Trust-Owned Life Insurance: A Lawsuit Waiting to Happen?

Matthew Tuttle, CFP, and Richard Urbealis, and Steven Zeiger

Trusts are often central to estate planning. Individuals set up trusts for a number of different objectives and name trustees to manage and look after the assets. Clients often name their accountant as their trustee. Trustees are usually aware that the Uniform Prudent Investor Act (UPIA) imposes a fiduciary standard on trusts that contain investment assets. There have been a number of successful lawsuits in which trustees invested trust assets inappropriately and then those assets were frittered away. The fact that trustees of Irrevocable Life Insurance Trusts (ILIT) are held to the same standard as trustees of any other type of trust is often overlooked. Trustees of investment trusts have a number of tools to help them in their tasks, such as Morningstar (morningstar. com), benchmarks, and Monte Carlo simulations. These types of tools are now available to trustees of ILITs. Often, trustees of ILITs fail to effectively monitor the insurance policies in the trust, setting themselves up for potential lawsuits. By following a prudent process and using the available tools, they can fulfill their fiduciary duty, make sure that the trusts are as effective as possible, and protect themselves from litigation.