In Part 1 of this article, published in the December 2011 issue of Trusts & Estates, I examined a lawyer's duty of care to trust beneficiaries and the current product considerations facing policyholders and carriers. Now, I turn my attention to Part 2, which provides suggestions for lawyers advising clients on different trustee management styles for life insurance trusts, particularly in light of
In Part 1 of this article, published in the December 2011 issue of Trusts & Estates, I examined a lawyer's duty of care to trust beneficiaries and the current product considerations facing policyholders and carriers. Now, I turn my attention to Part 2, which provides suggestions for lawyers advising clients on different trustee management styles for life insurance trusts, particularly in light of some state statutes that exonerate trustees from management responsibility. I also suggest how a lawyer can help a settlor communicate his intent and expectations to the trustee, to increase the likelihood of a successful outcome for trust beneficiaries.
TOLI Management Styles
Estate-planning lawyers know that trust-owned life insurance (TOLI) must be actively managed.1 But, there are two divergent approaches typically used to guide a trustee in managing a client-settlor's irrevocable life insurance trust (ILIT). Some estate-planning lawyers prefer to draft a plain vanilla, fully discretionary trust agreement for use as an ILIT, typically modified by adding certain special life insurance language that prevents inclusion of the trust assets in a settlor's gross estate. Lawyers who adhere to this drafting style prefer not to include in the ILIT agreement itself language that specifically recites the settlor's intent and purpose in establishing the ILIT or the settlor's expectations of the ILIT trustee in managing the TOLI. This approach is often used in long-term, multi-generational ILITs.
Many are concerned that an ILIT trustee might someday dispose of the life insurance policies during the settlor's lifetime, with the trust continuing on indefinitely holding other assets, in which case any customized language embedded in the ILIT agreement itself would no longer be relevant or appropriate. Lawyers using this approach should consider drafting non-binding letters of wishes, from the settlor to the ILIT trustee, expressing the settlor's current intent and what he expects of the trustee. More on this option, below.
Other estate-planning lawyers feel comfortable drafting a settlor's intent and expectations right into the ILIT agreement. But, no matter which approach is used, giving guidance to a trustee so that trust assets can be actively managed will not only produce the best long-term results for beneficiaries, but also will ensure that the trustee complies with the Uniform Prudent Investor Act (UPIA).
Increasingly, professional trustees (primarily institutional trustees, but sometimes lawyers) are insisting on including exculpatory clauses in trust agreements to relieve the trustee of TOLI management and monitoring responsibility. Estate-planning lawyers are now facing questions from clients — the settlor-insureds — about how to handle a situation in which a trustee insists on inclusion of such clauses. In a state that's adopted the Uniform Trust Code (UTC), a trustee has the burden of proof to demonstrate that any exculpatory clause inserted into an ILIT is “fair under the circumstances” and that “its existence and content are adequately communicated to the client.”2 On the other hand, the UTC essentially removes the protection to the client offered by this fairness/communication standard by providing that an exculpatory clause is presumed fair if a client was represented by counsel.3 Some states, however, aren't satisfied with mere notice to a client's lawyer. For example, Florida has modified its version of the UTC by enacting its own statute that provides that disclosure to a client's lawyer isn't adequate to rebut the presumption of the invalidity of an exculpatory provision.4
A lawyer who drafts an ILIT for a client who plans to rely on statutory exculpation of a trustee to manage his TOLI, should prepare an easy-to-understand, non-technical letter or memo. That way, the client can understand the potential consequences of an unmanaged “buy-and-hold” TOLI strategy and be aware of available “buy-and-monitor” alternatives.
A lawyer who prepares such a letter or memo must also be aware of the conflict-of-interest rules of professional conduct that potentially apply. These rules may be relevant if, for example, the financial institution serving as professional trustee, seeking to relieve itself of TOLI management responsibility, also sends a steady stream of client referrals to the lawyer or his law firm.5 The lawyer should also consider whether to disclose the magnitude of annual fees generated by such referrals, if applicable.
