Statistics show that 40%-50% of institutionally managed life insurance is “At Risk.” Policies that are underfunded and sporadically managed run a risk of not meeting maturity. When a policy is labeled “At Risk,” does that specifically mean the policy will fail? In short, we can’t know. “At Risk” means something different for every client. But what we do know is if a fiduciary is collecting premiums, charging fees and sending out Crummey notices and the policy does not pay off at the time of death – that’s a major problem and certainly creates potential liability.

To ensure our program adheres to the strictest fiduciary standards we built our process in accordance with the most conservative guidelines from the OCC Unique and Hard-to-Value Assets Comptroller’s Handbook , August 2012 Updates. This states:

  • Bank fiduciaries are responsible for protecting and managing the life insurance policy for the benefit of the beneficiaries for the life of the grantor. A bank fiduciary must understand each life insurance policy that the trust accepts or purchases, or the bank fiduciary must employ an advisor who is qualified, independent, objective, and not affiliated with an insurance company to prudently manage these assets, and
  • Many states have recently passed legislation to limit the liability of bank fiduciaries, in certain situations, by rescinding requirements under state law to perform due diligence on insurance companies as a directed bank fiduciary. The OCC, however, continues to require bank fiduciaries to follow 12 CFR 9.6(c) and 12 CFR 150.220 and to conduct annual investment reviews of all assets of each fiduciary account for which the bank has investment discretion. This review should evaluate the financial health of the issuing insurance company as well as whether the policy is performing as illustrated or whether replacement should be considered.

​Further guidance can be found in the recent Nebraska Supreme Court case, Rafert v. Meyer in which the court overturned a lower courts ruling and ruled in favor of the ILIT beneficiaries. This case is important for the following reasons:

  • Reversed and remanded a decision of the trial court stating that a trustee has a non-waivable duty to keep beneficiaries informed about the status of life insurance policies held in the trust.
    Held that a trustee has a non-waivable duty to act in good faith and in the best interest of the beneficiaries.
  • Held that a trustee’s authority is governed by both common law and the statutes pertaining to trusts and trustees, as well as the trust instrument itself.
  • States that no trust provision can limit a trustee’s liability for breach of trust “committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries,” and no exculpatory clause in a trust is valid “unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.”
  • Court agreed that the trustee breached his duties as trustee by providing a false address to the insurers, failing to keep the beneficiaries informed of the facts necessary to protect their interests, failing to furnish annual statements, failing to communicate the terms of the trust to the grantor, and failing to act in good faith and in accordance with the terms and purposes of the trust and in the interests of the beneficiaries.
  • The Court also found untenable the trustee’s argument that the instrument expressly limited his liability for any claims related to the nonpayment of premiums. The Court stated that this violated “the most basic understanding of a trustee’s duty to act for the benefit of the beneficiaries under the trust.”

Relieving a trustee of the duties referenced in this case may result in lower trustee fees, but it also leaves the trust without anyone to assure that the policy remains in effect, that it is the suitable policy for the trust, and that full advantage is being taken of policy options and elections. It also leaves the trust to determine if the policy held in the trust is adequately funded to maturity or an agreed upon target date as well as whether to policy is competitive as compared to what is available in the open market.

An appropriate approach would be to retain an independent, qualified consultant to perform policy reviews, follow a prudent process to remediate “at risk” policies while documenting every step taken. State in writing the review and remediation process as well as how often that process is followed, then act accordingly on all policies under management. If you have a written process that is prudent and you follow those steps, you will be able to prove you are actively managing the policy and can defend your decisions if questioned in the future.

For more information about how to properly structure a life insurance policy review and remediation process, contact us. We will help you make sure the policies you manage have been properly reviewed, the trust stakeholders been appropriately advised and that you are in compliance with regulatory guidelines for managing ILIT’s. We will also document the entire process so you are confident you can defend your actions in the future if questioned.