Take the TOLI Challenge: Can you answer this?

What is most important when determining the liability of a trustee’s actions?

Over the years, we have noticed that the knowledge of TOLI trustees varies from trust company to trust company. After publishing the TOLI Handbook in 2018, we thought we would “chunk it down” in 2019 with the TOLI Challenge—a series of questions designed to test the knowledge of the typical TOLI trustee. We will be publishing questions throughout the year and hope that you accept the challenge and maybe learn something new throughout the year.

Our first question:

What is most important when determining the liability of a trustee’s actions?

  1. The outcome
  2. Whether they follow the grantor’s instructions
  3. Whether the policy performs as expected
  4. The process

Before we blurt out the correct answer, let’s walk through the options.

The first option is the outcome determines the liability, and certainly, a negative result can draw the ire of the beneficiaries and initiate an action against the trustee, but often, the adverse outcome is outside the control of the trustee. If the outcome is because of direct negligence of the trustee, there may be an opportunity for the beneficiaries to move ahead with their claim.

The second option is whether the trustee follows the grantor’s instructions. If by grantors’ instructions we mean to follow the trust document, then this answer has some validity. After all, a trustee needs to review the trust document and then administer the trust according to the guidelines of that document. However, if it means following the whims of the grantor, then certainly the answer is no, as can be seen in Paradee v. Paradee.  

The third option deals with policy performance, and if this is an issue, then many trustees would be in trouble because in general, policies have not performed well over the last ten years or more. In Nacchio v. David Weinstein and the AYCO Company, we saw a fiduciary held liable for over $14M in a case that centered around policy performance.

All the answers above could have some consideration, but we believe the answer is the process. For the other options – each of which could bring liability – a proper process could either alleviate the problem or negate the liability.

If a policy has a negative outcome, it is not necessarily the trustee’s fault. The Uniform Prudent Investors Act (UPIA) speaks to this in Section 8 of the UPIA in reference to prudent decision making as it deals with compliance, which it says is “determined considering the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.” As long as the decision making at the time was prudent, liability will be limited. How to ensure it is? Have a prudent process that is followed and documented.

The second choice, following the grantor’s instructions, could be an issue, but not if you had a sound practice in-house to follow the guidelines of the trust document in a prudent manner, and as part of your administrative and decision-making process, you are not swayed by the whims of the grantor. For some trustees, this has been an issue – after all, the grantor pays the bills, but Section 5 of the UPIA is clear when it says a trustee is required to “invest and manage the trust assets solely in the interest of the beneficiaries.”

The third choice, policy performance, could be problematic for those trustees who have not closely tracked their portfolio and made their grantors aware of the situation. In the Nacchio case, the policies brought in had rate of return assumptions of over 10.5%, which were never attained. Again, the process followed could alleviate the issues that could come from a policy that did not live up to expectations. When the policy is taken in, make it your policy to assume very conservative returns for the cash-value investment. Create a document that shows the outcome (and additional costs) at a lower return and have it signed by the grantor and made part of the trust file. As part of your prudent process, review the policy annually, and if the policy is off track, provide the grantor with a solution (typically, more premium).

So, the answer, we believe is the fourth choice: the process followed is the most critical factor when determining the liability of a trustee’s actions. This is not the first time we have said this, and it won’t be the last. We firmly believe in the prudent process. It is the backbone of our business model.

The outcome cannot be (completely) controlled, but the process can.

Life Insurance Premium Financing, a South Dakota Trust and the Life Insurance Trust Company – A Perfect Combination

Life insurance premium financing is a specialized strategy that has gained favor in recent years for high net worth individuals looking to purchase large life insurance policies without tapping their personal or business cash flow.  For these qualified wealthy individuals, the retained capital that would go to pay a premium can be better utilized for investment opportunities they believe will outperform the cost of the third-party financing.

Prospects for these strategies include privately held business owners, corporate executives, hedge fund managers and private equity executives, real estate owners, entrepreneurs, and successful physicians – all working with specialized life insurance advisors in conjunction with insurance carriers that have developed products tailored to the strategy.

To date, there has not been a trust company that specialized in life insurance, including premium financed policies – but now there is.  ITM TwentyFirst, the largest manager of life insurance for trustees and institutions nationwide, has created an affiliated South Dakota-based trust company that focuses exclusively on life insurance. Though the trust company does not provide any financing themselves, it does provide the premium financing market with a logical option for housing premium financed policies.

