The Demanding Job of An ILIT Trustee Good day. Thank you for coming. The subject of my remarks today is The Demanding Job of An ILIT Trustee. An ILIT is short-hand or a nickname for an Irrevocable Life Insurance Trust. This is a special type of trust that is often used in individual and family estate planning. The trustee is the person responsible for managing the trust so it accomplishes its objectives. I think you will find the information I ll share during the next 30 minutes to be useful and informative. Let me introduce myself. My name is. I am (give title and provide background about yourself). 1
Disclosures Neither ING nor its affiliated companies or its representatives give tax or legal advice. The strategies suggested may not be suitable for everyone, and each individual should consult with his or her own tax advisor and legal counsel before implementing any of the strategies discussed here. These materials are not intended to and cannot be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matter addressed in this presentation. Taxpayers should seek advice from an independent tax advisor. Life insurance products are issued by ReliaStar Life Insurance Company, ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company. Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted, and its products issued. All are members of the ING family of companies. 2 At the outset, I want to make it clear than the information I m going to share with you today should not be considered tax or legal advice. My comments are designed to be general in nature. For specific tax or legal advice you should consult with your attorney or tax advisor. They can give you advice specific to your situation and they can provide the best answers to any tax and legal questions that may arise. READ REMAINING DISCLOSURES. 2
Being a Trustee is Combination of Good News & Bad News Good News An honor and a statement of trust Responsibility for managing trust assets must follow the terms of the trust, and comply with state law 3 Becoming a trustee of an irrevocable life insurance trust (ILIT) can be a combination of good news and bad news. Let s talk about the good news first. It is an honor to be asked to serve as an ILIT trustee. It means that the grantor of the trust believes you have the intelligence, ability and common sense to guide the trust so it accomplishes its objectives. It s a sign of great trust. The trustee makes important decisions. He/she is responsible for the management of the trust s assets as well as for their distribution. Some of the trust s provisions may guide those management and investment decisions. However, if the trust doesn t give specific investment directions, the trustee will have to make those decisions based on state law. 3
Being a Trustee is Combination of Good News & Bad News Bad News A trustee is a fiduciary Held to a high standard of performance State law may create unexpected responsibilities 4 There is also some bad news associated with being a trustee. Trustees are treated as fiduciaries under the law. Because trustees are entrusted with the care of property belonging to others, they are held to a high standard of performance. They must put the interests of the beneficiaries ahead of their own and must not manage trust assets to create personal gain. To protect trust beneficiaries, many states have passed laws that may create unexpected responsibilities for trustees. 4
Being An ILIT Trustee Can Be Demanding Probably not consulted about the trust s terms Probably didn t select what policies came into the trust No control over new funds coming into the trust timing of contributions, or contribution amounts Probably can t change the terms of the trust 5 In addition to dealing with the legal ramifications of being a trustee, there may also be some practical considerations which make being an ILIT trustee difficult and demanding. First, the trustee probably wasn t consulted about the terms of the trust. He/she probably didn t have any input concerning the trust s provisions. Second, the trustee probably didn t select the life insurance policies the trust owns. The grantor decided what policies the trust should have and trustee has to determine how to manage them. Third, the trustee has no control over funds coming into the trust. Specifically, the trustee can t control the amount of new funds the grantor will contribute or when the contributions will actually be made. It can be difficult to manage life insurance policies when you don t know if you will receive the money to pay them premiums or when you will receive it. Finally, the trust probably doesn t give the trustee the power to revise or change the terms of the trust. If the trust document leaves important provisions out or has some mistakes, the trustee can t amend the trust to make it better. The inability to control any of these important factors can make the trustee s life difficult. 5
