toli issues and solutions 2017 year in review · 12/12/2017 · background: a toli trustee is...

© ITM TwentyFirst 2017. All rights reserved.

itm-twentyfirst.comMinneapolis, MN Office T: 612.371.3008New York, NY Office T: 212.378.6730Cedar Falls, IA Office T: 866.384.2766

TOLI Issues and Solutions2017 Year in Review

keeping trusts on track

A Session Specifically Designed forITM TwentyFirst University

LEON WESSELSD: 605.574.1703E: [email protected]

MICHAEL BROHAWN, CFP®, CLUD: 319.553.6227W: itm-twentyfirst.comE: [email protected]

Presented By:

itm-twentyfirst.comPage: 2

Current Estate Tax Discussion

Over the Years: Change In Estate Tax Position: Fewer Wealthy “Need” A Life Insurance Trust.

YearExemption

AmountTop Rate

YearExemption

AmountTop Rate

YearExemption

AmountTop Rate

1997 $600,000 55% 2004 $1,500,000 48% 2011 $5,000,000 (indexed) 35%

1998 $625,000 55% 2005 $1,500,000 47% 2012 $5,120,000 35%

1999 $650,000 55% 2006 $2,000,000 46% 2013 $5,250,000 40%

2000 $675,000 55% 2007 $2,000,000 45% 2014 $5,340,000 40%

2001 $675,000 55% 2008 $2,000,000 45% 2015 $5,340,000 40%

2002 $1,000,000 50% 2009 $3,500,000 45% 2016 $5,430,000 40%

2003 $1,000,000 49% 2010 Repealed NA 2017 $5,490,000 40%

The Shrinking Federal Estate Tax Through The YearsIn 2000, a couple with a $10M estate had a federal estate tax of approximately $4,757,500

• 10,000,000 minus 1,350,000 = $8,650,000 times 55% = $4,757,500

In 2007, a couple with a $10M estate had a federal estate tax of approximately $2,700,000 • 10,000,000 minus 4,000,000 = $6,000,000 times 45% = $2,700,000

In 2017, a couple with a $10M estate pays no federal estate tax • 10,000,000 minus $10,980,000 < $0

House Version

Raises exemption amount to $11M

Raises annual exclusion amount to $28,000

Repeals gift and estate tax entirely in 2026

Senate Version

Raises exemption amount to $11M

Raises annual exclusion amount to $28,000


Shrinking Prospects?The number of estate tax returns declined nearly 76 percent from 49,050 in 2006 to 11,917 in 2015 primarily due to the gradual increase in the filing threshold.Source: Internal Revenue Service, Statistic of Income (SOI) Division of IRS, Estate Tax Returns Filed for Wealthy Decedents, 2006–2015

Only 2 out of every 1,000 estates will owe Federal Estate Tax in 2017.

If the estate tax stayed as it was in 2017 (with the top rate of 40% and the current exemption indexed for inflation,) over the next ten years, from 2017 – 2026, the average number of estate tax returns filed annually would be 11,280, with the number of taxable estates averaging 5,540, and annual average estate tax liability of $22.3 billion. This assumes and average of 2.84 million deaths per year in the United States.

So, why have an ILIT (with a corporate trustee) now?1. Things Can Change

• President Trump: 290 electoral votes, 70 electoral college votes in 6 states won by less than 1.5% of vote.• Won two states (Michigan (16) and Vermont (3)) by less than .4% of the vote – 15,781 total vote difference.• Won four states (Wisconsin (10), Pennsylvania (2), Florida (29), Minnesota (10)) by less than 1.5% of the vote, 254,418 total

vote difference

• Hillary Clinton’s Estate Tax Plan• $3.5M exemption, 45% top rate (up to 65%)

2. Other Taxes Besides Federal Estate Taxes

3. Asset Management• Average policy in an ILIT – $1.87M

• Average asset management fee – 1%, even robo-advisors are .30% • You cannot charge $18,700 or even $5,600, but you should be able to clearly show your value.

