Legal Library Section
Case Law Guidance (Finally) for Trust-Owned Life Insurance
"This case is a must-read for any individual or corporate trustee of an ILIT"
While many trustees are facing increased scruntiny of their investment performance in these difficult economic times, trustees of trusts holding life insurance (often referred to as irrevocable life insurance trusts, or "ILITS") face additional challenges in their management of this "special asset". Acknowledging the potentially serious trustee liability, a few states have passed legislation that reduces that trustee's fiduciary responsibility for life insurance as a investment. However, such protective statutes fo not help a trsutee to determine how to manage life insurance to maxmize the benefit for the trust beneficiaries.
Outside a few states with protective statutes, the Uniform Prudent Investor Act (UPIA) and similar statutes require as rigorous a management model for life insurance as for other types of assets. Until now, trustees have had no court guidance regarding the application of the UPIA to life insurance. A recent Indiana Court of Appeals case appears to provide some comfort to ILIT trustees (and perhaps some consternation to ILIT beneficiaries) in UPIA states by setting a low bar for investment due diligence with respect to life insurance.
Click Here to read the case law guidance.
Click Here to see if your state has adopted the Uniform Prudent Investor Act (UPIA).
Complying with the "Prudent Trustee Rule"
New legislation has raised the minimum standard of care for Trustees of Irrevocable Life Insurance Trusts (ILITs). Old rules prescribing trustee responsibility and liability (i.e., the "Prudent Man Rule" and/or "Prudent Expert Rule") previously exempted ILIT Trustees. However, this new "Prudent Trustee Rule" now requires ILIT Trustees to investigate, monitor, and manage ILIT assets in a manner that measurably maximizes benefits and minimizes costs for trust beneficiaries. Proper documentation for the exercise of these fiduciary duties is now essential both in complying with these new and higher standards, and for defending against this new risk of litigation. Proper documentation includes a written Trust Investment Policy Statement (TIPS) (go to the TIA Store for an editable version) and a periodic Confidential Policy Evaluator (CPE) Report (or other means of documenting the periodic measurement of both the appropriateness and the performance of ILIT assets against peer-group products).
The cost of failing to investigate the appropriateness of ILIT assets, and/or failing to monitor the ongoing performance of ILIT assets, and/or failing to manage ILIT assets can be far more expensive than the cost of complying. For instance, click on an example Complaint Letter from Legal Counsel representing ILIT Beneficiaries to see just how expensive, and read the below court cases providing precedence for such a letter.
The good news is that complying is as easy as 1, 2, 3...
- Send a New Services Announcement Letter to a) introduce new trustee responsibilities required by the “Prudent Trustee Rule”, b) explain the consider value to the client of these new services, and c) announce the new fee schedule for these new services
- Send a Notice to Grantors requesting consent that the trust bear the fees for these new services and that the insureds on ILIT-owned policies provide the required medical information necessary to consider alternative insurance policy investments and properly manage ILIT assets.
- Send a Sample Rates and Terms Sheet to demonstrate the value of managing ILIT assets using “best-of-breed” policies as compared to existing ILIT policies, together with a Confidential Policy Evaluator (CPE) Report providing a 1-to-5 Star Rating for the existing ILIT policies as compared to peer-group policies.
As you can see, the cost of complying with the “Prudent Trustee Rule” can not only be far less costly than that shown by actual prior cases below, but can also be a new opportunity to increase fee income and provide new value to ILIT clients. Click here to contact us for more information about subscribing to THEInsuranceAvisor.COM, or read on to learn more about the magnitude of this emerging fiduciary liability as defined by actual prior cases.
Prior Case Law
Stuart Cochran Irrevocable Trust v. KeyBank, N.A.
This case is a must read for any individual or corporate trustee of an ILIT. Click Here to read case law guidance.
Scalp & Blade v. Advest
A recent appellate court decision in New York allowed a trust fund to bring a claim for the profits it would have earned if its account had been invested so as to track the S&P 500. Given this precident, little imagination is needed to foresee how ILIT trustees will be liable ILIT to trust beneficiaries for the difference between death benefits actually received versus the death benefits that “should have been received” under the Uniform Prudent Investor Act (UPIA) unless suitability is properly documented.
