There are three continuing trends with respect to TOLI management in the corporate fiduciary space. If you find yourself managing or overseeing TOLI at a bank or trust company, I’m sure you are seeing some of this play out in your own department.
TREND #1 Overdependence on Support Software
If used correctly, ILIT support software is great for minimizing potential administrative miscues. Many of these services include policy reviews to “check the box” for audit and regulatory compliance purposes. While this was a viable option in the past to appease regulators, it does not solve the problems associated with managing this complex asset and is doing too little to effectively mitigate risk.
Many corporate trustees are realizing that to manage the complexities of life insurance, it takes expertise and significant internal resources above and beyond software. Most often, maintaining the required expertise in-house and dedicating the necessary resources internally for an asset class that is revenue neutral at best, is nearly impossible.
TREND #2 Low Administration Fees
ILIT administration fees remain too low for many corporate trustees. Trustee administration costs are estimated to be a minimum of $1,000 annually per ILIT account when factoring in employee costs, vendor costs, etc. In a recent industry survey, only 60% of institutions indicated they were collecting $1,000 or more annually in ILIT administration fees. Currently, grantors are likely spending more on their cell phone bills than their institutional trustees for managing potentially millions of dollars in trust assets for their beneficiaries!
Waiving or making concessions of ILIT fees remains an acceptable practice for corporate fiduciaries, but only if there are defined parameters and strong governance (i.e. minimum assets under management requirements). Corporate trustees should strive to show clients the value of their fiduciary services for this unique asset.
TREND #3 Institutions Continue to Limit Their ILIT Portfolios
There is little upside to serving as trustee for an ILIT, especially if the corporate trustee does not maintain a broader institutional or wealth management relationship with the client. Many institutions are looking to limit their trust owned life insurance holdings, choosing only to retain ILIT business if associated with a broader client relationship.
In the past, trustees have attempted to run off ILIT business through strategic fee increases. While this sounds good in theory, a trustee can spend months and numerous hours decanting, terminating, appointing successors, etc. and that assumes the trustee has cooperation from the interested parties and the account actually leaves. More realistically, the clients become unresponsive, stay, and refuse to pay the increased fee, causing adversarial relationships.