Life insurance trusts have become a cornerstone of sophisticated estate liquidity and wealth management plans. However, trust-owned life insurance (TOLI) too often represents an unmanaged and significant liability for those responsible for overseeing the plans. Our fiduciary services for TOLI can support credible and defensible policy acceptance, management and restructure determinations that protect the interests of all insurance trust parties: trustee, grantor, beneficiaries and professional advisors. Learn more about our fiduciary services for trust-owned life insurance by clicking on the topics of interest shown below.

Introduction to Trust-owned Life Insurance
Our Services for Trust-Owned Life Insurance

 

Introduction to Trust-owned Life Insurance

Learn more about trust-owned life insurance from one or more perspectives: trustee, advisor and beneficiary.

For Trustees

The Prudent Investor Rule measures trustee prudence in terms of the “process” by which investment decisions are made. It instructs a trustee to design and actively carry out a reasoned investment strategy that will fit within the trust’s unique purposes and the expectations of the beneficiaries to make the trust property productive. Further, TOLI is a concentrated investment that requires TOLI-specific procedures and credible policy evaluation determinations to appropriately document insurance trust capabilities.

Life insurance, a risk transfer mechanism, is ideally suited for trust ownership and management. The economic analysis justifying creation of an insurance trust, prepared by the grantor’s legal and/or tax advisor, documents the level of expected trust return (death benefit proceeds) and affirms the level of risk (100% premium adequacy to sustain the policy for the insured’s lifetime). A trustee can accept a guaranteed death benefit policy and transfer all premium adequacy and policy performance risk to the underwriting carrier, or retain premium adequacy risk by accepting a non-guaranteed death benefit policy and actively managing policy values. Acceptance of premium adequacy and performance risk implies grantor approval to do so, requisite trustee skill and capabilities to actively manage TOLI, and affirmative trustee election to manage the life insurance investment consistent with its Investment Policy Statement.

Active management requires risk-based procedures and premium adequacy evaluation. Mulligan Capital’s “Prudent Evaluation of Premiums" analysis (PEP) provides an evaluation of premium adequacy for policy acceptance, management and restructure determinations.

Mulligan Capital understands the liquidity and wealth preservation planning expectations of grantors, beneficiaries, and professional advisors. As a result, we assist trustees in transitioning to credible risk-based TOLI management and implementing “best practice” solutions for under-performing, unsuitable, and unneeded TOLI policies.

For Advisors

How can a professional advisor demonstrate the life insurance expertise expected of grantors, beneficiaries, and family members serving as unskilled personal trustees?

An insurance trust is implemented to achieve measurable asset preservation, liquidity timing, cash flow and tax leverage, and income planning objectives. This economic analysis typically identifies the level of expected return (death benefit proceeds) and affirms the level of risk (100% premium adequacy to sustain the policy for the insured’s lifetime).

When a corporate trustee is engaged, the professional advisor plays a key role in confirming trust objectives and trust management expectations. When a family member serves as personal trustee, the grantor and trustee usually rely upon the professional advisor to coordinate policy selection and trust operation. To avoid liability, a professional advisor should confirm:

• Product suitability based on the trust’s objectives and gifting plan
• Premium adequacy based on policy guarantees or actuarially certified evaluation
• Periodic performance of policy acceptance benchmark values

Subsequently, if the trust objectives change or the policy is under-performing its acceptance benchmark values or is no longer needed, the advisor should verify the trustee’s evaluation of restructure options.

Mulligan Capital Management’s PEP Analysis assists professional advisors in coordinating and confirming “best practices” for TOLI policy determinations.

For Beneficiaries

How can an insurance trust beneficiary confirm that a trustee is “doing the right thing?”

A trustee’s basic fiduciary duty is to maximize the probability of a favorable outcome to the trust estate. Unless otherwise agreed, beneficiaries may reasonably assume, at the time the trust policy is accepted and at all times during which the trustee maintains management control, the trustee has determined that (1) scheduled premiums are adequate to sustain the policy for the insured’s lifetime, and (2) the product and underwriting carrier are suitable to successfully achieve the trust’s objectives per the trustee’s risk management procedures.

An insurance trust beneficiary should annually request:

• A copy of the trust’s current TOLI Investment Policy Statement.
• The most recent premium adequacy evaluation.
• Confirmation that current policy values are performing consistent with policy acceptance benchmark values.