View executive summary.
Thank to Steve Leimberg for contributing his Estate Planning Newsletter #601 for the above executive summary. Leimberg Information Services (LISI) is a monthly subscription service providing financial service professionals fast, frank, and incisive analysis of proposed and recent legislation, regulations, cases, and rulings. LISI is also home to a powerful engine for customized searches and past and future cases. For more about LISI and Leimberg’s Estate Planning Newsletters, go to http://www.leimbergservices.com.
Baker Boyer National Bank v. Garver
A Washington State appellate court decision from 1986 found Corporate Fiduciary was liable for not considering equity investments and instead investing exclusively in bonds and real estate. Damages were assessed based on the premise that at least a 40 percent of trust assets should have been invested in equities. Again given this precedent, little imagination is needed to foresee how Irrevocable Life Insurance Trust (ILIT) trustees will be liable to trust beneficiaries for the difference between death benefits received from ONLY Universal Life (UL) and/or Whole Life (WL) policies where invested assets underlying policy cash values must be invested predominantly in high-grade corporate bonds and government-backed mortgages, versus the death benefits the beneficiaries “should have been received” from a diversified portfolio of UL, WL, AND Variable Life (VL) holdings where cash values can be diversified, unless reasons for lack of diversification are documented.
Noggel v. Bank of America
Another appellate case from California in 1990 awarded a significant judgment against the trustee for investing primarily in bonds where the appellate court was left to decide whether to use the S&P 500 of the bank’s proprietary equity fund to measure appropriate damages. Again, such precedent from the world of investment trusts gives beneficiaries (and trial lawyers) clear parallel case law to seek damages from trustees for the difference between death benefits actually received versus death benefits they “should have been received” based on a publicly available benchmark like the S&P 500 for investment performance and the TIA Benchmarks for cost of insurance charges (COIs), fixed administration expenses (FAEs), cash-value-based “wrap fees” (e.g. M&Es), premium loads, and historical performance of assets underlying policy cash values (use the TIA Policy Pricing Calculator for benchmark pricing and performance of life insurance products).
Vagelos v. Merrill Lynch
A complaint in which plaintiff "claims that Merrill Lynch 'breached its fiduciary and contractual duties' in the management of his assets [involving] whole life insurance policies…" See our recent "Merrill Lynch the Latest Example of Life Insurance Suitability Hindsight... Are You Ready?" TIA e-newsletter in our archives at
Micale v. Bank One N.A.
A case in which the Grantor to an ILIT sued the trustee for breach of fiduciary duty, and while the Court dismissed the case because the trustee does not have a fiduciary duty to the Grantor (i.e., the trustee’s duty is to the Beneficiaries), the court did NOT dismiss for lack of cause.
Larry King v. Meltzer Financial
A case in which plaintiff charges an insurance broker with breach of fiduciary duty in the mis-management of certain life insurance policy holdings so as to disproportionately benefit the broker while not properly considering the financial condition, health, and the likelihood of future uninsurability of the plaintiff.
Click Here to read.
Out-of-Court Settlements
The April 2003 issue of Financial Advisor magazine cites one of many cases in which lawyers retained by the beneficiaries of an Irrevocable Life Insurance Trust (ILIT) successfully sought damages based on the trustee’s failure to investigate other products from similarly rated insurers, but which offered lower policy expenses, and this could have provided the beneficiaries with greater death benefits. Because these cases have been settled out of court, they do not create legal precedent. However, the fact they have been settled out of court “without a fight” does show there is simply no defense to SECTION 7, INVESTMENT COSTS of the Prudent Investor Act which clearly states that 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”, that “wasting beneficiaries’ money is imprudent” and that “trustees are obliged to minimize costs”. The fact that this and a number of other cases have settled out of court shows there is simply no defense when an ILIT trusts pays cost of insurance charges (COIs), fixed administration expenses (FAEs), cash-value-based “wrap fees” (e.g. M&Es) and/or premium loads that cannot be justified.
Check back soon for more cases in which trustees, accountants, attorneys and other fiduciaries have been defendants in legal actions that should have been avoided or mitigated through the us of the Confidential Policy Evaluator (CPE) System.
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