South Dakota has long been a superior trust situs – ranked as one of the best places to house a trust in the US year after year by leading trust and estate planning publications. South Dakota has the lowest insurance premium tax of any state – 8 basis points.  It prides itself on client confidentiality and does not require trust documents to be filed publicly.  The legislators are cooperative and proactive toward trusts and have levied no state income taxes on trust assets, and state legal statutes allow for the trust creators to direct the trust company to follow the investment decisions of an outside advisor, making the life insurance professional part of the process.

The Life Insurance Trust Company is the perfect company to work with.  Started as an affiliated company of one of the country’s most highly regarded life insurance policy managers, the firm focuses exclusively on life insurance, with no eye toward acquiring other assets.  By utilizing the services of its parent company, the trust company provides expert trust administrators and life insurance specialists that work daily with tens of thousands of policies – this is not a side asset for the company – it is their daily work.  And it shows in the level of services provided.

The staff at Life Insurance Trust Company knows the trust business and understands the life insurance business – many come from that industry.  It is extremely advisor friendly and will work with you to ensure that your clients and their beneficiaries maximize the value of the policy in their trust.

Premium financing is a specialized strategy.  It just makes sense that you partner with a specialized company skilled in the management of life insurance as an asset class.   For more information, contact Leon Wessels, Corporate Business Development Manager, at 605.574.1703 or lwessels@lifeinsurancetrustco.com.

TOLI Trustee Alert: More of Your Clients Will Be Living to 100 and That Could Be a Problem

A little over five years ago we wrote about a little-known problem for trust-owned life insurance (TOLI) trustees – clients living to age 100 – the maturity age for many older life insurance policies. The problem is that many policies in their portfolio will not pay out a full death benefit at maturity and the chances of insureds living to maturity are increasing.

According to a Bloomberg article, “Over the past few decades, the average person’s lifespan has risen almost everywhere in the world,” and the wealthy “are counting on living even longer.” (1) In a survey referenced in the article, “53 percent of wealthy investors said they expected to live to 100.”  While that might not be the case, the wealthy – your TOLI clients – do tend to live longer.  According to the National Academies of Science, Engineering and Medicine cited in a Washington Post article, while the average life expectancy for a 50-year-old male in the lowest economic quintile is 76 years, it jumps to almost 89 years for those in the highest quintile. (2) 

The issue around insured living to age 100 is acknowledged by the life insurance industry, and policy design has been altered.  Policies issued today run well past age 100, most to age 121 and some carriers have modified their older policies to extend the maturity date past age 100. 

The reason? 

Some older policies mature at age 100 for cash value only, creating two issues. 

  1. If the policy matures for the death benefit and the cost basis is less than the amount received by the trust, the proceeds above cost basis are subject to taxation, just as if the policy were surrendered for its cash value. The amount taxed would be at ordinary income, not capital gains rates.
  2. The more common occurrence is that the policy matures with minimal cash value, much less than the death benefit that the beneficiaries expect.

What can a TOLI Trustee do?

  • When a policy comes into your trust make sure your documentation notes what happens if the insured is still alive at policy maturity – especially if the policy is an older policy. Make sure that all pertinent parties to the trust are made aware.
  • When an insured reaches age 80 and certainly by age 85, make sure that the annual policy reviews highlight the policy maturity outcome.
  • Review the policy funding with the grantor.  For policies that mature for cash value only, the only way to receive the full benefit is to fund the policy to endow (cash value equals death benefit at maturity).  While the option to fund a policy at the endowment premium, which is typically much higher, is rarely done, showing the grantor (and beneficiaries) the funding option should be part of your prudent process.
  • For those insureds who reach age 85 and beyond, a life expectancy (LE) report should be considered.  These reports, which cost less than $500, provide the TOLI trustee with another essential data point – a systematic estimation of an insured’s remaining life, which should be made a part of the trust file. 

Managing life insurance is not an easy task.  The age 100 maturity issue is just one of many problems you will encounter, but it is one you can easily deal with well ahead of time.     