Being A Trustee Can Also Be Financially Dangerous! The Trustee Should Use Sound Business Judgment; The Trustee Can Be Personally Liable For Losses! 6 Not only can serving as an ILIT trustee be difficult, it can also be financially dangerous! Because the trustee is a fiduciary under the law, the trustee is responsible for the trust s financial performance. The trustee must use sound business judgment in handling the trust s assets. This can be difficult for trustees who don t have business or financial experience. Unfortunately, inexperience or lack of knowledge can t be used as an excuse. Trustees don t have to do it all themselves. Those who are inexperienced or unsophisticated in financial matters should be able to get outside help. In fact, it may be wise to do so. That s because if the trust loses money, the trustee can be held personally responsible for the losses. State law may require a trustee to reimburse the trust for funds that were lost when unsound management practices were used. 6
A Trustee s Personal Assets Can Be At Risk! If the trust s assets aren t managed properly, the trustee can be held personally responsible A trustee can be ordered to use his/her personal funds to replace lost trust funds 7 This is the biggest downside to being a trustee. If the trustee doesn t manage the assets properly, the beneficiaries may be able to hold the trustee personally accountable for the losses. When this happens a trustee s personal wealth is at risk. This news comes as a big shock to many trustees. Many trustees aren t aware that when they accept the position of trustee they are potentially putting their personal financial resources at risk. Most trusts aren t drafted to protect the trustees; they are drafted to protect the beneficiaries. If a trust loses money or the trust funds don t grow as much as expected, there s always a chance the beneficiaries may try to use the trustee s money to make up the difference. 7
Three Trends Have Made an ILIT Trustee s Job More Difficult 1. The trust s policies may not perform as expected 2. Insurers have developed new life insurance policies 3. Many states have increased trustee performance standards 8 Over the last several years three trends have combined to make an ILIT trustee s job more difficult: First, the life insurance policies owned in many trusts have not performed as well as expected when the policy was purchased. Second, Life insurance companies have continued to develop new and better policies. In many cases the policies available today are less expensive and more effective than the ones available in the marketplace 5, 10 15, or 20 years ago. Third, many states have changed their laws to increase the standard of performance for trustees. Trustees are now expected to do more to protect the interests of a trust s beneficiaries. Most ILIT trustees aren t aware of these trends and the potential impact on themselves personally. 8
The Policy May Not Perform as Expected Life insurance illustrations are projections based on many assumptions Some of the assumptions may turn out to be wrong Interest rates Expenses --Mortality rates The performance of the policy changes over time The longer the insured lives, the greater the potential for change 9 Let s take a moment to review each trend individually. First let s talk about life insurance policy performance. When a life insurance policy is purchased, the policy owner is given a non-guaranteed projection of how the policy might perform in the future. This is the policy illustration and it is based on a number of assumptions. An illustration is only a non-guaranteed estimate; there are no guarantees about how the policy may perform in the coming years. A policy illustration is merely an educated guess and it can only be accurate if all the underlying assumptions hold true. Unfortunately, it is likely that over time at least some of these assumptions will be wrong. For example, interest rates may be different than assumed. Or policy expenses or mortality costs may be also different than the assumptions in the illustration. The policy s actual performance will likely be different from the illustration. Sometimes the difference can be substantial. Trustees who rely on the illustration are sometimes disappointed with the policy s actual performance. 9
New & Improved Policies Are Available The life insurance industry is very competitive; insurers regularly develop new products New products can have new features and benefits that may provide excellent value. Some new policies may have lower premiums Medical advances and increasing life expectancies have resulted in more flexible underwriting 10 The second trend impacting ILIT trustees comes from the competitive nature of the life insurance industry. Life insurance companies have a healthy competition for business. As a result of this competition, new and better policies are regularly developed and introduced for sale. These new policies may have features and benefits that may not be in the policies the ILIT owns. The premiums for some new policies may be lower than the premiums due on the policies in the ILIT. Finally, advances in medicine and nutrition have increased individual life expectancies. This has allowed some insurers to increase their underwriting flexibility. As a result, people who may have been uninsurable or highly rated in the past may be insurable today at reasonable rates.. 10
