For those of us managing life insurance portfolios in a trust setting there is a publication that should be on our required reading list.  In August of 2012, the Office of the Comptroller of the Treasury published the Handbook on Unique and Hard to Value Assets.  While the Handbook only applies to national banks and federal savings associations, the document provides another blueprint for policy management. For those who come under the watchful eye of the OCC, the Handbook “provides guidance for examining these types of discretionary assets” and “provides bank examiners with expanded examination procedures.”

Besides life insurance, the Handbook covers real estate, closely held businesses, mineral interests, loans and notes, tangible assets, and collectibles.  While I would suggest that you at least peruse the entire document (, I will provide some highlights as it relates to life insurance.

  • The OCC recognizes the use of an ILIT “as part of an estate planning tool” that allows life insurance to be “put into a trust to remove the policy from a grantor’s estate for inheritance or estate transfer tax purposes.”  But the document also notes some situations “where IRS rules could result in a clawback of these policies to the grantor’s estate”, alerting us to the fact that we must be vigilant to ensure that the grantor avoids any incidents of ownership in the policy at any time.  In fact, the document highlights something I had written about in a prior Blog (Make Sure You Know Who Your Real Client Is), “bank fiduciaries are responsible for protecting and managing the life insurance policy for the benefit of the beneficiaries”.  Too often I see grantors, for one reason or another, exercising what could be construed as too much control over a policy that they have irrevocably gifted.  I have come across situations where a policy was managed, not necessarily for the maximum benefit of the beneficiary, but according to the whims of the grantor, who after all probably has the relationship with the trustee.
  • The OCC requires that “a bank fiduciary must understand each life insurance policy that the trust accepts or purchases, or the bank fiduciary must employ an advisor who is qualified, independent, objective, and not affiliated with an insurance company to prudently manage these assets.”  It is interesting that the OCC adds the line…“not affiliated with an insurance company”.  Lately, we have seen a rash of activity from insurance marketing organizations offering “free” reviews, specifically citing the requirement made part of this document that a trustee “consider replacing an insurance policy if the bank fiduciary identifies concerns with the condition of the insurance provider or if that provider does not meet the needs of the grantor or beneficiaries”.  Clearly, the life insurance industry plays a role in this replacement requirement, but I suspect that managing all parties will be a chore for trustees going forward.
  • The requirements laid out by the document that a bank “must complete formal pre-acceptance, initial post-acceptance and annual reviews of the insurance policy” are not new.  In addition, the requirement that there must be “risk management systems and reviews” that focus on sufficiency of premium, policy suitability, carrier selection and appropriateness of investment strategy  are all steps that a well run trust department should already have in place.
  • The Handbook outlines the risks associated with these special assets and points out the fact that “these assets often require special expertise to manage”.  The risks; operational risk, compliance risk, strategic risk and reputation risk are outlined and examples are given for each.  In addition, the Handbook outlines required risk mitigation steps, noting that “because risk strategies and organizational structures vary, there is no standardized risk management system that works for every bank. Each bank should establish comprehensive risk management systems based on its size and complexity to ensure that the system is suited to each bank’s needs and circumstances”.  While a roadmap is provided by this Handbook, each trustee will have to review their own processes and procedures to see where changes/additions should be made.

There is no doubt there are requirements outlined in this document that are over and above what the “typical” trust department is currently doing.  And I suspect that after reading this entire document some trust department heads will adjust and/or add to their procedures.  We at Insurance Trust Monitor are in contact with the OCC about procedures that adhere to both the spirit and the letter of the Handbook requirements.  We are looking forward to using this guidance to improve our best practices.

NOTE: Insurance Trust Monitor has developed a strategic partnership with PDS Companies, Inc. (PDS), an industry leader that has developed software and specialized services designed exclusively for fiduciaries managing unique and hard to value assets. We are kick-starting the partnership by offering a free webinar series focused on this Handbook. If you are interested, please visit our website at