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 https://www.itm21st.com/Education#UpcomingWebinars

  • – 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.

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