4. The Value of a Trust (and Trustee)• Control• Asset protection• Investment after funding

5. Other Reasons• Business planning• Estate equalization

Source: Joint Committee on Taxation, From Center on Budget and Policy Priorities|CBPP.ORG


But What if Your Client Simply Does Not Want the Policy or To Fund It?Case Design: Grantor informs trustee that he will no longer be funding the policy. Background: A TOLI trustee is informed that an 83 year old grantor of a TOLI trust housing a current assumption universal life policy issued 13 years prior with a current level death benefit of $3,000,000 and Net Cash Value of $818,500. Has decided to not fund the policy and none of the beneficiaries are interested in funding the policy. The trustee must decide what to do with this $3,000,000 asset.

Review: Potential options were outlined for the policy.Option #1 - Pay the scheduled annual premium

• No money is forthcoming to fund the policy.

Option #2 – Surrender policy for the cash value and invest it. Reviewed • Surrender is not a taxable event as cash value is less than cost basis.

Option #3 - Allow the policy to run as is – at current death benefit, with no premium. Reviewed• Policy to lapse in approximately 10 years.

Option #4 – Reduce the death benefit to an amount that will carry policy to maturity with no premium. Reviewed• Death benefit of $2,100,000

Option #5 – Sell policy in the secondary market• No offers forthcoming.

Option #6 – Policy replacement to maximize death benefit • After obtaining informal application, no more efficient options could be obtained.

Analysis1 2 3 4 5 6 7 8 9

Year PolicyYear Ages

Surrender Value Invested

at 4%

Surrender Value Invested

at 6%

Policy Outcome at Current Death Benefit of $3,000,000 and No

More Premium

Policy Outcome at Reduced Death Benefit

of $2,150,000 and No More Premium

LE Report % of Insureds Who Would Have Passed Away

1 2017 13 83 $903,240 $920,610 $3,000,000 $2,150,000 3.40%2 2018 14 84 $939,370 $975,847 $3,000,000 $2,150,000 7.80%3 2019 15 85 $976,944 $1,034,397 $3,000,000 $2,150,000 11.00%4 2020 16 86 $1,016,022 $1,096,461 $3,000,000 $2,150,000 19.00%5 2021 17 87 $1,056,663 $1,162,249 $3,000,000 $2,150,000 25.00%6 2022 18 88 $1,098,930 $1,231,984 $3,000,000 $2,150,000 35.00%7 2023 19 89 $1,142,887 $1,305,903 $3,000,000 $2,150,000 41.10%8 2024 20 90 $1,188,602 $1,384,257 $3,000,000 $2,150,000 56.00%9 2025 21 91 $1,236,146 $1,467,312 $3,000,000 $2,150,000 65.00%10 2026 22 92 $1,285,592 $1,555,351 Policy Lapse $2,150,000 71.50%11 2027 23 93 $1,337,016 $1,648,672 $2,150,000 78.50%12 2028 24 94 $1,390,496 $1,747,593 $2,150,000 83.00%13 2029 25 95 $1,446,116 $1,852,448 $2,150,000 87.00%14 2030 26 96 $1,503,961 $1,963,595 $2,150,000 92.00%15 2031 27 97 $1,564,119 $2,081,411 $2,150,000 96.00%16 2032 28 98 $1,626,684 $2,206,295 $2,150,000 100%17 2033 29 99 $1,691,752 $2,338,673 $2,150,000 18 2034 30 100 $1,759,422 $2,478,994 $2,150,000

Option #2 Option #3 Option #4 From ITM21st LE Report


What Do You Do When You Come Across An Unwanted Policy?• Review client expectations, needs and goals.

i. The real client is the beneficiary

• Develop a prudent processi. Make sure that the decision you make makes sense based on the best facts and circumstances available at the time

• Alternative analysisi. You need to know how to analyze all of the options available

• Document, Document, Documenti. Get signatures from all pertinent parties

Remember:Section 8 of The Uniform Prudent Investor Act (UPIA): 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.

