Broker Check

Dierdre Collins, MSFS, RFC
Tim Murphy, AIF, RFC

 

The Times Are Changing

Get the Facts

If everything appears to be going well it is likely that you are not aware of everything that is going on. With TOLI products there are several liabilities and issues which are hanging over the accountants and other professionals who oversee these client risks. A fiduciary now who is not complying with the new process standards of care may be in the role of the defendant later on. A trustee that selects a low level of return that is not even able to keep up with inflation and erodes the value could be in violation of breaching fiduciary duty.

Do you provide retirement planning services to your clients?
Are you prepared for all the regulatory changes occurring in the industry? Do you understand the risks associated with UPIA and TOLI? With increasing complexities and the need for specialists now is the time to partner with a professional. 

Our endorsed financial planning affinity partner Harbor Strategies Group has joined forces with Integrated Financial Partners (IFP) a premier, process oriented, independent financial planning firm. They are the MSCPA's professional resource on the Department of Labor (DOL) rulings, Uniform Prudent Investor Act (UPIA), and Trust-Owned Life Insurance (TOLI).

In April of 2015, the DOL proposed a rule intending to tighten the framework for providing fiduciary investment advice for retirement accounts. The proposed rule is intended to require anyone dispensing financial advice including one-time or non-primary recommendations to retirement account holders to adhere to the ERISA Fiduciary standard. In an ERISA fiduciary relationship, all variable compensation is prohibited, unless an exemption can be met. This puts in question transaction-based-compensation models under the proposed rule. Additionally, ERISA fiduciary conflicts of interest cannot be cured through disclosure; they must be avoided entirely or a specific rule exemption must be used. Under the current proposal, ‘alternative investments’ may no longer be allowed in retirement accounts. What constitutes an alternative investment has not been determined, but it may include options, managed futures, and other structured products.  While the current proposed DOL rule is not final, and we cannot predict with certainty the precise changes that will occur; there will be changes within the industry unlike any we have seen previously.

Do you serve in a trustee capacity?

UPIA revamps rules that now govern the actions of trustees. Trustees are required to pursue an investment strategy taking into account such factors as risk and return. Clients establishing trusts depend upon the professionals they hire as trustee or advisor to ensure that their wishes meet the objective set forth. Trustees and other professionals that bear this responsibility include and are not limited to that of the Uniform Prudent Investor Act. The UPIA provides invaluable guidance as to the specific activities trustees can and should take under a management model for trust-owned life insurance such as;

  • The “duty to monitor” the performance of trust holdings
  • The “duty to investigate” the suitability of trust holdings

 Trustees can delegate investment and management functions, and only when properly delegated are not liable for the decisions or actions of the agent to whom the function was delegated.

 Be aware of “prudence” as defined under the Prudent Investor Act, this requires that trustees follow a “prudent process” which includes making a reasonable effort to verify facts relevant to the investment and management of trust assets. Keep in mind the amount being paid for COI and other expenses are clearly “facts relevant to the investment and management of trust assets.” Therefore this could create an increased risk of lapse “relevant to the investment and management of trust assets.” Studies have shown several liabilities and issues hovering over the professionals overseeing these risks. Surveys from Trusts and Estates which stated that anywhere between 70-95% of TOLI have no current servicing representatives. This survey looked at approximately 550 trustees. Of the professional trustees, 83.5% indicated they had no guidelines and procedures for handling trust owned life insurance (TOLI).

What does this mean for trustees?

Trustees continue to face increased scrutiny of their investment performance in volatile market environments in addition trustees of trusts holding life insurance face additional challenges in their management of this asset class as well. Every grantor with a TOLI needs to have an actively managed, dynamic review process. The trustee must have a documented process for TOLI reviews. As trusted advisers, CPAs have an obligation to educate their clients on the regulations surrounding TOLI.

 Managing these risks and regulations are integral to maintaining a professional and judicious business. As a member benefit, the experience planners at IFP are available to provide additional information on these important topics.  They are trained in financial analysis, fiduciary principles and pride themselves on keeping up with the changing industry regulations.


The Mass Society of CPA's (MSCPA) is not affialtied with LPL Financial.