Lindsey M. Bessy, ALMI, CLTC, MBA- Financial Representative
With an increase in litigation targeting Irrevocable Life Insurance Trust (ILIT) trustees for fiduciary breaches, it is important more than ever for trustees to be informed about their duties they owe beneficiaries and their exposure to liability for breaches. With ever changing economic conditions and life insurance products, the administration of an ILIT can become seemingly complicated. Because of this, fewer financial institutions are willing to act as ILIT trustees, and in turn, clients are relying on friends and family with no to minimal experience in trust administration or understanding of life insurance mechanics. These individuals most likely agree to the role without knowing the consequences of their actions or inactions.
Below are EBN’s suggestions for success as an ILIT Trustee, whether it be for an individual or a financial institution:
- Review the entire trust document to familiarize yourself with your duties and determine what authority you do and do not have.
- Remember the various duties owed to the beneficiaries – the duty of loyalty, the duty to invest prudently, and the duty to act in good faith and in accordance with the terms of the trust and in the best interest of the beneficiaries.
- To mitigate any exposure to liability for breach of trust, maintain records of reviews, actions, deliberations, the reasoning for taking such action, and any communication to beneficiaries.
- Periodically perform due diligence reviews of the portfolio (i.e. insurance) with outside advisors to assist with managing the trust assets. This would include determining adequate funding levels and future illustrated performance of the existing policies.
Bottom Line: With the duration of low interest rates, changing economic conditions and the complexity of insurance products, it is increasingly important for trustees to be proactive in managing the trust assets/insurance policies to avoid any potential liability.