Even If You Do Surrender a Policy – Do Not Surrender the Tax Advantages:An example: Assume your client has funded a current assumption universal life policy over 15 years at $20,000 per year. The policy would have a cost basis equal to the total premium paid - $300,000. Let’s further assume that the policy has a current cash value of $125,000. If the policy was surrendered and the cash value was placed into another policy, the cost basis that transferred over would be $125,000 (Option #1). However, if the policy was transferred via a 1035 Exchange, the cost basis that transferred over would be $300,000, the cost basis of the existing policy (Option #2). Option #2 allows you to keep an additional $175,000 cost basis, which is beneficial should the new policy be surrendered in the future. If the policy was exchanged for an annuity, the same $300,000 cost basis would transfer, again potentially sheltering up to $175,000 in gain.

From the ITM TwentyFirst blog entry, TOLI Trustees Should Not Throw Away A Tax Opportunity With The Policy, October 11, 2017

New Policy Has Cost Basis

of $125,000

Put Cash Into New

Policy

Option#1Surrender

Policy

New Policy Has Cost Basis

of $300,000

Cash Goes Directly Into New Policy

Option#21035

Exchange Policy

You can help your clients even if they surrender a policy.


Federal Funds Rate Over Last 50 Years

Some Carriers Who Raised Expenses – Cost of Insurance• Transamerica• AXA (USFL)• Legal & General

• Banner• William Penn

• Voya• AXA (Athena II)• Conseco• Transamerica (again)• Lincoln National

We Are Living in Crazy Times

%Historically low interest rates, even negative interest rates.

02468

101214161820

1967

1969

1971

1973

1976

1978

1980

1982

1985

1987

1989

1991

1994

1996

1998

2000

2003

2005

2007

2009

2012

2014

2016

• Northwestern Mutual• Transamerica (again) - 2017• Phoenix Mutual - 2017• Lincoln National (again) - 2017


What Does a COI Increase Mean for the Policy?

One of the first carriers to raise their cost of insurance (COI) was Transamerica. In those policies, the average COI increase was 40%, but for the representative policy we highlighted, the annual premium to carry the policy to maturity more than doubled from $36,400 to $81,595. From the ITM TwentyFirst Blog, Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees, September 9, 2015.

Policy Year Old Monthly Deduction Charges

New Monthly Deduction Charges % Change

28 3.29 4.61 40.2329 3.69 5.18 40.3230 4.09 5.75 40.4431 4.52 6.35 40.5732 4.94 6.96 40.733 5.38 7.58 40.8534 5.85 8.25 41.0135 6.33 8.93 41.1836 6.84 9.67 41.3537 7.39 10.46 41.5138 7.97 11.29 41.6839 8.58 12.17 41.8240 9.24 13.12 41.9141 9.95 14.12 41.9342 10.78 15.28 41.8343 11.59 16.41 41.5844 12.41 17.52 41.1545 13.31 18.71 40.546 14.74 20.56 39.4947 16.81 23.21 38.0948 19.5 26.59 36.38

Monthly deduction charges per thousand dollars of death benefit coverage provided.

Because of the cost increase the premium to carry the policy to age 100 jumped from $36,400 to $81,595 more than doubling the carrying cost of the policy.

As a TOLI policy manager you have struggled in a low interest rate environment with poorly performing policies that have not lived up to expectations. Could you be liable for them?What are your options with the policy?

1. Surrender the policy for existing cash value.2. Sell the policy in the secondary market.3. Pay higher suggested premium and keep the full death benefit intact.4. Keep death benefit intact, pay no premium now, pay higher premium at lapse. 5. Lower the death benefit to an amount that will allow policy to run to maturity with no premium. 6. Purchase a more competitive policy, if possible.

