1

mka
Lxecut|ve |anners September 16 2011

Trust Owned Life Insurance Review - What Are You Waiting For?
John J. Yagjian JD, Senior Consultant
mka Executive Planners
12 Gill street, Suite 5600, Woburn Mass. 01801
Tel: 781-939-6090 Fax: 781-939-6007
Website: mkaexecutiveplanners
Email: jyagjian@mkaplanners.com

ntroduct|on
1he comblnaLlon of a low lnLeresL raLe envlronmenL rlsk shlfLlng lnsurance producLs and flduclary law
has seL Lhe sLage for poLenLlal 1rusLee llablllLy and accompanylng responslblllLy for Lhe proper
managemenL of llfe lnsurance pollcles held ln LrusL ollcles LhaL were orlglnally supporLed by long ago
reasonable earnlngs and morLallLy assumpLlons may be ln danger of lapslng or faclng unwanLed
coverage reducLlons ollcles orlglnally pro[ecLed Lo requlre 7 annual premlums now requlre 20
ln addlLlon Lo earnlngs volaLlllLy Lhe rlsk of morLallLy raLe flucLuaLlon has been passed Lo Lhe consumer
and ln Lurn Lo Lhe consumer's LrusLee ln some cases ln lleu of brlnglng lnLeresL raLes down Lo maLch
Lhe markeL carrlers have lncreased Lhe cosL of Lhe morLallLy componenL of pollcles WlLhln pollcy
guaranLeed llmlLs llfe lnsurance carrlers can shlfL and shape lnLernal cosLs Lo lncrease revenues whlle
appearlng Lo be compeLlLlve
ln addlLlon Lo Lhe flduclary lssues relaLed Lo the Nassachusetts Piuuent Investoi Act (N.u.L. Chaptei
C) (See moie uetaileu uiscussion in Section below), and Lhe unlform 1rusL Code LrusLees should
be aware LhaL lmprovemenLs ln underwrlLlng and medlcal LreaLmenL may also lmpacL Lhe
approprlaLeness of exlsLlng pollcles CfLen older pollcles can be updaLed and modernlzed Lo provlde
Lhe same or more coverage for less premlum ouLlay ln addlLlon fallure Lo monlLor carrler raLlngs can
lead Lo lncreased rlsk of loss of coverage due Lo lnsurer lnsolvency
. Tbe Current State of tbe Law on Prudent Asset Management in Massacbusetts
he Nassachusetts Piuuent Investoi Ac ("N0PA") has been in effect since Becembei , 998. A bill
to auopt a veision of the 0nifoim iust Coue in Nassachusetts" {"H0TC") with a pioposeu effective
uate of }anuaiy , is penuing (Bill B S88).
he N0PA, anu the N0C combineu with the cuiient low inteiest enviionment that impact on
many existing policies, anu policies issueu with oluei moie expensive moitality, anu the evolution
of life insuiance policies ovei the last ten yeais cleaily suppoit the conclusion that life insuiance is
an asset that must be manageu, anu that failuie to piopeily manage this asset accoiuing to the
stanuaius piesciibeu in the N0PA may be a bieach of the tiustee's fiuuciaiy obligation.

2


2 Why Are Adv|sors (Lspec|a||y 1hose Who Act as 1rustee) Not More roact|ve Cn 8eha|f Cf
1hemse|ves And 1he|r C||ents?
,any advlsors and LrusLees have posLponed Lhe declslon Lo accepL Lhe lnevlLable concluslon LhaL
prudenL lnsurance pollcy managemenL ls a necessary evll 1he prlmary reasons glven for lack of acLlon
are (1) Lhe LrusL conLalns a broad exculpaLory clause (commenL see Lhe dlscusslon ln SecLlon 4 below)
(2) any llablllLy ls covered under Lhe errors and omlsslons pollcy LhaL covers Lhe LrusLee (commenL each
LC pollcy Lype ls dlfferenL and Lhe pollcy excluslons and llmlLs musL be clearly undersLood) and (3) Lhe
cllenL cannoL absorb any more admlnlsLraLlve fees assoclaLed wlLh Lhe operaLlon of Lhe LrusL (commenL
see Lhe dlscusslon ln SecLlon 3 below)
Add|t|ona| 8enef|ts of a o||cy kev|ews
pollcy revlew mlghL resulL ln savlngs for Lhe cllenL and Lhe generaLlon of goodwlll and opporLunlLy for
new buslness opporLunlLles for Lhe advlsor
Lxcu|patory C|auses and 1rustee L|ab|||ty

lLhough noL yeL law ln ,assachuseLLs Lhe ,u1C sheds some lnslghL on Lhe effecLlveness of
exculpaLory clauses conLalned ln LrusL documenLs SecLlon 1008 of Lhe proposed law provldes