An estate-planning lawyer may owe a duty of care to third parties, such as ILIT beneficiaries. The UPIA's high standards for investment management are aimed at protecting beneficiaries by ensuring that trustees are attentive and adopt monitoring procedures as well as modern portfolio theory. Delivery of TOLI death benefits to the beneficiaries is a bedrock of sound estate planning, but managing the process is challenging, and the estate-planning lawyer needs to be aware that some of the following issues may arise.
Beneficiaries can try to ensure that their rights are protected by requesting that the current trustee change the place of administration of an ILIT from a jurisdiction where the initial trustee had no duty of management or liability under state statute, to one that doesn't have a similar statute.6 However, it may be difficult to find an individual or financial institution willing to serve as successor ILIT trustee if there's been no active management of the ILIT in the original jurisdiction for 10, 20 or even more years.
Professional trustees in states that have enacted statutes relieving trustees of liability to manage TOLI may try to eliminate their responsibilities and liability to continue to manage existing ILITs, hoping that beneficiaries will fail to object to trustees' desire to be relieved of this responsibility. An ILIT settlor may try to pressure his beneficiaries not to object to an ILIT trustee's attempts to opt into this statutory protection by threatening to disinherit the ILIT beneficiaries.7
Estate-planning lawyers, beware: Although beneficiaries of unmanaged, failed ILITs maintaining a long-term buy-and-hold TOLI strategy will have no recourse against the ILIT trustee for mismanagement and bad outcomes (because of exculpation through state statute), it's unlikely that beneficiaries will idly sit by and do nothing. Be prepared for a beneficiary of a failed long-term life insurance program, in which his parents or grandparents invested significant money, to target the estate-planning lawyer, as well as the life insurance agent. In many states, a beneficiary harmed by an estate-planning lawyer's negligence may have a cause of action against the lawyer for malpractice.
Underlying Policy Considerations
Moreover, lawyers and life insurance professionals involved with clients implementing unmanaged TOLI must consider the nature of the underlying policy owned by the ILIT. In a variable policy, for example, a policyholder assumes all investment risk and must regularly allocate and rebalance policy cash value among a variety of different investment options offered by the carrier. In a no-lapse guarantee universal life policy (that is, a universal life policy under which the carrier guarantees that regardless of the balance in the policy cash account, the contract will remain in force and provide a promised death benefit so long as specified premiums are paid when due), there's a so-called secondary guarantee; the carrier guarantees that the policy won't lapse, separate from the primary guarantee providing a minimum crediting rate and maximum mortality/expense charges. Failure to initially diversify among a variety of major carriers and then periodically monitor those carriers' ongoing solvency and future claims-paying capacity could ultimately produce a bad outcome for purchasers of these secondary guaranteed universal life (SGUL) policies.
Due to the current sustained low interest rate environment and increased capital reserves required for SGUL policies, carriers are now incentivizing new customers requiring estate liquidity to purchase less expensive current assumption, universal life “hybrid” policies. These offer guaranteed premiums through a specified age pegged to the insured's current anticipated life expectancy (such as age 85 to 90), rather than actual lifetime (such as age 120). Hybrid policies, like all current assumption universal life policies and unlike SGUL policies, are risk-sharing arrangements between the carrier and policyholder. Carriers will actively manage their contractual commitments under these hybrid policies, and estate-planning lawyers should advise their clients contemplating purchasing new hybrid policies that they require proactive, ongoing monitoring for future premium adequacy (beginning at life expectancy). In hybrid policies, policyholders assume premium adequacy risk starting after the insured reaches life expectancy (possibly 20, 30 or more years after the policy is issued). Before then, the carrier has the authority to reduce the interest crediting rate and/or increase the insurance (mortality) charges and expenses on the non-guaranteed component of these policies. All of these changes will impact the amount of projected cash value available to maintain the policy after life expectancy until actual death benefit payout.