When a family member serves as an unskilled personal trustee, beneficiaries should clarify the life insurance expertise provided directly by the personal trustee and indirectly by professionals assisting the trustee.

If a TOLI policy is no longer suitable for the trust’s objectives or is significantly under-performing its acceptance benchmark values, the beneficiary should expect restructure recommendations based on credible analysis and evaluation.

Mulligan Capital Management’s PEP analysis assists beneficiaries in confirming the probability of a favorable outcome to the trust estate.

 

Our Services for Trust-Owned Life Insurance

The fiduciary review TOLI services of Mulligan Capital Management were developed to provide trustees with the TOLI risk management services necessary to meet the demands of contemporary trust asset management.

THE UPIA 3rd Restatement of Trusts in 1992, known as the prudent investor rule, replaced the “prudent person rule” in order to accommodate modern portfolio theory and contemporary investment management practices.

Contemporaneous to the UPIA life insurance illustration reform clarified that non-guaranteed illustrations are not credible to predict future policy values and to compare policies. Illustration methodology does not evaluate premium adequacy risk and does not affirm the reasonableness of agent-controlled policy design assumptions and carrier-controlled crediting rate and policy expense assumptions. Such illustrations are meaningless for TOLI determinations and their use demonstrates that a fiduciary lacks the special facilities requisite to manage insurance trusts.

A “best practices” TOLI risk management process requires TOLI-specific procedures, suitable products, and credible policy evaluation expertise.
 
TOLI Fiduciary Risk Management Consulting Service

The prudent investor rule replaced the prudent person rule to accommodate modern portfolio theory and contemporary investment management practices.

For TOLI

Risk identification and management replaces “custodial care” policy administration. In today’s corporate governance environment, TOLI determinations must be legally defensible, administratively feasible, and cost-efficient.

For National Banks

Banks must also demonstrate compliance with OCC Reg. 9.5 and 9.6 standards. “Best practices” TOLI risk management doesn't just happen. At a minimum a risk-based TOLI management program should:

• Confirm the trust’s objectives in a TOLI Investment Policy Statement (TOLI - IPS).
• Establish TOLI-specific procedures for premium adequacy evaluation, product suitability, carrier selection, new policy acceptance, periodic policy management, policy restructure, and successor trustee considerations, Implement our proprietary PEP service for premium adequacy evaluation.
• Determine the need for restructure, to include analysis of life insurance policy and life settlement options.

Continued trustee reliance on non-guaranteed carrier illustrations for policy acceptance and management decisions is a worst case – past practice that maximizes the probability of policy restructure, documents an imprudent risk management process, and exposes a trustee to unnecessary liability.

Mulligan Capital Management TOLI offers clients mainstream, contemporary trust management “best practices.”

Trust-Owned Life Insurance “Best Practices”

It’s all about “process!” Simply stated, a trustee, of a private trust, is an investment steward. An investment steward has the legal responsibility for the management of investment decisions.

The TOLI Services of Mulligan Capital Management are designed to assist the fiduciary with prudent practices in managing investment decisions related to life insurance. Our mission statement is, “To assess and manage risks posed to those who serve as trustee or in a fiduciary capacity of trust or institutionally held life insurance policies.”

To accomplish our mission, it requires a process. That process includes a system to:

1. Organize.
2. Formalize.
3. Implement.
4. Monitor the quality of fiduciary decisions.

Step One: Organize
Organize so that investments are managed in accordance with all applicable laws; trust documents, and a written investment policy statement.

Step Two: Formalize
Formalize and identify an investment time horizon.

Step Three: Implement
Implement an investment strategy in compliance with required level of prudence.

Step Four: Monitor
Monitor through periodic reports and compare the investment performance of the life insurance based upon its investment policy objectives.

Under the Uniform Prudent Investor Act (UPIA) this means that the trustee (the investment steward) is familiarized with the seven key practices of prudence: 

1. Knows the standards of prudence, applicable law and trust provisions.
2. Diversifies the assets to the specific risk/return profile of the client.
3. Prepares an investment policy statement.
4. Uses “prudent experts” and documents due diligence procedure.
5. Controls and accounts for expenses.
6. Monitors the activities of these “prudent experts.”
7. Avoids conflicts of interest.

Effective monitoring of trust-owned life insurance requirements

1. Establishing an investment policy statement unique to a life insurance policy.
2. Policy monitoring and review services.
3. Trust administration services.

What are the steps to establish a life insurance investment policy statement?

