How About Just Doing the Right Thing?

During an ITM TwentyFirst University webinar on trustee liability, I described a replacement case that came into our remediation department. A grantor with a whole life contract in his trust had decided to stop gifting. His agent advised him to complete a 1035 exchange of the cash value from the existing policy into a new current assumption policy. The exchange, with no other premium, would carry the new policy out past life expectancy on a non-guaranteed basis but not to policy maturity. The death benefit in the trust would be lowered, but the grantor was comfortable with this, as the focus was on limiting the costs associated with the trust. Our remediation team notified the trustee that the death benefit in the existing policy could be guaranteed to maturity by requesting a reduced paid-up policy with the existing carrier, which would contractually guarantee the existing policy’s death benefit with no additional premium. The death benefit would be lowered but would still provide $900,000 more in death benefit than the new non-guaranteed policy was proposing.

I was reminded of the case while reading an article in the Wall Street Journal explaining that the Fifth Circuit Court had “struck down” the Labor Department’s fiduciary rule, stating that the department “overreached” by requiring those who handle retirement accounts to act in the “clients’ best interest” and asserting that the “rule is unreasonable” (1). I understand the industry fight against this law. They are afraid that it will mire them in lawsuits and make the sale of some products much harder in the retirement plan community. The law as it stands only affects retirement accounts, but states are pushing to have “best interests” laws apply to non-qualified annuities and even life insurance (2), which would certainly increase the number of lawsuits.

What ever happened to just doing the right thing? In the case above, had the trustee allowed the replacement, the agent would have made approximately $20 thousand, depending on his brokerage arrangement, but the grantor’s beneficiaries would have lost almost a million dollars. Believe me, many trustees without specialized skills are allowing these cases to slip through.

At ITM TwentyFirst, we service trustees bound by fiduciary duty, and our new affiliated company, Life Insurance Trust Company, is bound by that same duty to maximize the benefit in the trust for the beneficiaries, but that duty does not extend to most of those selling life insurance products. This has created a conflict in the marketplace that trust owned life insurance (TOLI) trustees must recognize. Tomorrow, Tuesday, March 20, at 2PM, we are sponsoring a free webinar providing CE for CFP and CTFA designates that addresses the prudent purchase of life insurance. Click here to register, and if you cannot attend, stop back by our website for a replay at a later date.


1.) Fiduciary Rule Dealt Blow by Circuit Court Ruling, Lisa Beilfus, Wall Street Journal, March 15, 2018
2.) N.Y. Urges Life Insurance Fiduciary Standard in NAIC Rule, John Hilton,, January 25, 2018



Cost of Insurance Finger Pointing: Who Is To Blame?

The cost of insurance (COI) increases of the last 18 months have wrecked estate plans and created financial hardship among policy owners. The negative effect is clear – some policy carrying costs have more than doubled (see:Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees).  What is not so clear – who is to blame?

No less than five lawsuits alleging foul play are currently filed against life insurance carriers.  AXA, which increased costs on 1,700 specified Athena II policies (see: Lawsuit Filed Against AXA for Athena Life II Cost of Insurance Increase) is accused of subjecting policy owners to “an unlawful and excessive cost of insurance increase,” in a lawsuit filed in February of this year. According to the suit, while AXA insisted “affected insureds are dying sooner than … anticipated .… mortality trends for the affected insureds have continued to improve substantially since the time the policies were issued” (1).

Transamerica, in a suit spearheaded by Consumer Watchdog, is accused of an “unconscionable business practice” that is hurting “elderly Policyholders who have dutifully paid premiums for 20 years or more” (2).  A number of articles in The Wall Street Journal and The New York Times have highlighted the hardship of higher costs, especially for older policy owners.  The suit accused Transamerica of breaching the contract terms “in order to avoid its obligation to credit the guaranteed interest rates under the policies.”  Since the carrier’s investment returns are insufficient to support the policies’ guaranteed 5.5% rate, the suit says “they are attempting to offset the guarantee through higher monthly deductions taken from the policyholders’ accumulation accounts.”

Transamerica is also receiving unwanted attention for its use of so called “shadow insurance,” a practice that moves liabilities from regulated companies that market life insurance to shadow reinsurers, which tend to be less regulated, creating “unrated off-balance-sheet entities within the same insurance group” (3). The practice was noted in the Consumer Watchdog suit and linked to both dividend upstreaming and the COI increases.  That suit notes that in 2010, “Transamerica reported that it had taken reserve credits as a result of reinsurance transactions with affiliated reinsurance companies totaling approximately $30 billion, based on representations that Transamerica had made ample provision to cover the liabilities relating to those policies, including the future COI associated with its universal life policies.”  During that same year they “up-streamed dividends to their ultimate parent holding company, AEGON NV, totaling $2.3 billion.”  The suit infers that the practice left the carrier financially vulnerable and led to the cost increases.

