By Richard Gilman, CFP® and Philip J. Kavesh, J.D., LL.M. (Taxation), CFP®, ChFC, California State Bar Certified Specialist in Estate Planning, Trust & Probate Law

The Uniform Prudent Investor Act (UPIA) requires trustees of Irrevocable Life Insurance Trusts (ILIT) to evaluate the appropriateness of the Trust Owned Life Insurance (TOLI) and to manage ILIT assets in a manner that minimizes costs and maximizes benefits to trust beneficiaries. This equates to a duty to not only acquire the right policy, but to review it periodically to be sure it still is in the best interests of the beneficiaries.  (Be aware that the UPIA has now been adopted by all states; but does vary by state so it is important to look at your own state’s version.)

In the past, ILITs were exempt from such compliance testing.  Now, under the UPIA, life insurance is considered a financial asset and trustees need to evaluate TOLI or bring in outside resources to help with that evaluation.  Failure to document the exercise of their fiduciary duty could potentially leave ILIT trustees open to legal action by trust beneficiaries.

[EDITOR’S COMMENT BY PHILIP KAVESH: I have been told of a major national law firm that paid more than $5 million out-of-court settlement in such a case, where it was claimed the death benefit was inadequate under recent market conditions for the premium paid – – and the law firm was not serving as trustee, but merely advising the trustee!]

To help meet the standards of the UPIA, an objective process should be employed that documents the performance of fiduciary responsibilities.  Many past practices, such as relying on an insurance agent or company approved sales material and hypothetical insurance policy illustrations are no longer adequate.

When evaluating a proposed policy many factors should be considered including:

• The financial strength and claims paying ability of a company.

• The cost competitiveness (cost of insurance, policy fees, internal rate of return, etc.) of a policy as compared to other products that are available.

• The risk associated with different types of policies (whole life, universal life and variable universal life) and how to manage that risk.

• The stability of the proposed premium.  Unless the policy has a no lapse premium and death benefit guarantee, the illustration is a hypothetical and the actual premium required may vary over time based on crediting rates.

• Policy design and assumptions, including assumed life expectancy of the insured and how long will the policy stay in force.

Once a policy is in force a way to help meet some of the requirements of the UPIA is to periodically obtain policy updates from insurers.  These reports, which have to be requested from the company, are referred to as an inforce ledger or illustration of hypothetical projected policy values.  Unlike annual statements, which summarize the current policy death benefit, cash value and premium paid, the inforce ledger provides a projection that shows how the policy has performed and would continue to perform under different interest crediting assumptions.  The in force ledger can be used to help compare the performance of the policy against other products.

As part of a review, trustees should also evaluate if a policy replacement is appropriate.  Despite the claim made by many insurance companies that policy exchanges are not beneficial, at times exchanges can make sense; for example, if client circumstances have changed or new policies features become available.

I review many in force ledgers and frequently see –

• Policies that could lapse long before the assumed age of death. These policies require the trustee to either reduce the death benefit and/or make additional premium payments.

• Policies that were fully paid up, or where client was terminally ill, and the trustees were making unnecessary premium payments.

• Policies that had performed well and accumulated a large cash value.  However, the client’s circumstances had changed and cash value was no longer important.  Instead, the client was now concerned about getting the largest death benefit.  By exchanging the policies they were able to purchase new paid up policies with significantly higher guaranteed death benefits.

As a trustee, it is important to recognize life insurance can be a complicated product and should be treated as any other investment asset. As the estate planning attorney who sets up a trust or advises the trustee, or financial advisor who helps the trustee, it’s important to bring in a qualified insurance professional to assist in the now necessary periodic policy review.  And, as a life insurance professional, this is a great marketing and sales opportunity for you!

ABOUT THE AUTHORS

Richard Gilman, CFP® is an adjunct faculty member at Northeastern University and has developed curriculum for the Certified Financial Planner® program at Boston University, as well as training programs for several national financial companies.

Attorney Philip J. Kavesh is the principal of one of the largest estate planning firms in California – – Kavesh, Minor and Otis – – now in its 32nd year of business.  He is also the President of The Ultimate Estate Planner, Inc., which provides a variety of training, marketing and practice-building products and services for estate planning professionals.  If you would like more information or have a question for him, he can be reached at phil@ultimateestateplanner.com or by phone at 1-866-754-6477.