1. Identify the goals of the trust.
2. Develop clear objectives for life insurance in the trust.
3. Identify special features that should be part of (or avoided) as part of a policy design and carrier strength criteria.
4. Determine “expected” trust funding and integrating that amount in to corresponding life insurance premium payments for both annual amount and duration of premiums.
5. Where applicable to variable life insurance, determine asset allocation policy.
6. Document all decisions in a permanent file.

Policy review services should include:

1. Annual monitoring of a policy performance and baseline reference date.
2. Tracking materials changes of the policy.
3. Providing a comparable analysis to the “marketplace” of policy competitiveness.
4. Reporting to grantors, trustee, and advisors.
5. Ongoing monitoring of insurance carriers.

Trust Administration should include:

1. Sending annual gift (premium notices) to grantors.
2. Sending and tracking beneficiary “Crummey “ notices.
3. Collecting and paying insurance premiums.
4. Tracking “5x5” and “Hanging Powers.”
5. Reviewing the trust document.
6. Document and policy safekeeping.

When you work with Mulligan Capital Management, you work with a team of dedicated and knowledgeable life insurance and trust professionals. We make it our business to know and understand life insurance policy design, policy management needs, and trust administration for trust-owned life insurance.
 
TOLI and “PEP” Analysis

Mulligan Capital Management and its strategic partners use PEP analysis (Prudent Evaluation of Premiums) analysis for:

• Trust-Owned Life Insurance (TOLI) policy acceptance.
• Management.
• Restructure decisions.

When a trustee accepts a non-guaranteed policy, it must demonstrate the expertise to assess premium adequacy risk. Mulligan Capital Management’s TOLI “PEP analysis” uses common standards, impartial analysis, and objective data to provide evaluation of the premium required to:

• Sustain a life insurance policy for the insured’s lifetime or to contract maturity.
• Achieve the policy’s illustrated death benefit, usually the trust’s liquidity objective.
• atisfy the trustee’s funding risk of premium adequacy.

PEP analysis helps a trustee to establish preferred, acceptable, and unacceptable premium adequacy criteria. If a policy evaluates at less than the trustee’s preferred criteria then Mulligan Capital Management TOLI services can calculate the premium required to meet the established standard. Mulligan Capital Management TOLI services also suggests an appropriate periodic policy review cycle based on product type, and trustee premium adequacy risk tolerance based on Mulligan Capital Management’s TOLI analysis and current evaluation.

Implementation

PEP analysis serves a “quality control” purpose by objectively evaluating premium adequacy at the time of trustee policy acceptance. It allows the trustee to affirm its risk-based evaluation expertise to the grantor, grantor’s professional advisors, and beneficiaries.

When competing proposals are solicited, PEP allows a trustee to objectively evaluate premium requirements. PEP safeguards the trustee from selecting the lowest premium illustration, which likely has the lowest probability of achieving its illustrated values and the highest probability of needing restructure.
PEP should also be used prior to accepting the appointment of a successor Trustee. The American Bankers Association Certified Trust and Financial Advisor Fiduciary Law and Trust Activities Guide states:

 “A successor trustee may incur liability for failure to correct the wrongful acts of its predecessor; an exoneration provision in the trust instrument may not effectively insulate the successor from such liability. Therefore, prudent practice dictates that al successor trustee ensure that the predecessor has complied with applicable fiduciary standards”

Monitoring

PEP services allows a trustee to periodically:

1. Evaluate premium adequacy relative to its preferred, acceptable and unacceptable criteria.
2. Affirm policy performance to trust beneficiaries.
3. Document OCC Reg. 9.6 compliance. If premium adjustment is required, PEP can test premium and/or policy management alternatives consistent with the trust’s current objectives.

“The trustee’s duties apply not only in making investments but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved. The trustee’s compliance with these fiduciary standards is to be judged as of the time the investment decision in question was made, not with the benefit of hindsight or by taking account of developments that occurred after the time a decision to make, retain, or sell an investment.” Prudent Investor Rule, Section 227, Comment b.

Post-evaluation – Settlement Structuring

If trust objectives change and the existing TOLI policy is unsuitable, PEP Analysis allows a trustee to objectively evaluate restructure options and carry out a reasoned investment strategy that fits within the trust’s unique purposes and the needs of the beneficiaries.

If a TOLI policy is no longer needed, life income settlements, within the existing policy, may be an investment alternative.