  1. The Rich Are Betting On Living To 100, Ben Steverman, http://www.bloomberg.com, April 20, 2018
  2. The Stunning – And Expanding – Gap In Life Expectancy Between The Rich And The Poor, Max Ehrenfreund, September 15, 2015

How Whole Life Dividends Are Calculated

Near the end of last year we posted a blog reporting the 2019 dividend payouts for the big four mutual companies, all whose primary product line is whole life insurance. Dividends are a return of premium when carrier results exceed a very conservative projection for investments, income, and expenses.  Dividends are paid annually on participating whole life insurance and determined at the discretion of the board of directors.  They are paid in addition to the guaranteed cash values in the policy, but the dividends themselves are not guaranteed and will fluctuate. Over the last twenty to thirty years dividends have trended downward causing many whole life policies to underperform relative to expectations at policy issue.  The primary driver of this decline in dividends has been the drop in the dividend interest rate or DIR, the investment component of the dividend, but the dividend itself is based on the performance of three parts.

Investment Results: The interest rate portion of the dividend, the DIR, is based on the actual rate of return generated from the investment portfolio.  The cash value of a whole life policy is invested primarily in fixed instruments, a typical breakdown for the investments might be:

  • Bonds: 70%
  • Mortgages: 12%
  • Policy Loans: 4%
  • Cash and Short Term: 4%
  • Stocks: 4%
  • Real Estate: 1%
  • Other Assets: 5%

Over the last few years with low-interest rates affecting investment decisions, carriers have become a bit more aggressive in their investing style, but regulations limit the investment that can be made in equities.  Some carriers have developed venture capital investments in companies that can help them compete in the changing technology environment.  Investment returns are still driven by fixed investments that have lagged, and it is hoped that with current higher fixed market returns, carrier investments will trend upward.

Mortality: Carriers make conservative assumptions about the underwriting risks in their whole life policies.  The mortality most carriers experience is less costly – meaning there are fewer death claims than projected.  When this occurs, the dividend is affected positively.

Operating Expenses: Operating expenses of a carrier are reasonably easy to predict and include overhead and marketing expenses, including commissions and underwriting costs.  But as with mortality charges, the carriers make conservative assumptions about them, and when the operating costs are less than expected, the savings accrue to the dividend paid to the policyholder.

Dividends paid on a particular policy will be affected by the cash value in the policy, whether the policy has a loan and whether out of pocket premiums are still being paid on the policy. In general, a loan-free, premium-paying policy will have the highest dividend payments, all else equal.

The actual dividend paid will have a dramatic effect on the performance of a whole life policy and should be tracked annually especially if dividends will be or are currently being used to pay a premium.  Out of pocket premium expectations may have to be adjusted based on the actual dividends paid. 

Trustees of ILITs should monitor carrier dividends as part of the policy management process.

Another Good Year at Heckerling

The first thing you notice after entering the Orlando World Center Marriott Resort and Convention Center is the lineup of vendor booths set up in the hallway – the overflow from the cavernous convention center hall.  This year’s Heckerling Institute on Estate Planning appears to have been a great success.  The number of attorneys attending was up, and those putting on the session attracted more sponsors and exhibitors than ever. 

As we mentioned in one of our last posts, we have been coming to these sessions for over a decade and this year’s meeting was not only well attended but generated more attention than ever for ITM TwentyFirst services.  Not only was the traffic up at our booth, but so was the interest, especially from those attorneys who were finding out for the first time that there was a trust company that specializes in life insurance.  Many attorneys writing ILITs reluctantly become the trustee of the policy.  If not, they tend to lose track of the policy (and maybe the client).  Working with our trust company (https://lifeinsurancetrustco.com/) can alleviate an attorney-trustee of the fiduciary burden of handling the ILIT and still enable them to stay in contact with the client by receiving comprehensive updates on the policy and the trust that can be part of a billable year-end review.  This is one reason that the attorneys that stopped by are viewing the Life Insurance Trust Company as a partner in their clients’ ILIT success.  According to Leon Wessels, a TOLI veteran and the head of corporate development at the new trust company, the meeting was very gratifying. “The level of interest in the new trust company among lawyers attending Heckerling this year was much higher than even I expected. I was pleased that the attorneys I spoke with understood how we could benefit their practice. The fact that they are truly beginning to see our value was very rewarding for me.”

John Barkhurst, who heads up business development for our TOLI trust services shared Leon’s enthusiasm for this year’s reception.  “What attorneys and advisors are beginning to understand is that there is more to managing a policy than just tracking it. Our outsourcing service is much more than just a policy review. We have in-house life insurance experts who provide an analysis of any policy issues free from conflicts and deliver to the trustee what is most important – a prudent solution laid out in a concise report.  And since our solutions follow prudent practices that are documented and made part of the trust file, we can lower trustee risk.  Lawyers understand how valuable this can be should litigation about a policy ever occur.  That is one reason they are very receptive to the comprehensive services ITM TwentyFirst provides.” 

