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As a trustee overseeing Trust Owned Life Insurance, what you don't know about your responsibilities under the Uniform Prudent Investor Act Can Hurt You.
What We Know Can Help.
Trust Owned Life Insurance is often an integral component of estate planning for high-net worth individuals. In addition to providing an income-tax-free death benefit and allowing tax-deferred growth of cash values, it also serves as a source of non-taxable withdrawals and loans.
Although Trust Owned Life Insurance frequently is the largest asset involved in an estate plan, it often is also the least well managed. As a result, what the grantor envisioned as becoming a major source of provision for his or her beneficiaries may fall far short of expectations, leading to disappointment and even hardship for beneficiaries and potential liabilities for the trustee.
That's why it's vital that estate-planning attorneys and other trustees are well informed regarding their responsibilities and liabilities under the Uniform Prudent Investor Act.
Drafted in 1994 by the National Conference of Commissioners on Uniform State Laws and adopted by the American Bar Association in 1995, the UPIA now has been adopted in some form by 46 states and the District of Columbia and provides that a trustee "shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution provisions and other circumstances of the trust."
In general, state laws stemming from the UPIA have applied to Trust Owned Life Insurance products the same financial principles for minimizing costs and maximizing returns, relative to risk level, that already applied to other trust-held assets.
To help avoid litigation and penalties stemming from a potential breach of fiduciary duty involving Trust Owned Life Insurance, a trustee must prudently monitor, investigate, and manage the Trust and be able to demonstrate that he or she followed a prudent process in selecting and making decisions regarding current and potential future life insurance products, including the incorporating of independent, third-party information.
Among the Factors Trustees Should Consider:
- Does the Trust have an overall investment strategy that includes risk and return objectives that are “reasonably suited to the Trust”?
- Are the trustee’s actions consistent with the Trust document?
- Are policy costs appropriate and reasonable in relation to the assets?
- Is the policy at risk for becoming underfunded?
- Is the policy at risk for lapsing prior to the lifespan of the grantor?
- Is the trustee continuing to observe the suitability of current and potential future investments?
- Is the trustee monitoring information that may affect the value or security of the investment and any subaccounts?
- Is the trustee regularly and objectively evaluating the strengths and weaknesses of the policy against alternative peer-group products?
- Are financial decisions being based on hypothetical illustrations or actual costs and performance of products being considered (FINRA Rule 2210)?
- Are costs being minimized, and is the return on investment being maximized, relative to the grantor’s Trust’s investment strategy?
Let 1802 Insurance™ Help You Maintain the Trust of Your Clients in Your Role as Trustee
Court decisions have shown that trustees personally can be held liable if they fail to provide due diligence on behalf of a Trust, and judgments have reinforced that trustees should engage the resources of knowledgeable insurance professionals if the trustee lacks the experience in properly evaluating and managing insurance products.
At 1802 Insurance™, we can help you in your role as the trustee of Trust Owned Life Insurance products. We are true insurance professionals with more than 40 years’ experience in identifying, evaluating, and managing Trust Owned Life Insurance products against the goals of the Trust.
While you maintain complete control over every client relationship, the professionals at 1802 Insurance™ can:
- Evaluate the financial strength of life insurance products and carriers and their estimated ability to pay death claims at the time of payout
- Provide a full analysis of policy assumptions and costs
- Evaluate personal developments in the life of a beneficiary that may affect policy objectives
- Conduct an annual review of the selected policy’s actual performance
- Provide information about the availability of new and/or existing alternative products and perform a competitive analysis of your client’s current policy vs. competing products
- Keep you and your clients informed of any changes in federal or state tax laws or regulations that may affect the Trust
As a trustee partnering with 1802 Insurance™, our goal is to reduce your risk liabilities under the provisions of the UPIA but also help you increase the likelihood that your client’s Trust Owned Life Insurance policy will attain the goals of the Trust.