Joseph Belth, professor emeritus of insurance at Indiana University and a well-known industry icon, calls shadow insurance a “shell game” and warns the “industry is headed for serious trouble” (4).  He has brought suit against the state of Iowa to release information on the practice and also tied it into the COI increase, alleging that it “left a hole in Transamerica finances, resulting in its call for substantial life insurance premium increases” (5).

As a response, the carriers have pushed back. An AXA representative declared that the lawsuit against AXA “had no merit.” It is their belief that in their “effort to prudently manage” their policies, a “change was necessary because they expected future mortality and investment experience to be far less favorable than anticipated” (6).

There is no doubt that carrier investment experience has been hampered by the historically low interest environment which has affected their decisions. Most insurance carrier investments are centered on fixed investments, and part of their profits depend on the spread between what they earn and what they credit to the policies. Since the market correction of 2007-08, fixed rates have been squashed by central banks and governments worldwide. As an outcome, the investment spreads the carriers expect have shrunk, and in some cases, disappeared.  Perhaps that is another place to affix blame. While many believe that the low rates were necessary to guide the world economy to safer ground, there is an increasing call for a return to more normal rates, whatever that might be. An increase in interest rates would certainly be more beneficial to insurance companies, but not governments.  As we have noted (see: Low Interest Rate Winners and Losers), it was recently reported that between 2007 and 2012, “governments in the United States, the United Kingdom, and the Eurozone had collectively benefited by $1.6 trillion” because of low borrowing rates.  With 35% of all government borrowing at negative interest rates (7), and borrowing increasing yearly, there is little government incentive to increase rates. In the US, government debt as a percentage of gross domestic product has doubled in the last 9 years, yet net payments on the debt have declined. Without an increase in fixed rates, the stress on carriers will only grow. In the US and in Europe, increasing regulation and reserve requirements have placed additional pressure on the carriers while the governments are assisting in maintaining, what many economists believe, artificially low rates.

While the finger pointing has focused on the carriers and those who have kept interest rates low, we expect that the sights will soon turn to those who manage the policies: the Trust Owned Life Insurance (TOLI) trustees who may or may not have adequately informed grantors, and beneficiaries.  Life insurance is an asset affected dramatically by market changes and must be managed with those forces in mind.

Regardless of who or what is responsible for the increased cost of insurance charges, the impact on many policy owners has been severe. We see many policy owners and trustees looking for advice on what to do with policies impacted by the increases. In some cases, parties have determined they no longer want the insurance.  On November 1st we will be providing a free webinar entitled, What To Do With An Unwanted Life Insurance Policy. The session will provide one hour of free CE for CFP, CTFA and FIRMA members and will features real life case studies, including one centered around an actual cost of insurance increase case we reviewed.  To register for the course, simply click here.


  1. Brach Family Foundation v. AXA Equitable, U.S. District Court, Southern District of New York, Case No. 1:16-cv-740.)
  2. Feller et al v. Transamerica Life Insurance Company, United States District Court, Central District of California (Case 2:16-cv-01378)
  3. Minneapolis Fed Research, Shadow Insurance, Staff Report 505, Revised May 2016.
  4. Iowa in Middle of Debate Over ‘Shadow Insurance’ Deals, Insurance Journal, August 31, 2016.
  5. Joseph M Belth v. Iowa Insurance Division, filed September 2, 2016.
  6. Courts Divided Over Rising Insurance Costs,, March 14, 2016
  7. Citi Research,

Recent Court Case Identifies An Obvious Tax Liability: One TOLI Trustees Sometimes Miss

A recent US Tax Court Memo identifies the financial risk in unwittingly or intentionally mismanaging a life insurance policy. In 1987, a policy owner purchased a single premium variable life policy (since this was pre Code Section 7702A, it was not considered a modified endowment contract) with a payment of $87,500. The policy contract permitted the owner to take loans from the policy, allowing any unpaid loans and interest that accrued to be added to the “policy debt.” Once the policy debt exceeded the cash value of the policy, the carrier could terminate the policy after giving the policy owner notice and the opportunity to pay down the policy debt to avoid termination.

For 10 years the policy owner took loans totaling $133,800 and allowed the debt to grow over the ensuing years, even after receiving updates on policy values spelling out the growing interest and policy debt. In October of 2011, the carrier notified the policy owner by letter that he would have to make a minimum payment of $26,061 to avoid termination, which would cause a taxable gain. The owner did not make the payment, and the carrier terminated the policy and issued a 1009-R to the policy owner.