Many States Have Changed Their Laws And Increased Trustees Duties Performance standards have changed More is required of trustees today The Prudent Investor Rule has been widely adopted 11 The third important trend is in changes state laws that apply to trustees. Many states have revised their laws to increase the standards trustees must meet. In short, more is required of most trustees today than was required in the past. In 1994 the Uniform Prudent Investor Act (UPIA) was introduced. It contains a new and more exacting standard for trustees to follow; this standard is called the Prudent Investor Rule. Since 1994, many states have adopted this rule into their own state laws. Consequently, trustees responsibilities have increased. 11
Newly Adopted Standards Can Apply To Many Trusts They can even apply to trusts created before the new standards were adopted 12 Most states that have adopted the Prudent Investor Rule have done so in a way that makes applicable to all trusts and to all trustees in those states. Each state s law is different and trustees need to review the laws of the state where the trust is domiciled. But, in general, the new trustee standards often apply to trusts that were created BEFORE the new standards became part of the state s law. Thus, it is important for almost every trustee to understand how the Prudent Investor Rule applies to his/her specific trust. 12
What Standards Must a Trustee Satisfy? The trust may establish its own performance standards If the trust doesn t set standards, then state law does The new Prudent Investor Standard goal is to grow the principal The old Prudent Man Standard goal was to preserve the principal 13 To do his/her job properly, a trustee must first be able to determine what he/she is required to do. The trust document will provide much of this information, but it may be silent on some important issues. When the trust itself doesn t address all the trustee s responsibilities, state law sets the remaining standards. So, a trustee must first look to the trust to see what he/she must do. Then the trustee must look to state law to see if there are other requirements he/she must satisfy. Generally, states have adopted either the Prudent Investor standard or the Prudent Man standard for trustees. Most states have now adopted the Prudent Investor standard. Under that standard the trustee is responsible for managing the trust assets so they grow in value. The states that haven t adopted the Prudent Investor standard use the Prudent Man standard. Under the Prudent Man standard the trustee isn t required to invest for growth. Instead, he/she need only manage the trust assets so they do not lose value. 13
The Prudent Investor Standard Since 1994 most states have changed to this standard* No exemption for trusts established before the Prudent Investor standard was adopted * These states have not yet adopted the Prudent Investor standard Alabama, Delaware, Kentucky, Louisiana, Mississippi) 14 The Prudent Investor standard was created back in 1994 and was introduced as part of the Uniform Prudent Investor Act (UPIA for short). All but 5 states have considered the UPIA and incorporated it into their state laws. Generally, the Prudent Investor Rule applies to all trusts in that state. Trusts that were established before the UPIA was adopted are not exempt. Trustees of those trusts also must comply with its provisions. Only Alabama, Delaware, Kentucky, Louisiana, and Mississippi have yet to adopt the UPIA. They may do so in the relatively near future. 14
The Prudent Investor Standard Applies modern investment principles to trust management: Trustees must use reasonable strategies to grow the trust assets Trust assets should be managed together as a single portfolio Absent special circumstances, trust assets should be diversified Trustees can hire professionals to help in making decisions 15 The main goal of the Prudent Investor Rule is to encourage trustees to use modern investment principles to manage trust assets. The trustee s objective is grow these assets, not merely to preserve them. The trustee must manage the different trust assets as a single, integrated portfolio. To reduce the risk of loss, the trust s investments should be diversified among a variety of assets. Only if there are special circumstances should the trustee avoid diversification. To make sure he/she doe s a good job managing the trust assets, the trustee can get advice from professionals. Their observations and recommendations can be used to better manage the trust s assets. 15
The Prudent Investor Standard The trustee should implement good procedures: Adopt a formal investment strategy to grow the trust Diversify the trust s assets Regularly monitor asset performance Make changes as necessary 16 The Prudent Investor Rule requires trustees to grow the trust s assets. But it doesn t establish a specific target for annual growth (e.g. 5%, 10%, 15%, etc.). Instead, it encourages the trustee to adopt sound procedures that are likely to result in asset growth. Its philosophy is that if the trustee establishes and follows good procedures, then it is highly likely that growth will occur. To perform his/her duties the trustee needs to: Adopt a formal investment strategy Diversify the trust s assets to reduce the risk of loss Regularly monitor the performance of the assets, and Make change as necessary to achieve asset growth 16
