Seated around a conference room table are the client, Charlie, his estate planning attorney, tax advisor, investment advisor, a representative from the corporate trustee (the trustee) of his irrevocable life insurance trust (ILIT) and a life insurance agent who, though a seasoned veteran, has been newly assigned to the case by the insurer. They’re here to discuss a vintage loan regime split-dollar arrangement between the client and the ILIT (the plan). But unlike the convivial, generally upbeat tone of prior meetings, this one’s downright somber.
The Current Situation
Here are highlights from the advisory team’s presentation to Charlie:
- Charlie is the insured. The ILIT’s a grantor trust for income tax purposes, a term that once again requires explanation.
- The policy was issued on a preferred basis, a classification for which the client would no longer qualify.
- The original plan design called for the client to lend the annual premiums to the ILIT at an appropriate interest rate. It further called for the ILIT to eventually roll out of the arrangement by repaying the cumulative loans and accrued interest to Charlie from a combination of the policy’s cash value and whatever remained from additional cash or property that Charlie was supposed to transfer to the ILIT over the years. Unfortunately Charlie never got around to making those transfers.
- The timing of the rollout was always conditioned on a confluence of solid policy performance, relatively low loan interest rates and additional funding by the client, which, again, never happened. Now, with a high percentage of illustrations reporting, the advisors are predicting that the confluence isn’t going to happen in a timely enough fashion to make the plan work. It’s time for a Plan B.
Charlie listens patiently to the options for dealing with the plan, which range from trying to right the ship to abandoning it altogether, noticeably wincing at the income and/or gift tax implications of some of the options. Cutting to the chase, Charlie intones, “I don’t need the insurance anymore and frankly, even if I do, I think I’ve come down with a severe case of split-dollar fatigue. I want out. And I like what I’m hearing about the life settlement, assuming it can work. So, let’s look into that.” They adjourn.
Creating Competition
Later that day, Charlie confers with his attorney, tax advisor, investment advisor and trustee. He tells them that he’s been sharing his tale of split-dollar woe with an agent friend at his club. That agent had also brought up a life settlement. The client says, “With no offense intended to the new agent, I’d like to see some competition for the life settlement. I’m talking competition among both the agents and the life settlement companies.’
‘My company typically issues requests for proposal (RFP) to the vendors or service providers competing for our business. So why not do that here, meaning issue RFPs to the two agents and the life settlement companies they’ll bring to the table?”
“By the way, I assume that there are plenty of good life settlement companies out there, so I don’t want both agents to present the same company. And, if it turns out that we’d prefer to work with one agent but with the company that the other agent presents, which I’m sure happens, we’ll make that work. Can you guys handle all that? And of course, I’ll want you to do background checks on the companies.”
The investment advisor and the trustee agree to put together a discussion draft of an RFP. Meanwhile, the tax advisor circulates articles that cover some of the items that ought to find their way into the RFP, including “An Agent Takes a Novel Approach to Exploring a Life Settlement.” Here are the key points of the discussion draft.
The Agents’ RFP
Charlie will want to work with an agent who knows the business, knows the players and can add value in the transaction. Here are some questions for the agent:
- Are you licensed to transact life settlements in our state?
- How many life settlement transactions have you initiated? With how many life settlement companies? Of those, how many resulted in an offer that was accepted?
- How many policies of the type and face amount of this one have you introduced for settlement?
- How many of those policies were owned by ILITs? How many of those ILITs had independent corporate trustees?
- How many cases have you worked on with the company you’re proposing to work with on this case?
- How many of those cases actually resulted in sales?
- How many of those cases involved policies of this size or greater and were owned by ILITs that had corporate trustees?
- What was the typical difference between the value of a policy the life settlement company assigned to it before going to market and the actual sales price?
- Being as specific as possible, note whatever factors of platform, process, personnel, policies and procedures (including those to safeguard confidentiality), resources, communication, technology, pool of potential buyers and, of course, results, that distinguish the company you’re proposing from their competition, particularly for a case like this one. Please speak from your personal experience with the company and not from their marketing materials.