Additional Trustee Duties
In absolving an ILIT trustee of any duty to manage and administer the TOLI according to the standards set up by the UPIA, it's unclear whether a settlor also is relieving a trustee of other common law or statutory responsibilities. Even if an ILIT trustee has no duty or liability to manage the TOLI, beneficiaries still have a right to receive detailed information about material facts and transactions of the trust (even if the duty to account has been waived in the ILIT agreement). In the past, this duty to furnish information not only required that a trustee provide information upon request by a beneficiary, but also that a trustee affirmatively disclose certain facts.8 The UTC provides that a trustee must keep qualified beneficiaries reasonably informed of the trust administration and all material facts necessary for them to protect their interests.9
The duty of loyalty may be the most basic duty owed by a trustee. This duty isn't imposed by any special language in the trust agreement. Rather, the duty of loyalty is inherent in the relationship among the settlor, trustee and beneficiary. The trustee is obligated to administer the trust solely in the interest of the beneficiaries. A trustee must not only refrain from engaging in self-dealing, but also from doing anything that may be construed as an act that benefits the trustee in some way to the detriment of a beneficiary.10
A settlor, through his drafting lawyer, may reduce a trustee's duty of loyalty through:
… express language in the trust agreement or consent [that] reduces the standard of duty to good faith and permits the court to weigh the merits of the transaction … here the settlors themselves create a conflict of interest, a trustee cannot be liable for violation of the duty of undivided loyalty.11
An institutional trustee is usually selected for its objectivity and expertise and generally can't take a passive role in the administration of the trust for which it accepts fiduciary responsibility. An ILIT trustee, relieved of TOLI management responsibility under state statute, could, and should, delegate this responsibility to someone knowledgeable about life insurance.
The modern trend is to give trustees greater power to delegate. Many trust agreements now specifically authorize a trustee to delegate certain tasks. Under the version of the UPIA adopted in most states, a trustee can delegate investment responsibilities to a professional investment agent.12 If an ILIT trustee doesn't possess the investment management skills required by the UPIA, the settlor and trustee should agree that the trustee will appoint a qualified person to manage the policies to be held in the ILIT.13
The UTC also specifically authorizes trustee delegation.14 Under the UTC, “[a] trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances.”15 The UTC holds the trustee to a standard of reasonable care, skill and caution when selecting an agent. A delegation requires the trustee to continually monitor the agent's actions and, in most jurisdictions, the trustee remains liable for any negligent conduct of the agent.16
In a directed trust, while the trustee has minimal responsibilities that are limited to performing certain administrative or custodial functions, the holder of a power to direct often is held to a general fiduciary standard. For example, South Dakota's directed trust statute relieves the trustee of liability and designates the trust advisor17 as a fiduciary for trust law purposes.18 A key advantage to a settlor who relies on a directed trust statute in the TOLI context is that, in most circumstances, someone, albeit a non-professional, has fiduciary responsibility for ongoing policy performance. In a directed trust that owns life insurance, estate-planning lawyers know that a fiduciary, and not merely the life insurance agent, is responsible for establishing that there's a process in place for policy monitoring. Fiduciaries generally guarantee the trust beneficiaries that they'll provide a fair and reasonable investment process and that the fiduciary will take prudent and reasonable steps to minimize losses and maximize gains.
Bottom line: Estate-planning lawyers who actively advise ILIT settlors to exonerate the trustee of all TOLI management responsibility or advise a beneficiary not to object to a trustee's request to opt out of UPIA, should recognize — and communicate to their clients in easily understood, layman's language — that “life insurance is no longer a sleepy, static, buy-and-hold asset.”19
In fact, an ILIT trustee should expect to make changes in TOLI just as he would expect to make changes when managing a traditional investment portfolio held in trust. A trustee should expect continuing changes in product design and pricing availability, with new opportunities looming and disappearing more quickly than in the past. It's an environment that makes it incumbent on trustees to continually monitor TOLI.20
Who's in Charge?
