FIDUCIARY PROFESSIONS Legal Challenges and Solutions for Trustees of Trust-Owned Life Insurance: Active and careful management is required.

AuthorBronstein, Grace

Many trustees mistakenly believe that life insurance is a static financial instrument. However, trust-owned life insurance (TOLI) requires active and careful management. Recent case law provides a roadmap for how trustees can adequately manage TOLI pursuant to the Uniform Prudent Investor Act (UPIA). Trustees should be aware of their exposure to liability, as there's been an increasing trend towards lawsuits filed against trustees for policy mismanagement.


Trustees assume fiduciary duties to manage the risks and performance of all trust assets, and TOLI is no exception. However, trustees are often unaware of the numerous risks associated with life insurance policies, such as policy sustainability, solvency and performance. Various factors, particularly sustained low interest rates, have adversely affected policy performance and have rendered traditional policy illustration tools inadequate. Trustees need access to better tools to manage life insurance, and they potentially face a severe liability risk for not properly managing life insurance as prescribed by the UPIA. Trustees can reduce litigation exposure and better serve trust beneficiaries by following the prudent investor standard outlined by the UPIA, which recent case law has clarified.


An enormous number of life insurance policies lapse prematurely due to mismanagement. Based on the false premise that policies are fixed "buy and hold" financial instruments with guaranteed benefits, many trustees mistakenly believe that their duties are limited to handling gifts made to the trust, paying scheduled premiums and timely sending Crummey notices. However, policies aren't static and are subject to changing premium amounts, cost of insurance (COI) increases and other critical variables, all of which can affect policy performance. Consequently, Americans ages 65 and older let approximately $112 billion in benefits lapse each year,l and 34% of TOLI policies are rated "high risk"--meaning they're either projected to lapse prior to maturity or the no-lapse guarantees have been compromised.

Policies need to be treated as investments that require regular review and management. Insurance companies, agents and brokers don't have the responsibility of monitoring life insurance policies. Most policies are currently managed by trustees who are family members, accountants, attorneys or close friends of the settlor of the trust. These trustees may lack the expertise to manage life insurance effectively and should therefore engage an independent consultant to satisfy their fiduciary responsibilities and mitigate liability.


In most states, trustees are held to the prudent investor standard under the UPIA. This standard requires trustees to manage assets with reasonable care and prudence and therefore to maximize the benefits and minimize the costs of investments, implicitly including life insurance policies, on behalf of trust beneficiaries. Proper management is explained as monitoring the "suitability" of existing investments, including life insurance policies.2 Doing so requires trustees to understand the underlying COI charges, policy earnings assumptions, actual life expectancy projections, policy expenses and other vital variables. Trustees who violate their fiduciary duties can be held responsible for damages in the form of recovery of the losses incurred caused by ineffective management. Therefore, trustees should understand what proper management of life insurance entails, and the case In re Stuart Cochran Irrevocable Trust provides a clear roadmap to avoid liability.(3)

In this case, irrevocable life insurance...

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