- What’s your role in the process, and how does the client benefit from your involvement? Give us some examples of where and how you interceded on behalf of the policyholder and/or got a policyholder a “better deal” than what was originally offered.
Life Settlement Company’s RFP
The agent will propose a life settlement company. Here’s what the team should accomplish with the RFP:
- Help understand the rules of engagement with the company throughout the process.
- Help gauge how professional, thorough and effective the company is and to create a basis for comparison with the competing company.
- Establish why the client should have confidence in the company’s assessment of the outcome of its auction process. This is critical! Neither the client nor the trustee wants to go through this process only to find that the policy won’t fetch anywhere near enough to enable the ILIT to repay the split-dollar loan in full.
- Help address the client’s concern about who would own such a large policy on his life.
- Help manage the team’s own risks in the transaction vis a vis the client and the ILIT’s beneficiaries.
- Note that we’ll use the terms “client” and “trustee” interchangeably for now.
Questions for Life Settlement Company
- What is it about your platform, process, personnel, policies and procedures, resources, communication, technology, pool of potential buyers and the auction process itself and, of course, results, that distinguishes your company from your competition?
Regarding the policy:
- How many policies of the type and face amount of this one have you sold?
- How many of those policies were owned by ILITs? How many of those ILITs had independent corporate trustees?
Regarding the process and documentation:
- Provide a detailed overview and timeline of the process, from start to finish. Tell us who’s involved at each critical step in the process.
- Provide and match to the timeline, samples of all documentation/forms used throughout the process, including but not limited to the contract between you and the seller, medical and other questionnaires, checklists, standard communications and reports, including tax reports.
- Describe the breadth, depth and quality of the pool of potential buyers that would see this policy and potentially bid on it, and describe your due diligence process on the buyers in that pool.
Regarding setting and managing the client’s expectations, rights and responsibilities:
- Generally speaking, what are the criteria and parameters that buyers consider these days when making (or not making) offers?
- Before being formally engaged to handle the sale, does the company provide its “best guesstimate” of the policy’s value on the market and, therefore, the offers the client should expect to receive? In addition to the usual illustrations, how much medical information do you actually need to provide that estimate?
- Describe in detail the process by which you determine that expected value.
- Provide empirical experience of the range of difference between the market value of a policy that you’ve historically projected and the actual offers received for the policy.
- Which firms provide the life expectancy reports to your company?
- Will you share with us any life expectancy reports you receive?
- Provide a sample of the report you issue once offers are received.
- How long from when the client provides all required information should it take to get offers?
- How long after offers are received does the client have to indicate acceptance?
- How long after acceptance does it take for the client to get the proceeds?
Regarding the possibility that the client changes their plan (or heart):
- Assume that sometime before the sale, perhaps after receiving your estimated value of the policy, the client decides that they don’t want to sell the policy or doesn’t want to work with the company on the sale. The client asks you to halt the process. What happens?
- What fees or charges does the client incur?
- Is the client free thereafter to work with another company or does the company, once engaged, claim an “exclusive” on the sale of the policy? If so, for how long and under what terms?
Regarding fees:
- Provide a schedule that details all fees, charges, commissions or compensation paid to you, the agent or anyone else in connection with the sale of a policy.
- Assume this policy sells for $5 million dollars. How much will the seller net from the transaction? What would be the actual amount of each fee or other charge that would be deducted from the sales price to get to that net amount? Note that we’re asking for specific dollar figures, not ranges, for all such items.
RFP Follow-up and Videoconference Presentations
- After we review the responses to the RFP, we’ll follow up with the agents and companies with items they should clarify or expand on. Once we receive those responses, we’ll schedule videoconferences to give everyone the realtime opportunity to discuss the responses (and anything else) in greater detail.
- The team will review and revise the discussion draft, fill in any gaps and tighten up the wording and formatting for an RFP. They can then share this with Charlie, and, if he approves it, they can send it to the agents and companies.
