a grantor may stop making contributions to the ILIT — leaving the trustee in a difficult position. The trust still owns the policy, and premiums are due, but the expected funds to pay those premiums are no longer coming in.
In this post, we’ll explore why this scenario is more common than many assume, the risks it creates, and the steps trustees should take when faced with this challenge.
Why Grantors Stop Funding Trusts
There are many reasons a grantor might stop funding an ILIT:
- Liquidity problems
- Family changes
- Cognitive decline
- Perceived lack of value
Whatever the reason, trustees must be prepared to act.
Read More: Handling Unresponsive Grantors: A Guide for ILIT Trustees
Step-by-Step: What Trustees Should Do
Confirm the Situation: Reach out directly to the grantor and document communication
Review the Trust Document: Understand trustee powers and restrictions
Order a Current In-Force Illustration: Assess policy status and sustainability under current conditions
Explore Funding Alternatives: Consider beneficiary contributions, loans, or trust assets
Consider Policy Remediation: Look into reducing face amount, life settlements, or replacement
Communicate with Stakeholders: Inform beneficiaries and document all communications
Document Everything: Maintain records of decisions, actions, and rationale
Read More: Life Settlements in TOLI: When, How, and Why?
The Trustee’s Role in Uncertain Situations
This kind of situation illustrates why trustees must actively manage ILITs. A trustee’s role goes beyond collecting premium gifts and forwarding payments. When a grantor’s contributions stop, it’s up to the trustee to safeguard the trust’s value and make reasoned, well-documented decisions.
Even if the policy ultimately lapses, a trustee who follows a sound process and communicates clearly will be far better positioned than one who delays action or fails to engage.
Read More: Managing Suspended Premiums in Whole Life Policies
When a grantor stops funding the trust, time is of the essence. Trustees must quickly confirm the facts, assess the policy’s status, and weigh their options. With a proactive, transparent approach, it’s often possible to preserve value — or at the very least, fulfill fiduciary obligations with confidence and integrity.
Need help evaluating your options? ITM’s tolimonitor solution is built to help banks and trust companies manage ILITs with confidence, offering policy monitoring, risk mitigation, and documentation tools designed for complex, high-stakes trust administration.