One Possible Saving Grace? Lawsuits• Transamerica• Lincoln National

What Can We Expect in the Future?• What needs to change? • Will interest rates go up?

Industry opinion• Moody’s downgraded the insurance industry from stable to negative in 2017 citing the low interest rate environment as

the main reason. • Larry Fink, CEO of BlackRock, Inc., the world’s largest asset manager and biggest investor in insurance companies,

commented that the “persistent low rates” were “destroying the viability of insurance companies.” • Evan Greenberg, the head of Chubb, the world’s largest publicly traded insurer, said “the current environment is

unsustainable over any reasonable period of time.” Because of the low rate environment, “many companies are not earning their cost of capital — and many are losing money, or will lose money in the future.”


Policy SizeSize %

<100k 8.60%100k-1M 33.99%1M-5M 40.71%5M-10M 6.91%

10M and Up 3.73%NULL 6.06%Totals 100.00%

AveragesPolicy to Trust Ratio 1.34

Trust Value $2,518,119.51Policy DB $1,877,351.96

Loans (Trust) $11,079.82Premiums (Policy) $18,174.92Premiums (Trust) $24,378.28

Policy DurationDuration Death Benefit %<2 years $1,888,743,064.77 3.33%2-5 years $4,349,736,481.04 7.89%6-10 years $7,826,832,105.98 19.81%11-20 years $9,579,678,901.77 35.72%21-40 years $3,110,696,431.75 27.53%>40 years $62,285,805.38 5.71%

Totals $26,817,972,790.69 100.00%

TOLI SummaryTo be or not to be a TOLI trustee, that is the question!

• A look at the numbers• 169 Organizations• 241 Accounts

Gross Death Benefit Net Death Benefit Premium Loans$26,933,499,404.95 $26,817,972,790.69 $259,628,682.15 $118,000,089.37

Policy CategoryType Death Benefit %

Annuity $7,367,027.33 0.22%Term $4,139,054,065.14 12.17%

Universal $14,994,611,441.44 44.80%Variable $4,015,851,092.39 10.87%Whole $3,661,089,164.39 31.94%Totals $26,817,972,790.69 100.00%

Trust SizeSize %

<100k 27.77%100k-1M 45.59%1M-5M 8.14%5M-10M 5.35%

10M and Up 11.05%NULL 1.57%Totals 99.47%

Policy Rating ProjectionsGrade %

A+ 40.18%A 5.61%A- 7.00%B+ 5.15%B 4.59%C 6.03%D 5.26%F 16.63%U 1.62%

Not Rated 7.95%Totals 100.00%


47 Policy Types Top 20 ShownCategory Type %

Whole Whole Life 16.88%Guaranteed Guaranteed Universal 14.06%Guaranteed Guaranteed Survivorship Universal 11.98%

Universal Universal 8.11%Term Term-20 Year 6.29%

Universal Survivorship Universal 5.90%Whole Survivorship Whole Term Blend 5.42%

Variable Survivorship Variable Universal 5.21%Whole Survivorship Whole Life 4.46%

Variable Variable Universal 3.77%Whole Whole Term Blend 3.42%Term Term-10 Year 1.69%Term Term-15 Year 1.27%Term Term-30 Year 0.99%

Guaranteed Guaranteed Indexed Life 0.60%Term Annual Renewable Term 0.55%

Variable Variable Whole Life 0.55%Universal Interest Sensitive Whole Life 0.51%Variable Guaranteed Variable Universal 0.50%Group Group Term 0.44%