The independent judgment of an estate-planning lawyer involved in a TOLI situation would appear to be under greatest stress when the client designates an institutional trustee for his ILIT. Institutional trustees are often familiar with serving as ILIT trustees and understand what terms are optimal for them in that role. While the majority of estate-planning lawyers zealously represent their clients' best interests, Professor Melanie Leslie of New York's Benjamin N. Cardozo School of Law reminds us that, “… those attorneys who have not fully internalized norms of loyalty and honesty face a disincentive to argue too vociferously with institutions who wish to modify fiduciary obligations.”21 Prof. Leslie suggests that this incentive structure has resulted in a rash of cases imposing disciplinary sanctions against lawyers in the context of professional (institutional) trustees.22 On the other hand, she concludes that non-professionals who serve as trustees are unlikely to participate in drafting a trust's terms and are likely to be on a level playing field with the settlor in terms of sophistication.23
A lawyer whose client insists on exonerating an ILIT trustee of all future TOLI management responsibility, leaving no accountable professional in charge of the program, needs to do a lot of soul-searching. The lawyer may be allowing a non-professional (that is, the client) to set unreasonable and unachievable goals for a long-term TOLI program. An estate-planning lawyer's role goes beyond being the draftsman of the ILIT and includes the difficult task of educating his client about the possible consequences of buy-and-hold versus buy-and-monitor TOLI management styles. He should explain to his client why a buy-and-hold approach may be both unsatisfactory and avoidable. A lawyer must realize that what the client says he wants and what he should want are two very different things; the lawyer must set the agenda for the client.
Noted estate-planning lawyer and frequent expert witness, Howard M. Zaritsky, of Rapidan, Va., summarizes the lawyer's dilemma by offering this blunt warning:
I have served as an expert witness in many estate-planning malpractice cases. In almost all of these cases, the attorney-defendant states at some point that he or she only did what the client wanted the attorney to do. I have never seen this argument prevail with the plaintiff, the judge or the jury.
Instead, the plaintiff usually responds that, if the attorney had explained things better, the client would have understood the likely results of the proposed plan, and would have wanted something else. Frankly, I find this to be a pretty compelling response. So do the judges and juries.24
The UPIA contemplates that a trustee will put an investment policy statement (IPS) in place. The IPS is a formal statement of the investment practices the trustee intends to use in managing the trust assets. Most professional trustees are familiar with an IPS, but a non-professional will have little familiarity with this document.
An IPS isn't a legal document. It's a written statement of how a trustee expects to manage the trust assets to meet the trust's objectives. The IPS is flexible, and a trustee can revise it as circumstances change.
An ILIT trustee should ideally prepare an IPS that explains how he plans to manage the TOLI program. The IPS should include discussion of anticipated management activity, diversification across major carriers, policy review procedures, policy suitability, product alternatives and health of the insured(s).
Most estate-planning lawyers don't regularly prepare a written IPS to accompany the trusts they draft. There are a variety of reasons for failing to include an IPS, including additional time and client costs and the estate-planning lawyer's lack of expertise in preparing and periodically revising a non-legal, investment document that's often prepared by the trustee or its counsel. Lawyers regularly representing fiduciaries may be best able to prepare an IPS.
The defense bar warns institutional trustees that create internal operating manuals, written IPSs or other guidelines, to review all such materials on a regular basis to ensure compliance and to update them as necessary to reflect changed practices:25
Noncompliance with written policies, even if not material to the main allegations of a particular case, can result in the fiduciary having to adopt a more defensive posture and can cause the trier of fact to view the fiduciary with heightened scrutiny because of its failure to follow its own policies.26
Non-binding Letters of Wishes
Noted author and Berkeley Law Professor Edward C. Halbach, Jr. rightfully points the finger at lawyers for their failure to develop and provide information about the purposes of a trust and the general frame of mind in which the settlor wishes the trustee to act, by concluding “it is one of the most neglected aspects of estate planning.”27 Similarly, Boston attorney Alexander A. Bove, Jr. notes:
Drafting lawyers habitually draft discretionary trusts offering no real guidance to the trustees in the exercise of their discretion with respect to distributions to beneficiaries. We should strongly encourage settlors to provide a non-binding written expression of the manner in which they would like to see the trustees exercise their discretion, so that the administration of their trusts will have a good chance of reflecting the manner in which the settlors themselves would have administered them.28
In the absence of an IPS, a settlor's non-binding letters of wishes can supply the trustee with the basic purpose of the ILIT, as well as other important management considerations. Even the Internal Revenue Service has acknowledged that letters of wishes are used “as part of normal estate planning and … for legitimate purposes.”29 In lieu of a non-professional trustee adopting and updating a formal IPS, an estate-planning lawyer might resort to non-binding side letters to ensure that the settlor has adequately communicated his intent or purpose for the ILIT and how the trustee should manage the trust assets. (See “Communicating a Settlor's Wishes,” p. 61 and “A Settlor's Expectations,” p. 62.)
