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©2014 Voya Services Company. All rights reserved. CN1126-6186-1215

The demanding job of an ILIT Trustee


Disclosures

The Voya™ Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws change frequently and the strategies suggested may not be suitable for everyone. You should seek advice from your tax and legal advisors regarding your individual situation.

These materials are not intended to and cannot be used to avoid tax penalties and they were prepared to support the promotion or marketing of the matters addressed in this document. Each taxpayer should seek advice from an independent tax advisor.

Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and it's products issued. All are members of the Voya™ family of companies.

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Being a Trustee is combination ofgood news & bad news

Good News An honor and a statement of trust Responsibility for managing trust assets must

–Follow the terms of the trust, and

–Comply with state law

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Being a Trustee is combination ofgood news & bad news

Bad News A trustee is a “fiduciary” Held to a high standard of performance State law may create unexpected

responsibilities

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Being an ILIT Trustee can be demanding

Probably not consulted about the trust’s terms

Probably didn’t select what policies came into the trust

No control over new funds coming into the trust

–Timing of contributions, or

–Contribution amounts

Probably can’t change the terms of the trust

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Being a trustee can also be financially dangerous!

The Trustee should use sound business judgment; the Trustee can be personally liable for losses!

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A Trustee’s personal assetscan be at risk!

If the trust’s assets aren’t managed properly, the trustee can be held personally responsible

A trustee can be ordered to use his/her personal funds to replace lost trust funds

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Three trends have made an ILIT Trustee’sjob more difficult

1. The trust’s policies may not perform as expected

2. Insurers have developed new life insurance policies

3. Many states have increased trustee performance standards

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Life insurance illustrations are projections based on many assumptions

Some of the assumptions may turn out to be wrong

– Interest rates

– Mortality rates

– Expenses

The performance of the policy changes over time

The longer the insured lives, the greater the potential for change

The policy may not perform as expected

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The life insurance industry is very competitive; insurers regularly develop new products

New products can have new features and benefits that may provide additional value

Some new policies may have lower premiums

Medical advances and increasing life expectancies have resulted in more flexible underwriting

New & improved policies are available

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Many states have changed their laws and increased trustees’ duties

Performance standards have changed

More is required of trustees today

The Prudent Investor Rule has been widely adopted

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Newly adopted standardscan apply to many trusts

They can even apply to trusts created before the new standards were adopted.

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The trust may establish its own performance standards

If the trust doesn’t set standards, then state law does

– The new “Prudent Investor” Standard—Goal is to grow the principal

– The old “Prudent Man” Standard—Goal was to preserve the principal

What standards must a trustee satisfy?

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Since 1994 most states have changed to this standard*

No exemption for trusts established before the “Prudent Investor” standard was adopted

* Consult with your tax and legal advisors to see if your state has adopted the new Prudent Investor standard.

The “Prudent Investor” Standard

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Applies modern investment principles to trust management:

– Trustees must use reasonable strategies to grow the trust assets

– Trust assets should be managed together as a single portfolio

– Absent special circumstances, trust assets should be diversified

– Trustees can hire professionals to help in making decisions


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The trustee should implement good procedures:

– Adopt a formal investment strategy to grow the trust

– Diversify the trust’s assets

– Regularly monitor asset performance

– Make changes as necessary


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Administering an ILIT can be difficult:

– Life insurance policies are complex financial instruments

– The policy may not perform as originally expected

– Funds to pay the premiums may not come into the trust

– Cash value withdrawals or loans may limit the policy’s performance

ILIT Trustees may need assistance

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Situation #1 – A Policy In Trouble

– ILIT owns a $1,000,000 policy that has minimal cash values

– The grantor will not provide any more funds to pay premiums

– Without additional funds, the policy is expected to lapse in 5 years

– The insured is healthy and has a life expectancy of 10 years

– If the policy lapses, the assets in the trust will be minimal

What should the trustee do?

An ILIT Trustee may encounter these situations

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Situation #2 – A Policy With Limited Death Benefits

– The trust owns a policy with a $1,000,000 death benefit; its performance is in line with the original illustration

– A new policy is available that will pay a death benefit of $1,500,000 (a 50% increase) without an increase in premiums

– The new policy is from a highly rated life insurance company



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Situation #3 – A Policy From a Marginal Insurer

– The trust owns a $1,000,000 policy issued by an insurance company that currently has lower ratings from industry rating agencies

– This policy is performing as originally illustrated

– A new $1,000,000 policy can be purchased from an insurance company that has higher ratings



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A trustee may be able to reduce his/her personal risk:

– Know exactly what the trust requires (make a checklist)

– Create a written Investment Policy Statement (IPS) to manage trust assets

– Monitor the performance of trust’s policies regularly

– Document all actions taken

– Seek detailed information about the life insurance policies

How can ILIT Trustees protect themselves?

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Have you adopted a written investment policy statement?

Have you been regularly monitoring the trust’s policies?

Do you have the knowledge and experience to evaluate different life insurance policies?

Three key questions

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A trustee who answers “NO” to any of these questions, might benefit from consulting with someone who has experience in evaluating life insurance policies.

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Review the trust’s life insurance policies

Evaluate the current policies to see how they’ve performed

Survey the marketplace to see if better life insurance policies are available

Summarize available options & make recommendations

An experienced financial professional may help:

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A Financial Professional experienced with life insurance can assist the trustee

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Some financial professionals have experience in providing life insurance policies to trusts

He/she may help implement a formal investment policy– Assist in drafting an Investment Policy Statement

– Help draft a checklist to review the trust’s life insurance policies and help monitor them in the future

– Compare the ILIT’s policies to new policies currently available

A Financial Professional may help limita Trustee’s risk of personal liability

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The Stakes Are High!

Beneficiaries Want The Trust To Grow;Trustees Need To Avoid Personal Liability

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Contact Your Financial Professional Today

Find out how he/she can help maximize benefits

and reduce the trustee’s potential liability

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Thank you!

Questions?

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