ABA Tele-Briefing Summary

This ABA Tele-Briefing was very well attended with almost 500 individuals and 60% of those surveyed primary area of responsibility was associated with Trusts. “The knowledge and insight contributed greatly in providing ABA members and other a timely and quality program on an important subject.” according to the ABA

The presenters were THEInsuranceAdvisor.COM founder, Barry D. Flagg, and X-Ray Your Life Insurance Services President, Steven S. Zeiger, were asked to voice their expert opinions as part of an ABA Tele-Briefing on New Case Law for Trust-Owned Life Insurance: What Every Trustee Should Know about Managing TOLI (But Has Been Afraid to Ask).

The tele-briefing discusses how trust-owned life insurance (TOLI) often is the cornerstone of an estate plan and a critical fiduciary responsibility of the trustee.  And, too often financial institutions face substantial risk because Irrevocable Life Insurance Trust (ILIT) trustees have not had guidance for how to the Courts will apply the Prudent Investor Act to TOLI.  Now that we have new case law and guidelines to effectively manage TOLI, better serve ILIT clients (while potentially creating new fees/revenues) and protect financial institutions from potential problems down the road.  

In Re: Cochran. , 901 NE 2d 1128 (Ind. App. 2009) examines the prudence of an exchange of trust-owned life insurance (TOLI) policy holdings in accordance with the principals under the Uniform Prudent Investor Act. The case appears to be the first such breach of fiduciary duty case involving TOLI, and something of a "poster child" case with facts that are common in many irrevocable life insurance trust (ILIT) situations. For instance, the life insurance agent appears to have sold "flavor of the day" products to the same insured on two or three separate occasions over the course of only 15 years, where policy selection and management decisions appear to have been made by the agent and the insured grantor without the ILIT trustee, and where the ILIT trustee was generally involved after the fact and asked to serve more as a "custodian" than a fiduciary (but with fiduciary responsibilities). The timing of this case is also fortuitous for life insurance trustees facing similar situations in which TOLI holdings are underfunded due to steadily declining interest rates on universal life and whole life TOLI holdings, and due to stock market underperformance in variable life TOLI holdings, and due to the grantor's own economic situation where they are less/not able to make premium payments.

The case provides clear guidance that ILIT trustees do not need to be concerned about being second-guessed in hindsight provided they have and follow a "prudent process" and particularly when such a process incorporates information from an "outside, independent entity with no policy to sell or any other financial stake in the outcome." The case also raised but did not resolve the duties to "incur only those costs reasonable and appropriate for the purposes of the trust" and have "overall investment strategy having risk and return objectives reasonably suited to the trust" and a corresponding "expected total return from income and the appreciation of capital." In that the court here in Cochran" recognize[d] that this process was certainly less than perfect", the prudent trustee will certainly want to follow the clear guidance for a prudent process that incorporates independent research, and may also wish to consider justifying TOLI expenses and setting reasonable expectations as to the rate of return on invested assets underlying TOLI cash values.

Those practitioners who equip themselves with the tools necessary to support Prudent Investor principals will have a substantial competitive advantage over those who do not. Had the trustee in Cochran actually used CPE Research Reports to measure/justify TOLI expenses and/or to set reasonable expectations as to the rate of return on TOLI holdings, they very well may have either maintained the original UL/WL holdings or maintained the VUL policy but perhaps with a reduced death benefit and cash values allocated to the fixed account, either of which could very well have saved the trustee from the time, expense and aggravation of litigation.

Trustees that participated in the tele-briefing recognized that this was “a great list of what should be done”…and expressed interest in even “more indepth materials…” or “a follow up briefing…”

Click Here to view presentation handouts.

To listen to an audio presentation of this tele-briefing, click here.