SecLlon 1008 LxculpaLlon of 1rusLee
(a) Lerm of a LrusL rellevlng a LrusLee of llablllLy for breach of LrusL ls unenforceable Lo Lhe exLenL LhaL lL
(1) relleves Lhe LrusLee of llablllLy for breach of LrusL commlLLed ln bad falLh or wlLh reckless lndlfference
Lo Lhe purposes of Lhe LrusL or Lhe lnLeresLs of Lhe beneflclarles or
(2) was lnserLed as Lhe resulL of an abuse by Lhe LrusLee of a flduclary or confldenLlal relaLlonshlp Lo Lhe
seLLlor
(b) n exculpaLory Lerm drafLed or caused Lo be drafLed by Lhe LrusLee may be lnvalld as an abuse of a flduclary or
confldenLlal relaLlonshlp unless Lhe LrusLee proves LhaL lLs exlsLence and conLenLs were adequaLely
communlcaLed Lo Lhe seLLlor

lLhough oplnlons may dlffer exculpaLory language LhaL llmlLs Lhe LrusLee's llablllLy Lo acLs of bad falLh
gross negllgence and reckless lndlfference may be unenforceable lf Lhe exculpaLory language has noL
been approved and accepLed by Lhe seLLlor ln wrlLlng 1here ls even greaLer rlsk of unenforceablllLy
when Lhe exculpaLory language regardless of lLs scope ls conLalned ln a LrusL LhaL has been drafLed by
Lhe LrusLee/advlsor absenL wrlLLen approval and accepLance by Lhe seLLlor ln my oplnlon Lhe ,u1C
when enacLed wlll merely codlfy exlsLlng law

S 1he Cost of rudent Management Shou|d not be a Concern
l work wlLh esLaLe plannlng professlonals as a Leam Lo make sure Lhe LrusL owned llfe lnsurance
coverage LhaL ls ln place ls approprlaLe and meeLs Lhe seLLlor's famlly and esLaLe plannlng goals 1hls ls a
compllmeototy servlce where l work wlLh lndlvlduals and esLaLe plannlng professlonals Lo provlde
lnformaLlon wlLh Lhe purposes of (a) lmprovlng llfe lnsurance coverage where approprlaLe and (b)
provldlng Lo pollcy owners especlally LrusLees a professlonal and deLalled reporL LhaL lncludes
3

1 Carrler llnanclal SLrengLh
2 ro[ecLed ollcy erformance and ssoclaLed 8lsks
3 remlum LvaluaLlon (can pollcy be obLalned less expenslvely)
4 verlfylng LhaL Lhe lnsurance Coverage (lncludlng CuaranLees) ls pproprlaLe
3 LvaluaLlon of CurrenL PealLh ClasslflcaLlon ln LlghL of ,edlcal dvancemenLs and 8elaxed
underwrlLlng SLandards
6 8evlew of Cwner and 8eneflclary lnformaLlon for ccuracy
7 rovldlng nnual ln lorce ollcy Ledgers wlLh ueLalled ollcy CosLs (where avallable) and 8asls
CalculaLlons on any 8eplacemenL ollcy
8 sslsLlng ln urafLlng an pproprlaLe lnvesLmenL ollcy SLaLemenL for Lhe 1rusL
1he added beneflL of an annual revlew ls LhaL Lhe lnformaLlon conLalned ln Lhe revlew wlll be
sufflclenL for annual accounLlng purposes Lhereby addlng an addlLlonal layer of proLecLlon
6 What Does a L|fe nsurance o||cy kev|ew Lnta||?

Llfe lnsurance professlonals who are versed ln Lhls area undersLand LhaL ln order Lo avold llablllLy lL ls
lmporLanL LhaL LrusLees esLabllsh and malnLaln an lnvesLmenL ollcy SLaLemenL and adhere Lo pollcles
and procedures for Lhe evaluaLlon of llfe lnsurance as an lnvesLmenL grade asseL LhaL wlll enable Lhe
LrusL Lo accompllsh Lhe lnLended purpose of Lhe seLLlor much as Lhe LrusLee would for any equlLy bond
or muLual fund 1hese pollcles and procedures should lnclude guldance regardlng Lhe revlew and
evaluaLlon of carrler solvency and producL performance lncludlng buL noL llmlLed Lo Lhe followlng
1 1he accepLable flnanclal sLrengLh of Lhe lnsurance carrler ls lL sLlll lnvesLmenL grade and
whaL sLandards are Lo be applled ln maklng Lhls deLermlnaLlon?
2 1he amounL of lnsurance LhaL may be placed wlLh any one carrler absenL healLh
conslderaLlons Lhey may lmpacL on overall premlum cosL
3 1he 1rusLee's dlscreLlon Lo modlfy Lhe LrusL porLfollo
ln addlLlon Lhe 1rusLee musL monlLor Lhe followlng aL regular lnLervals (absenL an effecLlve exculpaLory
clause)
1 ollcy performance relaLlve Lo any lllusLraLlons ls lL performlng as expecLed?
2 re loans affecLlng Lhe lnLended purpose of Lhe pollcy?
3 1he posslblllLy of beLLer lnvesLmenL cholces
a ollcles ln Lhe LrusL LhaL were lssued ln Lhe '80's and '90's many were sold aL hlgher
credlLlng raLes Lhan Loday are Lhey performlng as lllusLraLed?
b CosL efflclency of newer pollcles could currenL pollcles be resLrucLured Lo provlde
Lhe same deaLh beneflLs aL lower cosL or a hlgher deaLh beneflL aL Lhe same cosL glven
changes ln morLallLy Lables?
c newer producLs may offer beLLer guaranLees and new feaLures allowlng Lhe LrusLee
more opLlons ln selecLlng a pollcy LhaL meeL's a cllenL's needs and ob[ecLlves (le reLurn
of premlum rlders guaranLeed deaLh beneflL proLecLlon rlders eLc)