Heckerling always marks the beginning of the new year for us, and we are thankful this year the importance of our work has resonated and grown even stronger in the legal community. 

New Legislation Introduced in Congress Would Help Seniors and the Life Settlement Industry

A bill introduced in Congress could help spur sales of life insurance in the secondary market by allowing policyholders to use the proceeds from the sale of a life insurance policy to fund an account to be used for paying long-term care expenses on a tax-favored basis. 

HR Bill 7203, introduced by U.S. Rep. Kenny Marchant of Texas, a Republican, and U.S. Rep. Brian Higgins of New York, a Democrat, has been referred to the House Ways and Means Committee. The bill would allow policyholders to reduce “the amount of gain from the sale or assignment of a life insurance contract … by the amount of contributions to a long-term care account” as long as the contribution was made “during the 30-day period beginning on the date of such sale or assignment.”

Currently, in a life insurance policy sale, the policy owner is taxed on the amount above the cost basis – typically the premium paid. This new law would allow a policy sale to occur tax-free, and then allow the policyholder to place the proceeds into a newly created long-term care account that would be “exempt from taxation” as long as the account was used for paying for long-term care.

Tax-free distributions could be made from the accounts to pay for “qualified long-term care services” as well as “premiums for a qualified long-term care insurance contract,” for both the beneficiary and the beneficiary’s spouse, and after the death of the account beneficiary, the account would revert to the spouse.   

The accounts created would be held in trust by a bank, an insurance company, or “another person who demonstrates to the satisfaction of the secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.”

Any amount distributed from the account that was not used exclusively for long-term care would be includable in the gross income of the beneficiary and subject to a 20% surcharge, except in cases where the beneficiary dies or becomes terminally or chronically ill under current law. 

The proposed law greatly expands the tax advantages of selling an unneeded life insurance policy in the secondary market, and if passed, would provide the policyholder with another reason to explore the life settlement market.

We will report back on the progress of the bill as it moves through the legislative process.

Join ITM TwentyFirst at the 53rd Annual Heckerling Institute of Estate Planning

We have three office locations across the United States, and as I write this, none will see 40 degrees as their high-temperature today, so it is no wonder we are looking forward to heading south to the sunshine of Orlando, Florida, for this year’s Heckerling Institute of Estate Planning session from January 14-18.  However, it is much more than that.

It has been about 15 years since we attended our first Heckerling session. Back then, we were pioneers in the trust-owned life insurance (TOLI) policy review space. Before we came to market, trustees had few resources, except local life insurance agents, to help review their portfolio. Our service solved a significant problem: for the first time, TOLI trustees could receive a non-biased policy review (our Standard Solution). We followed that up with a full-service outsource offering (our Managed Solution) that provided dedicated experts in trust administration and policy management to not only track the policy but to handle all back-office administration and equally important, to solve policy issues. We helped mitigate liability by creating the trust file documentation necessary to prove a prudent process occurred.

Last year, again taking a pioneering approach, we created the first trust company focused on life insurance (Life Insurance Trust Company) after clients approached us looking for a trustee who would take some or all their ILITs and not compete with them on their other assets.

Over the years, ITM TwentyFirst has grown by listening to clients. Going to Heckerling is one way we get to do that face to face. When we first exhibited there, we were focused only on prospecting, but now when we go, we get to visit with clients. Many of the exhibitors at Heckerling are trust officers at some of our more than 200 bank and trust clients, and we have worked with and received referrals from many of the attorneys speaking at the sessions. The satisfaction of going to Heckerling is not just the generation of new business, though thankfully that still happens. The real fulfillment is seeing clients we have had for over a decade – peers that have been a part of our growth and have grown their business alongside ours.  

It is also interesting to see the continued expansion in the industry we helped develop and to welcome others who are also trying to help trustees maximize this often-misunderstood asset of life insurance. We are proud of our part in helping to initiate and lead this progress.  

This year, Leon Wessels, who is spearheading growth at our new trust company, and John Barkhurst, who is heading up business development on our TOLI services, will be attending. Please take the time to stop by and bring along your toughest problems about the life insurance policies you handle. You will not find two more capable people on the exhibit hall floor to solve them.

If you stop by and see them at booth #128, you can also find out how to get a free PDF copy of The TOLI Handbook, the most comprehensive guide available for TOLI trustees and take the ITM TwentyFirst TOLI Challenge for the chance to win a prize.

We hope to see you there.