Are You A Litigation Target?

If you are a trustee of, or if you have ever drafted a trust that subsequently purchased a life insurance policy, it’s possible that the Prudent Trustee Standard could get trustees and the attorneys that drafted the trust sued.

Let me explain.

In many jurisdictions, the rule that governed trustee behavior, the Prudent Man Rule or the Prudent Expert Rule, has been replaced by The Prudent Trustee Rule.

Under the old Prudent Man rule trustees of Irrevocable Life Insurance Trusts were exempted; that’s no longer true under the new Prudent Trustee Rule.

The new Prudent Trustee Rule requires that ILIT trustees now investigate, monitor and manage ILIT assets in a manner that measurably maximizes benefits and minimizes costs for trust beneficiaries. Proper documentation demonstrating that the trustee did meet these new higher standards is necessary to show compliance with these higher standards and to defend potential litigation.

Imagine getting the following letter:

Dear Mr. Trustee,

We have been retained to represent the beneficiaries of the Smith Family Irrevocable Life Insurance Trust (ILIT) to determine the suitability of the assets held in named trust.

In accordance with the Unified Prudent Investor Act (UPIA), you as the trustee of the trust are required to investigate the suitability of ILIT assets, including life insurance policies, monitor the continuing suitability of ILIT assets, and supervise ILIT assets in a manner that keeps costs to a minimum and maximizes the benefits to trust beneficiaries.

A review of trust account statements shows receipt of $3,000,000 in death benefits produced by an annual outlay of $24,000 in premium. By comparing the performance of this trust asset to industry benchmarks, it would appear the trust should have received between$4,500,000 and $6,700,000 for the same premium outlay, depending upon the objectives set forth in the written Investment Policy Statement (IPS) for this trust. A further review of annual policy statements seems to indicate you have been paying excessive Cost of Insurance (COI) Charges, Premium Loads, and Fixed Administration Expenses and that invested assets underlying policy cash values appear to have under-performed their benchmarks for the respective asset classes, to lack diversification, and to be inconsistent with the trust objective to maximize benefits to trust beneficiaries.

As such, please produce the trust IPS and all documentation as to your investigation of the suitability of ILIT assets, your monitoring of the continuing suitability of ILIT assets, and your management of ILIT assets to minimize costs and maximizes benefits to trust beneficiaries. In the absence of such documentation, we will seek damages in the amount of $3,700,000 representing the difference between the death benefits actually received versus the death benefits that should have been received under UPIA.

Sincerely,
J.D. Attorney, Esq.

Think this is farfetched?

The court cases below provide some precedent for a trustee or an attorney’s client getting a letter like the one you just read. And, if a trustee gets a letter like this one, bet on their attorney getting one just like it if they haven’t broached this subject yet.
What should you do?

Anyone who has put Irrevocable Life Insurance Trusts in place need to be aware that a process called a Life Insurance Appraisal and Assessment™ exists that will help them comply with the requirements of the Prudent Trustee Rule. A Life Insurance Appraisal and Assessment™ analyzes the life insurance policies currently owned by the trust in great detail and also examines potential alternatives to insure that costs are minimized and benefits to trust beneficiaries are maximized. Often, a plan redesign exists that can significantly improve an existing life insurance plan design. (Examples follow the court cases below).

If after reviewing the court cases below and the case redesign examples, you’d like to learn more, feel free to give me a call. I have a Prudent Trustee Rule notification letter for attorneys to use with clients that I’d be glad to share.