The policy owner did not report the income on his joint tax return, though he and his wife did consult with tax advisors, including one that told them they were “going to owe a bunch of money.” Instead, they affixed a handwritten note to their return that explained that they did not know how to compute the tax and that the “IRS could not help when called.” They asked for a “corrected 1040 explanation + how much is owed.”

As you can imagine, this did not end well for them. According to the Tax Memo, the loans taken “resulted in a policy debt of $237,897.25,” “the termination of the policy in 2011 resulted in the extinguishment of” that debt, and “$150,397.25 (the amount by which the constructive distribution exceeded his investment in the life insurance contract) was includable in their gross income.”

This particular case seems straightforward enough. “Phantom income” will be always be attributed to a taxpayer who allows a life insurance policy to lapse when the debt on the policy exceeds the cost basis, yet, at ITM TwentyFirst, we have seen situations in which trustees have allowed this to occur. After bringing in a portfolio of policies, I once asked a trust advisor about one particular whole life policy with a very large loan and was told not to worry because “that policy has lapsed.” Luckily, with a minimal payment, it was reinstated. If not, it would have resulted in a taxable event of almost $200,000 for a trust that had no cash assets.

In another case, the liability was less transparent and off in the future.  A grantor with a portfolio of whole life policies had not been paying anything into the policies for years, allowing loans to pay the premiums. When we took over, we reached out to the agent who said he “had a plan,” essentially allowing the interest and loans to accrue on the policy. When we reviewed the policies, we realized that shortly the portfolio would be in jeopardy, and in short order, cash contributions would have to be made, or taxable lapses would occur. Even with the cash contributions, each year as the loans grew, the net death benefit on the policies would drop. This was not a good situation, and one that could have been avoided with a little educated foresight.

These two cases highlight two types of liabilities for trustees. The first is easy to see (but sometimes is missed); the second can only be seen with a thorough analysis (which is often not done). On Tuesday, September 27, ITM TwentyFirst University will be hosting a free webinar entitled, How Trustees Can Avoid Getting Sued. The session will include the thorough analysis we provided on the second case above as one of the “real life” case studies. The session will provide one hour of continuing education for both CFP and CTFA designations. To sign up, simply click this link:


401(k) Lawsuits Flourishing – Is TOLI (Trust Owned Life Insurance) Next?

In the past few years, we have seen a rash of lawsuits against 401(k) plan sponsors. Most of these suits allege that plan sponsors shirked their fiduciary duties, usually for allowing excessive fees or self-dealing.

Well-known firms like Lockheed Martin and Boeing have signed multimillion-dollar settlements with their employees. Even financial firms that provide 401(k) plans to the public have recently been sued by their employees. (1)  Some have already settled suits in favor of their employees. Banks are not exempt either. In May of this year, suits were filed against two large banks, accusing them of “self-dealing” (2) and providing “proprietary investments options and recordkeeping services at the expense of performance.” (3)

The suits include some of the largest and most respected plan providers. Vanguard, long known as a low-cost provider of mutual funds, was cited in a lawsuit brought in December of last year by participants and beneficiaries of the Anthem Inc. 401(k) plan. An attorney familiar with the case was quoted as saying, “Even so-called low cost might be too high cost.” (4)

All of these cases were brought under the Employee Retirement Income Security Act of 1974 (ERISA), established to provide minimum standards for retirement and health plans in private industry. ERISA also gives plan participants the right to sue for breach of fiduciary duty by the plan sponsor. And although there have been lawsuits in the past under ERISA, the past few years have seen the beginning of the deluge — and it does not seem like it will let up.

According to research by the Investment Company Institute, the average fees paid by 401(k) plans declined by about 30 percent between 2000 and 2014. An attorney who represents employees believes these fee decreases are directly related to the series of lawsuits over the past decade. (5) You can easily argue that the lawsuits are creating a positive outcome for the average investor.

TOLI trustees are generally subject to the Uniform Prudent Investor Act (UPIA) as adopted in their state, which outlines the responsibilities and fiduciary requirements of being a trustee of a life insurance trust, including, but not limited to, “investing as a prudent investor would” as well as “investigating” and “monitoring” trust assets (Section 2), reviewing the trust assets and disposing of “unsuitable assets within a reasonable time” (Section 4), investing and managing trust assets “solely in the interest of the beneficiaries” (Section 5), acting impartially “in investing and managing the trust assets” (Section 6), and only incurring costs that “are appropriate and reasonable” (Section 7). The UPIA actually references the ERISA, noting that the UPIA is a “comparable prudence standard” in relation to the ERISA laws imposed by Congress.

Although it has been used as a reason for TOLI lawsuits, the UPIA has not created the volume of lawsuits that has been created by ERISA — yet.

