Reprinted from the November/December 2005 issue of The Banking Law Journal.
There appears to be an increased expectation that Irrevocable Life Insurance Trust (ILIT) trustees should discharge the duties of their office in a manner that is academically sound, administratively reasonable, and legally defensible. Here, the authors explore when an independent trust company or bank trust department, or other professional trustee, should consider when to replace trust owned life insurance policies.

Although a comprehensive discussion of prudent administration of life insurance assets is beyond the scope of this article, it is important to consider a trustee’s decision to replace an existing life insurance contract:

1) Trust owned insurance policies are often a cornerstone for estate plans that contemplate the availability, upon the death of the insured, of large sums of insurance proceeds for asset protection, estate transfer liabilities, business continuity, etc.;

2) Insurance replacement transactions may incur substantial costs; but, a failure to replace a financially unsound or underperforming asset may violate the duty to make trust property productive; and,

3) Trustees failing to discharge the duties of their office without requisite care, skill, and caution may be personally liable should they be found to be in breach of their fiduciary duties.

Download The Decision to Replace Trust Owned Life Insurance Policies