A trust company and two outsourcers grapple with trust-owned life-insurance. Reliance Trust, Investment Scorecard and Insurance Trust Monitor (ITM) are out to help corporate trustees do a better job of managing trust-owned life-insurance -- or get out of the business altogether.

The trust-owned life insurance market refers mostly to irrevocable life-insurance trusts -- ILITs for short. There were approximately 1.3 million ILIT-owned policies in force in the U.S. providing around $1 trillion in coverage, according to industry estimates.

Because they remove the life-insurance policy from the grantor's estate for estate-tax purposes, they can be handy vehicles for giving heirs a liquid asset to pay estate taxes and other expenses without having to dip into less liquid holdings.

From the trustee's point of view though, ILITs can be vexing.

Fraught

"Many [ILIT] trustees simply do not have all of the resources needed to properly administer and review the trust and asset, much less to ensure that the trust asset is suitable and the most efficient vehicle for wealth transfer," says Ed Linsley, head of Atlanta-based Reliance Trust's personal-trust business.

Trustees have a fiduciary obligation to manage and monitor ILITs -- and that means requesting and documenting gifts from grantors, sending out and documenting "Crummey" notices to beneficiaries (to give them the chance to demand withdrawal of the gift within a stated period) and paying and documenting premiums.

In addition trustees have to monitor and manage ILIT-held insurance policies -- and that means they need an intimate understanding of the particular policies in the ILIT, be able to assess alternative policies and be up on actuarial assumptions and an avalanche of other insurance-specific issues.

A high percentage -- perhaps as much as 60% -- of ILIT-held policies were either poorly managed or not managed at all, according to Leon Wessels, who heads up Investment Scorecard's InsuranceIQ group.

And for all their troubles -- which includes potential liability for bad management -- corporate trustees get a flat fee managing an ILIT. Although these fees have risen quite a bit in recent years, in many cases, trustees frequently have very little on which to build relationships with next-generation beneficiaries.

The hope of forging ties with beneficiaries dwindles further with "orphan" ILITs. These are ILITs that the corporate trustee has inherited through acquisition or ones from which the policy advisor has been "alienated" through neglect or attrition. In either case the relationship with the grantors of orphan ILITs, let alone their beneficiaries, may be extremely tenuous.

But ILITs tend to be used by very wealthy clients, says Wessels, so where a corporate trustee can administer them well, there's a potential glean business from grateful or otherwise favorably impressed beneficiaries.

In a nutshell

And that's where Reliance Trust, Investment Scorecard and ITM come in -- though they do so at different levels, depending on how and to what extent a corporate trustee wants to deal with trust-owned life insurance.

For corporate trustees who want to manage ILIT-held life insurance policies while maintaining strong relationships with the grantors, Investment Scorecard, a unit of White Plains N.Y.-based Informa Investment Solutions, can grade and monitor the policies, and chart courses of action for remediation.

For trustees who want to outsource the administration of their ILIT-held policies, x-based ITM provides reviews of the trust assets and upgrade opportunities that may be available -- using Investment Scorecard's InsuranceIQ.

And for corporate trustees who want rid of their "orphans" or who want out of the ILIT business altogether, Reliance can take them over -- using InsuranceIQ and ITM's administrative services.

Reliance, an Atlanta-based company with about $60 billion in trust assets under custody, got into the trust-owned life-insurance business when it bought Prudential Financial's trust company in 2003. It found itself trustee to additional ILITs when it bought MetLife's trust business a few years later. -FWR

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