— The author wishes to thank Howard M. Zaritsky for reviewing this article.
One lawyer wrote, more than five years ago, that trust-owned life insurance (TOLI) is like fitting a square peg (the irrevocable life insurance trust (ILIT)) into a round hole (the Uniform Prudent Investor Act (UPIA)):
The settlor should specifically state that the ILIT is intended to hold one or more [life insurance] policies and perhaps waive the requirement of diversification under the Prudent Investor Act. The trustee should have no independent obligation to make premium payments if annual contributions from the settlor are inadequate to make such payments. Consideration should be given to appointing a special trustee for policy selection and annual policy performance review. If policy selection and analysis are to be delegated, consideration must be given to the costs of delegation. The trustee's fee structure must be determined accordingly.
See Richard Zinn, “New Challenges in Trust Design and Investments,” Kansas Bankers Association (2005), at pp. 82-83.
- Uniform Trust Code (UTC) Section 1008(b) (2005).
- See comments to UTC Section 1008(b). Since the settlor's lawyer is an agent of the settlor, disclosure of an exculpatory term to the settlor's lawyer is considered disclosure to the settlor under the UTC.
- Florida Statutes Section 736.1011.
- See, e.g., the Illinois Rules of Professional Conduct, Rule 1.7, which provides that a lawyer shall not represent a client if the representation may be materially limited by the lawyer's responsibilities to another client, to a third party or by the lawyer's own interests unless the lawyer reasonably believes that the representation will not be adversely affected and the client consents after the disclosure.
- Patrick Lannon, “Risk Management for the Life Insurance Trust Trustee” (March 3, 2011), http://tinyurl.com/747m8c6.
- Ibid. at p. 6.
- Rollins v. Branch Banking and Trust Company of Virginia, 56 Va. Cir. 147 (2001). This case found that a trustee has a duty to communicate with the beneficiaries even when the trustee wasn't responsible for making investment decisions. Although the trustee had no duty to diversify, it did have a duty to warn the beneficiary.
- UTC Section 813(a).
- The UTC states that the trustee “shall administer the trust solely in the interests of the beneficiaries.” UTC Section 802(a).
- Caldwell v. Hanes, 214 B.R. 786 (Bank. E.D. Va. 1997).
- See UPIA Section 9.
- Kathryn Ballsun, Patrick Collins and Dieter Jurkat, “Trustee Administration of Life Insurance” (Part 1 of 4), 31 ACTEC Journal 280, 294 (2006).
- UTC Section 807(a).
- UTC Section 807, comments.
- David Diamond and Todd Flubacher, “The Trustee's Role in Directed Trusts,” Trusts & Estates (December 2010) at p. 24.
- The nature and extent of the powers and duties of a trust advisor, as well as the relationship and responsibilities allocated among the trust advisor, trustee and beneficiaries, are generally set out in the trust instrument. The principal distinction between the trust advisor and the trustee is that the trust advisor doesn't have title to, or custody of, trust assets. A trustee's powers are provided by state law as well as the trust instrument, whereas the trust advisor's powers are limited to those stated in the trust instrument. Courts will generally consider a trust advisor to be a fiduciary, because the trust advisor has been granted discretionary authority and courts will act to protect beneficiaries from improper actions of a trust advisor. For example, a trust instrument that grants a trust advisor the power to direct trust investments carries with it duties of loyalty, impartiality among beneficiaries and responsibility to follow a prudent investment policy. For an excellent article on the topic of trust advisors and when and how to use them, see Sheldon Gilman, “The Effective Use of Trust Advisors: Parts 1 and 2,” www.lynchcoxlaw.com.
- South Dakota Codified Laws 55-1B-1.
- David Freeley and Melvin A. Warshaw, “Checking Under the Hood,” Private Wealth Magazine (July 2010), at p. 67.
- Ibid. at p. 69.
- Melanie Leslie, “Common Law, Common Sense: Fiduciary Standards and Trustee Liability,” 27 Cardozo Law Review 2713, 2716 (2006).
- Ibid. at p. 2716, footnote 11.