7 1he Massachusetts Un|form rudent nvestor Act and 1he De|egat|on of Management
Iunct|ons kegard|ng L|fe nsurance o||cy Management

Llfe lnsurance ls ofLen a slgnlflcanL asseL ln a famlly's flnanclal porLfollo lL ls ofLen a crlLlcal componenL
of any welldeslgned esLaLe plan Llfe lnsurance provldes a means of supporL for Lhe survlvlng famlly as
4

well as a source of llquldlLy Lo pay esLaLe Laxes lL ls more ofLen Lhan noL owned by an lrrevocable LrusL
esLabllshed by Lhe lnsured or Lhe lnsured and hls or her spouse

When llfe lnsurance ls owned by a LrusL lL ls sub[ecL Lo Lhe same flduclary responslblllLles LhaL Lhe
LrusLee would have wlLh respecL Lo any klnd of asseL held ln LrusL ln ,assachuseLLs Lhose
responslblllLles are dlcLaLed by Lhe provlslons of Lhe ,u LhaL provlde a broad sLandard of care LhaL ls
belng lncreaslngly recognlzed by Lhe courLs (see o ke 5toott cocbtoo ttevocoble 1tost 901 nL2d 1128
(lnd CL pp 2009)

,u ln general lmposes upon Lhe LrusLee Lhe conLlnulng responslblllLy for overslghL of Lhe sulLablllLy
of lnvesLmenLs already made as well as Lhe LrusLee's declslons respecLlng new lnvesLmenLs" ,u
provldes aL SecLlon 3 LhaL (w)lLhln a reasonable Llme afLer accepLlng a LrusLeeshlp or recelvlng LrusL
asseLs a LrusLee shall revlew Lhe LrusL asseLs and make and lmplemenL declslons concernlng Lhe
reLenLlon and dlsposlLlon of asseLs ln order Lo brlng Lhe LrusL porLfollo lnLo compllance wlLh Lhe
purposes Lerms and Lhe oLher clrcumsLances of Lhe LrusL and wlLh Lhe requlremenLs of Lhls chapLer
mong Lhe sLandards seL forLh ln ,u are
1 ssesslng rlsk Lolerance Laklng lnLo conslderaLlon Lhe purposes of Lhe LrusL and Lhe relevanL
clrcumsLances of Lhe beneflclarles"
2 1aklng lnLo conslderaLlon
a Ceneral economlc condlLlons
b LxpecLed Lax consequences of lnvesLmenL declslons and sLraLegles
c dequaLe dlverslflcaLlon of Lhe lnvesLmenLs and
d n asseL's speclal relaLlonshlp or value lf any Lo Lhe purpose of Lhe LrusL

MUA app||es to a|| trustees |nd|v|dua|s and profess|ona|s

WlLh Lhe sLandards lmposed by ,u LrusLees are exposed Lo llablllLy from lawsulLs lnvolvlng LrusL
owned llfe lnsurance 1hls poLenLlal llablllLy may be ellmlnaLed slmply by Lhe LrusLee's compllance wlLh
SecLlon 10 of ,u whlch provldes
5ectloo 10 (o) A ttostee moy Jeleqote lovestmeot ooJ moooqemeot fooctloos lf lt ls ptoJeot to Jo so A
ttostee sboll exetclse teosoooble cote sklll ooJ cootloo lo
(1) selectloq oo oqeot
(2) estobllsbloq tbe scope ooJ tetms of tbe Jeleqotloo cooslsteot wltb tbe potposes ooJ tetms of tbe ttost
ooJ
(J) petloJlcolly tevlewloq tbe oqeots octloos lo otJet to mooltot tbe oqeots petfotmooce ooJ compllooce
wltb tbe tetms of tbe Jeleqotloo
(b) o petfotmloq o JeleqoteJ fooctloo oo oqeot sboll owe o Joty to tbe ttost to exetclse teosoooble cote to
comply wltb tbe tetms of tbe Jeleqotloo
(c) A ttostee wbo complles wltb tbe tepoltemeots of sobsectloo (o) sboll oot be lloble to tbe beoeflclotles ot
to tbe ttost fot tbe Jeclsloos ot octloos of tbe oqeot to wbom tbe fooctloo wos JeleqoteJ
(J) 8y occeptloq tbe Jeleqotloo of ttost fooctloos ftom tbe ttostee of o ttost tbot ls sobject to tbe lows of tbe
commooweoltb oo oqeot sobmlts to tbe jotlsJlctloo of tbe cootts of tbe commooweoltb

mka LxecuLlve lanners your lncome / your caplLal / your fuLure slnce 1971