Policy Providers %Northwestern Mutual 11.02%John Hancock Life (USA) 9.11%Lincoln National 7.85%MassMutual 6.29%Hartford Life and Annuity 3.85%New York Life 3.00%Pacific Life 2.95%MetLife USA 2.74%Protective Life 2.64%Transamerica 2.62%Pruco 2.56%Sun Life Assurance Canada 2.53%American General Life 2.28%Prudential Ins Co 2.00%MetLife 1.78%AXA Equitable 1.62%New England Life 1.53%Genworth Life and Annuity Insurance 1.52%Principal Life 1.48%Guardian Life Insurance Co 1.34%Thrivent 1.30%Jackson National 1.29%ReliaStar 1.13%Brighthouse Life Ins 1.09%

Policy Providers: 194 Carriers – Top 50 Shown

Security Life of Denver 1.05%Nationwide 1.02%Phoenix Life 1.00%Penn Mutual 0.96%Lincoln Benefit 0.90%National Life 0.85%Hartford Life Insurance Company 0.84%General American Life 0.82%Minnesota Life 0.71%Principal National Life 0.68%New York Life Insurance and Annuity 0.64%West Coast Life 0.63%Banner Life 0.62%Ameritas 0.55%Ohio National Life Assurance 0.50%Nationwide Life and Annuity 0.46%Athene Annuity and Life Co 0.45%Midland National 0.43%Connecticut General 0.43%MONY 0.41%Accordia Life Ann 0.41%State Farm 0.40%Great West Life and Annuity 0.39%Genworth Life 0.36%United of Omaha 0.36%


Average Trust Organization • 57 ILIT’s• 77 Policies• $159,369,818 Death Benefit• $1,536,264 Annual Premiums

Trustee Administration, Operations, and Remediation ProjectionsILIT Administration & Operations

194 Beneficiaries77 Polices39 Trusts Requiring Premium Payments54 Policies to Process Premium18 Trusts Grantors Not Gifting to Pay Premium26 Policies with No Premium Payment - Analysis Needed342 Incoming Mail to Process308 Outgoing Mail to Process60 Premium Notices to Review & Process45 Premium Payments to Process151 Crummy Notices to Mail29 Hours on Phone with Carrier40 Hours on Phone Dealing with Administration Tasks11 Hours Processing Gifts/Deposits

Remediation Services*20 Policies in need of immediate attention24 Add'l Policies to be reviewed for these issues;2 Policies projected to lapse in less than 45 days3 Policies projected to lapse in less than 1 year8 Policies projected to lapse in 1-5 years14 Policies projected to lapse in 5-15 years13 Policies projected to lapse in more than 15 years2 Policies where Grantor Requests Lower Death Benefit 6 Term policies conversion issues

Additional Remediation, Client Service & Legal Commitments4 Clients Wanting to Cancel the Trust20 Hours Reviewing Policy Replacements or New Policy Proposals15 Hours Handling Client Questions and Advisor Inquiries29 Hours replying to internal emails, phone calls, and questions29 Hours preparing remediation related documents6 Hours dealing with carrier issues - bad information & discrepancies

*Remediation is the act of preserving or maximizing benefits & minimizing fiduciary liability


Remediation Summary Report

Remediation Category # %

COI Increase 7 0.48%

Death Benefit Decrease 12 0.83%

Dividend Decrease 9 0.62%

Policy Lapse Less than 45 days 19 1.31%

Less than 1 Year 41 2.83%

1-5 Years 129 8.90%

5-10 Years 204 14.07%

> 10 Years 451 31.10%

Life Settlement Review 1 0.07%

New Policy 8 0.55%

Other 25 1.72%

Pending Maturity 17 1.17%

Policy Loan Issue 150 10.34%

Pre-Acceptance 131 9.03%

Policy Replacement 30 2.07%

Requested Review 10 0.69%

Surrender 17 1.17%

Term Conversion/Prem Increase 123 8.48%

Trust Changes 10 0.69%

Variable Life 5 0.34%

Whole Term Blend Issues 55 3.79%

© ITM TwentyFirst 2017. All rights reserved.

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toli issues and solutions 2017 year in review · 12/12/2017 · background: a toli trustee is...

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