ILIT Trustees May Need Assistance Administering an ILIT can be difficult: Life insurance policies are complex financial instruments The policy may not perform as originally expected Funds to pay the premiums may not come into the trust Cash value withdrawals or loans may limit the policy s performance 17 Following the Prudent Investor Rule can be difficult for several reasons: Fist, life insurance policies are unique and complex financial tools; they are best managed by someone who has experience with how life insurance policies work. Because they are based on a variety of components, life insurance policies can be difficult to evaluate. Without experience and training, it can be difficult to determine exactly how well the policy is performing. The performance of a policy can depend on when funds come into the trust to pay premiums. Unfortunately, the trustee has no control over when or even if money will come into the trust so premiums can be paid. Finally, the trustee may need to withdraw or borrow policy cash values to meet thee needs of the trust s beneficiaries. If this happens, the withdrawals and loans may negatively impact the policy s performance. These potential problems can make it advisable for the trustee to get professional help in managing the trust s policies. 17
An ILIT Trustee May Encounter These Situations Situation #1--A Policy In Trouble ILIT owns a $1,000,000 policy that has minimal cash values The grantor will not provide any more funds to pay premiums Without additional funds, the policy is expected to lapse in 5 years the insured is healthy and has a life expectancy of 10 years if the policy lapses, the assets in the trust will be minimal What should the trustee do? 18 Let s consider three demanding situations ILIT trustees can find themselves in. In the first situation the ILIT owns a $1,000,000 policy that has minimal cash values. The grantor is experiencing difficult financial times and is not in a position to contribute any more funds in the near future to pay policy premiums. Without those contributions the policy is expected to lapse or terminate within 5 years. The insured is healthy and has a life expectancy of at least 10 years. The policy is the only significant asset in the trust. If it lapses, there will be next to nothing to distribute to the beneficiaries. In this dire situation what should the trustee do? 18
An ILIT Trustee May Encounter These Situations Situation #2--A Policy With Limited Death Benefits The trust owns a policy with a $1,000,000 death benefit; its performance is in line with the original illustration A new policy is available that will pay a death benefit of $1,500,000 (a 50% increase) without an increase in premiums The new policy is from a highly rated life insurance company What should the trustee do? 19 Here s another situation that is not uncommon. The ILIT owns a policy with $1,000,000 death benefit. It is performing well very close to the projected performance in the policy illustration. A beneficiary brings to the trustee s attention the fact that a different insurer has just introduced a new policy that offers a a50% increase in death benefits ($1,500,000) without an increase in premiums. This insurance company is well-known, well-respected, and highly rated. What should the trustee do? 19
An ILIT Trustee May Encounter These Situations Situation #3--A Policy From a Marginal Insurer The trust owns a $1,000,000 policy issued by an insurance company that currently has low ratings from industry rating agencies This policy is performing as originally illustrated A new $1,000,000 policy can be purchased from an insurance company that has higher ratings What should the trustee do? 20 The third situation is also not unusual. The trust owns a $1,000,000 policy that was issued by an insurance company that is not highly rated by independent rating agencies. The policy is performing as illustrated. The trustee learns that a $1,000,000 policy is available from a different insurer that is very highly rated. The premiums for both policies are about the same. Should the trustee change from the current policy to the new policy or not? What should the trustee do? 20
How Can ILIT Trustees Protect Themselves? A trustee may be able to reduce his/her personal risk: Know exactly what the trust requires (make a checklist) Create a written Investment Policy Statement (IPS) to manage trust assets Monitor the performance of trust s policies regularly Document all actions taken Seek detailed information about the life insurance policies 21 Each of these situations is potentially perilous for the trustee. If there are losses, it is possible the trust beneficiaries may try to recover them from the trustee. How can an ILIT trustee protect him/herself? Is there anything a trustee can do to reduce their personal risk? Fortunately, there is. Trustees can take several steps to protect themselves: First, the trustee create a written checklist detailing all the actions they are required to perform. The trust document needs to be reviewed carefully for this information. Second, the trustee should consider drafting an Investment Policy Statement that explains how he/she intends to manage the trust s policies. Third, the trustee should establish a procedure for monitoring the policies annual financial performance. Fourth, the trustee should keep track of the actions he/she takes. Being able to document the activities may be very helpful if a dispute arises. If the trustee isn t used to managing life insurance policies, he/she may wish to seek advice and recommendations from a life insurance professional. 21
