•uncertainties and estimates related to the valuation of life insurance policy assets reflected on our financial statements.
The Trust and IRA Partnership have no employees, and none are expected in the future. Vida was appointed as the servicing company under the Plan in connection with the maintenance and collection of benefits of the Policies and to provide investor account services, including maintaining the ownership registers for the Continuing Fractional Interests, Position Holder Trust Interests and IRA Partnership interests. As permitted under the Plan, Vida has subcontracted the servicing agreement to its subsidiary, Magna Servicing, LLC (“Subservicer” or “Servicing Company”). Pursuant to the servicing agreement, fees for servicing the Policies will be paid out of the death benefits paid on Policies that mature in an amount equal to 2.65% of the death benefits paid (“Servicing Fee”). As of September 10, 2019, the Life Partners Position Holder Trust has entered into an agreement with Vida Capital, Inc. and Magna Servicing LLC to effectuate a termination of the policy services provided by them to the Trust, effective October 31, 2020. Pursuant to the agreement, the Trust will pay Vida Capital, Inc. an early termination fee of $2.5 million. As part of the agreement the Trust paid $2.0 million and accrued the remaining $0.5 million of the termination fee as of December 31, 2019. Starting October 31, 2020 a new policy servicing company will take over the responsibility of policy services.
The increase in total expenses of $0.9 million is primarily due to the fees totaling $2.5 million to Vida Capital, Inc for termination of the policy services provided by it to the Trust (see Item 1. Description of Business, "Administration and Operations") and additional professional services due to the transition of the Trust management and changes in Trust operations. The additional expenses are offset by a decrease in interest expense due to the pay down of the notes payable balance and recovery of accounts receivable totaling $1.6 million which was previously considered unrecoverable.
On November 13, 2019, the Trust made a distribution to Unit holders for the amount of $20.0 million based on the holder's Pro Rata share of the outstanding Units.
Net decrease in net assets for the year ended December 31, 2018 was $70.5 million as compared to a net increase in net assets of $35.2 million for the period ended December 31, 2017. The following are the components of net change in net assets resulting from operations for the years ended December 31, 2018 and 2017:
The Position Holder Trust was authorized to issue New IRA Notes in a principal amount of $63.7 million bearing interest at 3.0% per annum and maturing in 2031. The Trust ultimately issued $35.9 million of New IRA Notes in accordance with the Plan. As of December 31, 2019, there were $24.9 million of New IRA Notes outstanding. Interest is payable annually in December.
If the Trust elects to redeem any New IRA Notes, it must notify the New IRA Note Trustee of the redemption date and the principal amount to be redeemed at least 60 days before the redemption date (unless a shorter period is satisfactory to the trustee). If fewer than all the New IRA Notes are being redeemed, the notice must also specify a record date not less than 15 days after the date of the notice of redemption is given to the New IRA Note trustee. The New IRA Note Trustee will select the notes to be redeemed on a pro rata basis in denominations of $100 principal amount and higher integral multiples of $100.
On August 1, 2019 the Trust redeemed in full all New IRA Notes having a balance of $5,000 or less and made partial redemptions of all remaining Notes equal to 2/15ths of the original balance of those Notes. The total amount paid was $5.7 million and only funds set aside in a sinking fund established pursuant to the Bankruptcy Plan for that purpose were used. On December 15, 2019 the Trust redeemed in full all New IRA Notes having a balance of $7,500 or less and made partial redemptions of all remaining New IRA Notes equal to an additional 2/15th of the outstanding balance of those Notes. Accrued interest on all New IRA Notes through the redemption dates was paid as well. The total amount paid in connection with the second redemption was $5.9 million again using only funds out of the sinking fund.
On March 28, 2017, the Bankruptcy Court allowed $5.5 million to be paid as compensation for the services rendered by H. Thomas Moran as the Chapter 11 trustee, with fifty percent (50%), or $2.8 million, paid promptly. The remaining amount is to be paid in cash pursuant to the terms of an unsecured promissory note issued by the Trust (the “Moran Note”). The note does not bear interest and the principal amount was scheduled to be paid in three equal annual installments on January 1 of 2019, 2020 and 2021, with the full principal amount paid no later than December 30, 2021, or in full on or after January 1, 2019. On January 11, 2019 the Trust paid the first installment and on December 27, 2019 the Trust paid the second installment. Subsequent to the end of the reporting period, on January 27, 2020 the Trust paid the final installment and the note has now been completely satisfied.
During the years ended December 31, 2019 and 2018, the Position Holder Trust paid premiums on Policies totaling $44.7 million and $56.7 million, respectively on the PHT Portfolio. Also, for the years ended December 31, 2019 and 2018, there were maturities received of $124.5 million and $75.7 million, respectively.
The Trust accounts for its interests, net of Continuing Fractional Interests, in life insurance policies at fair value in accordance with ASC 325-30, Investments in Insurance Contracts. Any resulting changes in fair value estimates are reflected in operations in the period the change becomes apparent.
No provision for state or federal income taxes has been made as the liability for such taxes is attributable to the Unit holders rather than the Trust. The Trust is a grantor trust with taxable income or loss passing through to the Unit holders. In certain instances, however, the Trust may be required under applicable state laws to remit directly to state tax authorities amounts otherwise due to Unit holders. Such payments on behalf of the Unit holders are deemed distributions to them.
