"Opportunity is a haughty goddess who wastes no time with those who are unprepared" - George Clason
“It is not often that a man can make opportunities for himself. But, he can put himself in such shape that when or if the opportunities come, he is ready.” - Theodore Roosevelt
Trustees (and wealth advisors to grantors) of life insurance Trusts are certainly well aware of the “Prudent Trustee Rule" of the Uniform Prudent Investor Act (UPIA), requiring trustees to maximize benefits and minimize costs of the policies in the Trust. What many are less aware of - or, more precisely, the implications of - is the responsibility to investigate, monitor, and manage those policies. What that actually means is that the Trustee's responsibility is not only to make certain premiums are paid to ensure policies do not lapse and beneficiaries receive the promised death benefits, but it is also to ensure the proper management of those policies.
But what does "proper management" mean for a Trustee in the event that the grantor can no longer afford to or no longer wishes to make premium payments to keep the policy in force? What can the Trustee do to ensure that the beneficiaries' interests are protected?
For the Trustee who is aware that the policy is potentially of resale value far in excess of surrender value - typically referred to as a "life settlement" - and how to pursue a proper valuation and sale, there is an opportunity to create substantive value for the beneficiaries. The same is true of the grantor's wealth Advisors, inasmuch as the proceeds from a sale can be added to AUM and used to fund alternative, higher return, fee generating strategies, to the benefit of those beneficiaries...and, obviously, to grow fee revenue.
However, for the Trustee who is unaware of the option to sell the policy, the likelihood is that the policy is lapsed or surrendered for little or no benefit to the Trust, and therein lies the risk, that Trustee is in jeopardy of being held liable for damage from not having explored options to maximize the value of the trust and failing to fulfill his/her "Standard of Care" fiduciary responsibility.
Being Prepared for the Opportunity Creates Value
We recently worked with the Trustee of a $3 million ILIT and the grantor/insured's wealth advisor. The grantor/insured no longer wished to pay, after 15 years, the $75,000/year premiums to keep the policy in force. The Advisor, though, was aware of - prepared for the opportunity, as it were - of the potential to sell the policy, so, discussed it with the Trustee, who wanted to ensure the best possible outcome for the beneficiaries. The policy was sold for $170,000, 3.4x surrender value and the proceeds were redeployed into an alternative strategy that the grantor’s Wealth Advisor will manage. Over the projected life expectancy of the grantor/insured, the beneficiaries, at an 8% return, will receive $520,000 more than what surrendering the policy and redeploying those proceeds would generate (Redeploy $170,000 sale vs $50,000 surrender @ t = 0). Clearly, a win for the beneficiaries and the Advisor...and the Trustee was able to fulfill his fiduciary responsibility to "manage" the policy and maximize the value of the Trust for the beneficiaries, even with the underlying not being maintained.
Not Being Aware Means Not Being Prepared...
And not being prepared typically results in a missed opportunity...and, potentially, a breach of fiduciary obligation to maximize the value of the Trust. We recently met with an excellent wealth Advisor - not a Trustee - for whom the introduction piqued a recollection of a client who "might be" lapsing a large policy held in a Trust. Unfortunately, much to his and his client's disappointment and financial detriment, the policy had, indeed, been lapsed - for no compensation at all to the owner. The Advisor had been unaware. The Trustee had been unaware - and the grantor remained unaware. An opportunity had been squandered; the $2,000,000 policy would likely have fetched $300,000.
So, whether you are a Trustee of a life insurance Trust or a wealth Advisor to a grantor of such a Trust, wouldn't you prefer to "...put yourself in such shape that when or if the opportunities come, you are ready" than to run the risk of "opportunity wasting no time with the unprepared"?
If yes, we'd love to help ensure that you are "ready".
Brief, simple posts to provide wealth advisors and HNW policy owners additional insight as to how to most efficiently and cost effectively - and how to avoid common pitfalls and less-than-professional intermediaries - undertake the sale of an unwanted or surplus life insurance policy.