Liability Risk For Trustees

Although many trustees do not realize the risk, they have a legal responsibility to monitor trust-owned life insurance policies. Ariston Advisory Group can help trustees implement “best practices” for policy management and improve the likelihood of a favorable outcome for beneficiaries.

• Only 29% of trustees have reviewed policies in past five years 

• 84% do not have any guidelines or procedures 

• At least 70%  do not have a servicing agent 

• 92% of existing policies could be restructured to provide more value 

  (Source: Trusts and Estates)

A trustee is a “fiduciary” who is held to a high standard of care. There are three main categories of Trustees, professional trustees, and trust companies, professional advisors (attorneys, CPAs, accountants) and family relatives or friends (spouses, children, relatives, friends).  All are tasked with the proper supervision and management of the trust’s assets. This includes Life Insurance policies and any other assets held by an Irrevocable Life Insurance Trust (ILIT).

ILIT’s are commonplace, but even though most trustees only do this as a courtesy or an accommodation to clients, friends or family, they are still trusted with fiduciary duties that must be satisfied. Rarely does the Trustee have the expertise or internal resources to supervise and manage Life Insurance. The standard of care has changed, and the new rules may even apply to the trusts created before the new standards were adopted.

Trustee Standards

Generally, a trust may establish its own standards of care and fiduciary responsibilities through the terms included within it. If the trust doesn’t set such standards, then state law does. Since 1994 most states have changed to The “Prudent Investor” Standard, and there is no exemption for trusts established before the standard was adopted.

The Prudent Investor Standard applies modern investment principles to trust management and requires the trustee to implement quality procedures in order to be in compliance. As a result, a trustee must regularly monitor asset performance and make changes as necessary.

The modern investment principles state:

-Trustees must use reasonable strategies to grow trust assets

-Trust Assets should be managed together as a single portfolio

-Absent special circumstances, trust assets should be diversified

-Trustees can hire experts to help make decisions and delegate responsibility

Irrevocable Life Insurance Trust (ILIT) Trustees

Administering an ILIT can be difficult. Life insurance policies can be very complex and may not perform as originally expected.

A trustee may be able to reduce his/her personal risk by knowing exactly what the trust requires and by monitoring the performance of the trust regularly. Clearly, a trustee might benefit from consulting with someone who has experience in evaluating life insurance policies. An insurance expert could review the trust’s policies, evaluate the past performance and, where necessary, recommend a better policy to ensure maximum performance.

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