Overlay Insurance Portfolio Management

Why Unify Policies?

Why must a policy situated with others in the same trust be evaluated and managed differently

(requiring additional steps) than if it were the sole asset in the trust?

A crucial aspect of managing trusts is the unification of all assets to manage them as one,

and to better continually reduce risks and costs, and improve productivity and suitability.

OCC:

CFR Reg 9.6 (c) (as reiterated in the Comptroller's Unique and Hard-to-Value Assets' Handbook

[August 2012]): "..a bank shall ...evaluate whether the assets are appropriate , individually, and

collectively , for the account."

"....to ensure each asset is appropriate for the account as a whole."

"..must assess how these assets fit into the account's overall investment goals."

UPIA:

SECTION 2. STANDARD OF CARE; PORTFOLIO STRATEGY; RISK AND RETURN

OBJECTIVES.

(b):A trustee's investment and management decisions respecting individual assets must be evaluated not

in isolation but in the context of the trust portfolio as a whole and as a part of an overall

investment strategy having risk and return objectives reasonably suited to the trust.

Comment:

Portfolio Standard. Subsection (b) emphasizes the consolidated portfolio standard for evaluating

investment decisions. An investment that might be imprudent standing alone can become prudent

if undertaken in sensible relation to other trust assets, or to other non-trust assets. In the trust

setting the term "portfolio" embraces the entire trust estate.

"Specific investments or techniques are not per se prudent or imprudent. The riskiness of a specific

property, and thus the propriety of its inclusion in the trust estate, is not judged in the abstract but in

terms of its anticipated effect on the particular trust's portfolio."

2(c): Among circumstances that a trustee shall consider in investing and managing trust assets are

such of the following as are relevant to the trust or its beneficiaries:

(4) the role that each investment or course of action plays within the overall trust portfolio, which

may include financial assets, interests in closely held enterprises, tangible and intangible personal

property, and real property;

2(f): A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's

representation that the trustee has special skills or expertise, has a duty to use those special skills or

expertise.

SECTION 3 DIVERSIFICATION. A trustee shall diversify the investments of the trust unless the

trustee reasonably determines that, because of special circumstances, the purposes of the trust are

better served without diversifying.

UPIA SECTION 7. INVESTMENT COSTS. In investing and managing trust assets, a trustee may

only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the

trust, and the skills of the trustee.

Comment

Wasting beneficiaries' money is imprudent. In devising and implementing strategies for the

investment and management of trust assets, trustees are obliged to minimize costs.

UPMIFA: Uniform Prudent Management of Institutional Funds Act: Portfolio Standard

3(e)(2) : management and investment decisions about an individual asset must be made not in isolation

but rather in a context of the institutional fund’s portfolio investments as a whole and as a part of an

overall investment strategy having risk and return objectives reasonably suited to the fund and to the

institution.

3(e)(3): “ the riskiness of a specific property, and thus the propriety of its inclusion in the trust estate, is

not judged in the abstract but in terms on the anticipated effect on the particular trust’s

portfolio”

Prudent Investor Rule:

Whether investments are underproductive or overproductive of income shall be judged by the

portfolio as a whole and not as to any particular asset.

ACTEC Journal 2006 “Trustee Administration of Life Insurance”:

pg. 289: “in the words of one author, in evaluating assets and asset performance under the

UPIA, ‘generally a trustee must … conduct analysis according to the financial valuation principles

embodied in modern portfolio theory.”

pg. 292: “A lawyer who not only prepares an ILIT, but who also advises a client about

insurance products may be deemed to have abandoned the counselor’s role for one which subjects

the attorney to a higher performance standard.”

“If an inter vivos trust contains a life insurance policy and other assets, the trustee should be

capable of assessing the life insurance policy with evaluative tools comparable to those employed

for other trust held assets.”

pg. 295: “In the author’s opinion, the UPIA requires investment management of a life

insurance policy held in an ILIT. A trustee who is charged with responsibility for a life insurance

policy must manage that policy just as it would any other trust investment.

Since the UPIA only endorses one investment standard against which to evaluate a trustees

investment management, ..”

ACTEC Journal 2006: ILIT Asset Management: The Written Investment Policy Statement

pg. 253: “Trust assets are “completion portfolio.” A completion portfolio complements

or completes an existing portfolio…”

Thus, it is a customized portfolio designed to fill in asset allocation gaps or to hedge potential

liabilities. When combined with the grantor’s other assets, the aggregate portfolio is more balanced,

prudent and diversified.”

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