Our TOLI Administration team received notice from a 91-year-old grantor that she would no longer be making any contributions to her trust. This is not an entirely uncommon occurrence, as those of you who manage life insurance trusts know. Her trust held a portfolio of Whole Life policies that totaled $1.2M in death benefit. Though she was over age 90, she was “in good health” according to all who knew her.
All of the policies in the trust had loans, and the loans would grow if no further contributions were made. We researched all options, assuming no additional funding, but we also did something that probably saved us in the end: we obtained a TwentyFirst Life Expectancy Report.
A Life Expectancy Report estimates the average number of years a person is expected to live based on his or her age, gender, lifestyle, smoking status, family history, and medical condition. The TwentyFirst Life Expectancy Report indicated that the grantor had an approximate life expectancy of seven years.
We found that if no more out of pocket contributions were made to the policies over this span the loans on the policies would cause a “loan squeeze,” which would cause policy lapses. With each lapse a taxable event would occur.
We determined that to keep the bulk of the death benefit in force past the probable life expectancy of the grantor/insured, one of the smaller policies would have to be surrendered, and the cash value would need to be used to buffer the remaining policies. The action would push the duration of the remaining policies out far enough that we could prudently assume they would each pay a death benefit. We made the beneficiaries aware of the impending surrender and gave them the opportunity to contribute money to the trust. They declined to do so and we documented their agreement to the trustee’s action of policy surrender after participating in conference calls during which we reviewed all options.
Unfortunately, the grantor passed away unexpectedly from acute appendicitis less than one year later. The beneficiaries, who had signed off on all actions and declined to contribute when offered the opportunity, hired an attorney who contacted the trustee and inquired as to how he could surrender a policy on a 91- year- old insured woman. The trustee provided the attorney with a recap of the process that we undertook, a copy of the ITM|TwentyFirst information and review of options, and all other pertinent documentation of the case. The trustee never heard from the attorney again.
Lesson Learned: For trustees of TOLI trusts, the Uniform Prudent Investor Act (UPIA) states that “compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.” A trustee must make prudent decisions and document those decisions, but a trustee cannot be responsible for an outcome that does not come out as expected, which is exactly what happened in this situation. However, even though the beneficiaries had signed off on all that we did, we still had to prove that we made a prudent decision. Luckily for us, our comprehensive and compliant trust file, with the TwentyFirst Life Expectancy Report and thorough policy analysis as the centerpiece of the process, was proof enough.
When a decision you make is reviewed in the future, the thoroughness of the process employed, and not necessarily the outcome, will be held up for examination.