As we mentioned in our year-end roundup (see The Year in TOLI – 2015 Edition), the past year has been challenging for trustees responsible for managing life insurance. The historically low interest-rate environment has put significant stress on policies and contributed to an unprecedented increase in cost of insurance (COI) that has dramatically altered the viability of the affected policies. We manage hundreds of these polices and have seen the effect. (See Transamerica Cost Increase Causes Premium to Maturity to Jump Over 200%: A Case Study for TOLI Trustees and Taking a Look Under the Hood of the AXA Athena II Universal Life Cost of Insurance Increase.) In addition, regulatory oversight has increased.

Trustees face tremendous pressure to manage life insurance policies prudently. A policy lapse or the mismanagement of a policy can turn a multimillion dollar asset into a multimillion dollar liability overnight. And let’s face it, the TOLI market is not growing—at least not like it once was. Estate tax law changes in the last decade have whittled down the TOLI prospect list by approximately 80% as the number of estates affected by the Federal Estate Tax has dwindled.1 So, as a business line, TOLI has its challenges. Large financial institutions, which are increasingly focused on core businesses with high ROEs, are finding that resources focused on TOLI can be better deployed elsewhere in the organization. These institutions, which are beleaguered by litigation costs and regulatory inquiries, are also concerned about the downside risk associated with TOLI.

Some trustees have adapted to the new environment, but many are struggling, as they do not have the requisite resources to manage this asset. Some have sought assistance from vendors like ITM TwentyFirst. We have seen a tremendous increase in the number of trustees using our software for managing trust-owned policies (Standard Solution) and an even greater increase in the number using our Managed Solution, in which trustees outsource all of the tasks of TOLI trust administration and policy management to our team.

But some TOLI trustees, especially those with “orphaned” trusts where the trustee no longer has a significant banking or wealth-management relationship with the grantor, are looking for a way to exit the market altogether. One option we are seeing more frequently is the bulk transfer of TOLI trusts to another trustee more committed to the ongoing business of managing life insurance trusts. In recent years, we have witnessed as many as 1,000 trusts changing hands in a single transaction. The process can include all TOLI trusts in the portfolio or only those TOLI trusts selected by the trustee. Generally, in a bulk transfer all of the trusts are moved at once, with one trustee taking control over the trusts from another at a specified date.

Obviously, as with any transaction, there are advantages and disadvantages that should be considered before undergoing this type of transaction. In our experience, a bulk transfer can make sense for two primary reasons: (i) the original trustee avoids liability and (ii) the revenue associated with the trusts, including other relationships that the trustee has with the grantors, does not meet ROE requirements of the trustee when increased administrative and regulatory costs are taken into consideration.

Having been a part of a few of these transactions in the last year, we have found that the end result can be beneficial to both sides, alleviating one trustee of an unwanted business line and providing another trustee with a source of additional revenue. It is a business win-win.

1 – According to the IRS, in 2004 there were 31,329 taxable estate tax returns filed. In 2014 only 5,158 taxable estate tax returns were filed.