A recent article in Estate Planning magazine notes there is a “growing concern” among estate planning professionals that “over the next ten to 15 years there will be an onslaught of litigation by trust beneficiaries against the trustees of life insurance trusts.” (6) The article cites the low interest rate environment and cost of insurance increases that have occurred, which have wreaked havoc on policy performance. But it also points out other areas that could spur litigation. For example, hidden issues surrounding the trust document that may cause an adverse outcome, and inadequate or incompetent trust administration that might generate a negative result. The article goes on to highlight the responsibilities of a TOLI trustee to review and manage the asset to maximize the value to the beneficiary, another possible area of litigation.

We at ITM TwentyFirst could not agree more. In fact, we could provide many more examples of situations we have seen that could create litigious situations for a TOLI trustee. As part of our fall ITM TwentyFirst University schedule, we will be providing a special webinar on this very subject. Titled How TOLI Trustees Can Avoid Getting Sued, it will include real-life scenarios where trustees could have been liable for hundreds of thousands of dollars of damages and also provide trustees with solutions to mitigate their liability. If you are a TOLI trustee, you will want to take part. Just click here to register.

  1. New York Life Accused of Profiting Off Workers’ 401(k)s, Bloomberg BNA, July 20, 2016
  2. Participants File Self-Dealing ERISA Suit Targeting M&T Bank,, May 16, 2016
  3. BB&T Finds Itself Targeted in Self-Dealing ERISA Suit,, May 23, 2016
  4. New 401(k) Suit Targets Vanguard Fund Fees, InvestmentNews, January 5, 2016
  5. Uptick in Fee Litigation Reshaping 401(k) Industry, Bloomberg BNA, June 9, 2016
  6. Troubling Trend for Trust-Owned Life Insurance Trustees, Estate Planning (a Thomson Reuters/Tax & Accounting journal), August 2016

Trustee Beware: Policy Replacement Ahead

The TOLI world has been altered with the estate tax law changes of the last few years.  Today’s wealthy couple can pass on more than ten million dollars in assets to their heirs before incurring any estate tax liability.  In the last decade this has decreased the number of individuals subject to the estate tax by more than 80% (1).  Because of this, the number of new ILIT’s (and thus the number of new ILIT policies being written for ILIT’s) has dropped.  The resulting drop in new policy sales has led to another change, an increase in replacement policies as agents look to existing policies as a source for new business.   In fact, we review far more replacement policies than new policies for our Managed Solution outsource clients.

Often the replacement cases we see make absolute sense.  There are many valid reasons (change in trust investment temperament, policy performance issues, carrier financial downgrades, etc.), and the new policy has significant advantages over the policy being replaced.

We have also seen a number of replacements that were marginally beneficial at best.  Replacement case reviews are typically not black and white, but nuanced, especially when the replacement is from one policy type to another.  In some cases, the new policy, while it may have had some advantages over the existing policy, may also come with significant disadvantages—disadvantages that need to be made clear to the grantor.

Unfortunately, we have run across a number of cases, some in the last few weeks, that were not beneficial.  In fact, a couple of the new suggested policies could have created liability for the trustee had the replacements gone through.

We, at ITM TwentyFirst, do not sell life insurance, but are aware of the market forces behind policy evolution and selection.  Because we manage life insurance, we are cognizant of the outcomes of the policy selection process.

On Wednesday of this week (May 18th) we will host a webinar on “How to Make Sure Your TOLI Policies Are Competitive.”  The webinar will not focus as much on the number of policy selections as it will on the process behind a policy selection and on what information is needed to make a prudent decision for a particular client.  If interested, you can register for the session at

  • – According to the IRS, in 2004 there were 31,329 taxable estate tax returns filed. In 2014 only 5,158 taxable estate tax returns were filed.

A Close Look at the Current Universal Life Cost Increase

Michael Brohawn, CFP, CLU
Tuesday, October 27th at 2PM EST
1 Hour CE credit for CFP and CTFA (Financial)

A Close Look at the Current Universal Life Cost Increase

While it seems the cost of life insurance should be going down since we are living longer, three carriers have announced their costs are going up.  In some instances the premium needed to carry a policy to maturity has more than doubled in just the last few months.  Find out why this is and whether other carriers may follow suit.  A case study will be reviewed that will look inside a policy affected, analyze all options and to show the steps needed to develop prudent policy management decisions.  If you are a TOLI Trustee or just an advisor on life insurance, this is an important session for you.

Download CE Attendee Form: Free Continuing Education Credits Attendee Form Click Her

Using the Intentionally Defective Grantor Trust (IDGT)


Using the Intentionally Defective Grantor Trust (IDGT)

Download Handbook here: IntDefTrust_Handbook_10 18 15

Download CE Attendee Form: Free Continuing Education Credits Attendee Form Click Here