The Financial Accounting Standards Board (the “FASB”) has provided guidance for how uncertain tax positions should be recognized, measured, disclosed, and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Trust’s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. The Trust has no material uncertain income tax positions as of December 31, 2019 or December 31, 2018.
As of December 31, 2019, and December 31, 2018, the Trust holds $8.3 million and 14.3 million, respectively, of maturities collected on behalf of continuing factional holders pending payment.
The Financial Accounting Standards Board (the “FASB”) has provided guidance for how uncertain tax positions should be recognized, measured, disclosed, and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. The Partnership has no material uncertain income tax positions as of December 31, 2019 or December 31, 2018.
No provision for state or Federal income taxes has been made as the liability for such taxes is attributable to the Unit holders rather than the Trust. The Trust is a grantor trust with taxable income or loss passing through to the Unit holders. In certain instances, however, the Trust may be required under applicable state laws to remit directly to state tax authorities amounts otherwise due to Unit holders. Such payments on behalf of the Unit holders are deemed distributions of them.
Under certain circumstances, the Trust may be required to indemnify certain persons performing services on behalf of the Trust for liability they may incur arising out of the indemnified persons' activities conducted on behalf of the Trust. There is no limitation on the maximum potential payments under these indemnification obligations, and, due to the number and variety of events and circumstances under which these indemnification obligations could arise, the Trust is not able to estimate such maximum potential payments. The Trust has not made any payments under such indemnification obligations, and no amount has been accrued in the accompanying financial statements for these indemnification obligations of the Trust. The Trust maintains insurance to mitigate its exposure to this contingency risk.
On December 9, 2016, the Trust entered into a revolving line of credit with Vida Longevity Fund, LP, an affiliate of Vida Capital, Inc., for $25.0 million. Interest accrues at 11% of outstanding balance and is paid quarterly. The line of credit matured on December 9, 2018, at which point there was no amount outstanding. As of December 31, 2018, there were no amounts outstanding on the line of credit and the line of credit facility was terminated in January 2019.
On August 1, 2019 the Trust redeemed in full all New IRA Notes having a balance of $5,000 or less and made partial redemptions of all remaining notes equal to 2/15ths of the original balance of those notes. The total amount paid was $5.7 million and only funds set aside in a sinking fund established pursuant to the Bankruptcy Plan for that purpose were used. On December 15, 2019 the Trust redeemed in full all New IRA Notes having a balance of $7,500 or less and made partial redemptions of all remaining New IRA Notes equal to an additional 2/15th of the outstanding balance of those notes. Accrued interest on all New IRA Notes through the redemption dates was paid as well. The total amount paid in connection with the second redemption was $5.9 million again using only funds out of the sinking fund.
The life insurance policies’ fair value estimates were reduced significantly in 2018. The primary cause of the change was the use of standard mortality multipliers for all policies as opposed to using previous life expectancy estimates that were previously determined by the Debtor for certain policies. A secondary cause was the increase in the cost of insurance imposed by certain life insurance companies on a number of policies in the PHT Portfolio.
Through the first quarter of 2018, the PHT Portfolio’s value was estimated using an actuarially based approach incorporating net cash flows and life expectancies as provided by third-party life expectancy providers when they were available. This approach applied a monthly mortality scale as generated by the specific life expectancy (“LE”) and/or a default mortality multiplier of each insured which was used to project the PHT Portfolio’s present value of net cash flows (death benefits less premium payments and servicing company compensation). The mortality scale was actuarially rolled forward from the LE underwriting date to the valuation date.
The LEs that the Trust holds were issued by life expectancy providers to the Debtor during the course of the bankruptcy. The LEs were approaching, and in some cases exceeding, two years since issuance. As LEs age, they become less reliable because they are based on increasingly out of date medical information. After two years, many industry participants obtain new medical information from insureds and purchase new LEs. The Trust does not purchase new LEs because of the significant time and financial burden that would be required to obtain new medical releases from the insureds and collect their medical records from various doctors, clinics and hospitals.
The exclusive use of the mortality multipliers has had the effect of extending anticipated longevity of the insureds in the PHT Portfolio. As a result, the amount of premiums that the Trust anticipates paying increased as did the anticipated length of time before the receipt of the death benefit. These factors were major contributors to the 2018 reduction in the estimated fair value of the PHT Portfolio.
The monthly net cash flows with interest and survivorship were discounted to arrive at the PHT Portfolio’s estimated value as of December 31, 2019 and 2018. Future changes in the longevity estimates and estimated cash flows could have a material effect on the PHT Portfolio’s fair value, and the Trust’s financial condition and results of operations.
We have audited the accompanying balance sheets of Life Partners IRA Holder Partnership, LLC (the "Partnership") as of December 31, 2019 and 2018, the related statements of operations, changes in net assets, and cash flows for the years ended December 31, 2019 and 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.
On November 13, 2019, the Trust made a distribution to Unit holders for the amount of $20.0 million. The Partnership's portion of the distribution was $12.1 million based on its Pro Rata share of the outstanding Units. Management has determined the distribution to be a return of capital. Subsequently, the Partnership distributed most of the funds received from the Trust to its Unit holders based on their Member Interests.