Three Key Questions Have you adopted a written investment policy statement? Have you been regularly monitoring the trust s policies? Do you have the knowledge and experience to evaluate different life insurance policies? 22 To gauge their level of potential risk, ILIT trustees should ask themselves three questions: 1. Have you adopted a written investment policy statement? 2. Have you been regularly monitoring the trust s policies? 3. Do you have the knowledge and experience to evaluate different life insurance policies? If not, where will you get this expertise? 22
A trustee who answers NO to any of these questions, might benefit from consulting with someone who has experience in evaluating life insurance policies 23 Trustees who answer NO to any of these questions might benefit from consulting with someone who has extensive experience in evaluating life insurance policies to assist them in making decisions about the trust s policies. Like any decision by the trustee, any decision to consult with third parties, such as life insurance professionals, should be made in conformance with the trustee s overall duties to the trust and beneficiaries. 23
A Life Insurance Professional Can Help The ILIT Trustee Review the trust s life insurance policies Evaluate the current policies to see how they ve performed Survey the marketplace to see if better life insurance policies are available Summarize available options & make recommendations 24 These are some of the ways a life insurance professional may help a trustee increase what the trust provides its beneficiaries while reducing the trustee s personal financial risk. A life insurance professional can review the life insurance policies top make sure they are suitable for this trust and these beneficiaries He/she can evaluate the current policies and report on how they ve performed so far and estimate how they might do in the future. He/she can survey the marketplace to see if better or more suitable life insurance policies are available. Finally, a life insurance professional can summarize the options available to the trustee and make recommendations on what to do in the future. 24
An ING Representative May Be The Life Insurance Professional the Trustee Needs 25 An ING representative may be the life insurance professional the trustee needs. Many ING representatives have years of experience reviewing and evaluating life insurance policies. Many of them are familiar with the life insurance marketplace and keep up to date with product offerings and the financial health of life insurance companies 25
An ING Representative May Help Limit A Trustee s Risk of Personal Liability Many ING representatives have experience in providing life insurance policies to trusts He/she can share the tools ING has created to help trustees implement a formal investment policy Assist in drafting an Investment Policy Statement Help draft a checklist to review the trust s life insurance policies and help monitor them in the future Compare the ILIT s policies to new policies currently available 26 Further, many ING representatives have experience working with trust-owned life insurance policies ING representatives can share the tools ING has created to help trustees implement a formal investment policy. They can: assist in drafting an Investment Policy Statement help draft a checklist to review the trust s policies assist in regularly monitoring the trust s policies compare the ILIT s policies to policies now available 26
The Stakes Are High! Beneficiaries Want The Trust To Grow; Trustees Need To Avoid Personal Liability 27 Sound management of the ILIT s policies is essential, because the stakes are high. The beneficiaries very much want the value of the trust to grow and the trustees want to minimize their personal risk as much as possible. 27
Call your ING representative TODAY Find out how he/she can help maximize benefits and reduce the trustee s potential liability 28 Wise trustees can get the best of both worlds. With good planning and execution the life insurance death benefits can increase the funds available for the beneficiaries and reduce the trustee s liability risk. An ING representative who knows life insurance can be the catalyst that makes this happen. His/Her guidance can help the trustee identify good procedures and life insurance policies to provide for the beneficiaries and satisfy the trustee s duties under the law. Call your ING representative today and set up a time to meet. 28
Thank You! Questions? 29 Thank you for your time today. I hope your have found this information helpful and interesting. What questions would you like to ask? 29