- Ibid. footnote 12.
- Howard M. Zaritsky, “How Important Really is What the Client Wants?” Leimberg Estate Planning Newsletter Message #1857 (Aug. 29, 2011), at p. 2.
- John T. Brooks and Samantha Weissbluth, “Risk Management for Trustees: Becoming Ill-Suited for Litigation,” ALI-ABA Course of Study on Representing Estate and Trust Beneficiaries and Fiduciaries (July 16-17, 2009), at p. 33.
- Edward Halbach, “Problems of Discretion in Discretionary Trusts,” 61 Columbia Law Review 1425, 1434 (1961).
- Alexander A. Bove, “Letters of Wishes,” Trusts & Estates (January 2006), at p. 50.
- Abusive Offshore Tax Avoidance Scheme — Glossary of Offshore Terms,” www.irs.gov/businesses/small/article/0,,id=106572,00.html.
Melvin A. Warshaw is general counsel to Financial Architects Partners in Boston
Communicating a Settlor's Wishes
A non-binding letter can supply a trustee with an irrevocable life insurance trust's purpose
[Statement of Intent or Purpose]*
To My Trustee:
A primary purpose of this trust is to provide a possible source of liquidity to satisfy the financial needs that may confront my family at my death and the death of a spouse who may survive me. The liquidity demands that may occur at my death and/or the death of the survivor of my spouse and me are very difficult to determine because of uncertainties in the nature and value of other assets that may then be available to my family, the debts and taxes that may be due at my death and/or the death of the survivor of my spouse and me, and the cash needs of individuals who are financially dependent on me or to maintain a business or investment in which I may have invested.
I believe that an appropriate technique to ensure that cash will be available to meet those liquidity demands is for the trustee to invest trust assets in life insurance on my life and/or my spouse's life. I recognize that if I live beyond normal life expectancy, an investment in life insurance may not yield as high a rate of return as other possible investments or that an investment in life insurance may result in a negative return (loss of principal). I believe, however, that if I and/or my spouse should die before normal life expectancy, the magnitude of the life insurance death benefit compared with other investments may outweigh the possibility of a lower yield received beyond normal life expectancy.
*This form is adapted from “Sample Administrative Provisions for Wills and Trusts,” JPMorgan Private Bank (2005), at pp. 18-23. For additional samples, see Sebastian Grassi, Jr., “A Practical Guide to Drafting Irrevocable Life Insurance Trusts,” ALI-ABA (2007) at pp. 657-663.
A Settlor's Expectations
Convey in writing how a trustee should manage trust assets
[Specific Expectations of Due Diligence]*
To My Trustee:
I recognize that the selection, ownership and retention of trust-owned life insurance policies raise complex questions of due diligence. In carrying out my wishes, you may decide to delegate to a qualified professional management, responsibility and liability for the life insurance policies owned by the trust.
Active v. Passive Policy Management. I expect that you or an agent under your supervision will monitor the performance of any policies owned by the trust and, when appropriate, compare them with other life insurance policies available in the marketplace. I expect that you will use your best judgment in determining whether to add new policies to the trust or surrender, exchange or settle any policy currently owned by the trust.
I believe that active management of the life insurance policies owned by the trust is desirable. I believe that a “buy and hold” strategy for policies owned by the trust may not be in the best interests of the trust beneficiaries.
Diversification. I recognize that during my life and the life of my spouse, the only asset class of the trust may be life insurance policies. You are authorized to hold life insurance policies as the predominant or exclusive asset class of the trust without any duty to diversify into other asset classes during my life. I would encourage you, however, to consider diversifying among different carriers and possibly among different product types.
Liquidity. I do not envision that the life insurance policies owned by the trust will have to be converted into cash in order to make current distributions to beneficiaries or to pay the current cost of administering the trust or managing the life insurance portfolio. I do envision that for as long as I continue to make contributions to the trust, you will use all or any part of these contributions to pay premiums. You have no obligation to have the trust make premium payments if contributions made to the trust by me or a related party are inadequate to make such payments.
I recognize that my advisors may suggest that either I or a related party advance premiums directly to the carrier “on behalf of” the trust under some combination of split-dollar arrangement and/or private loans, which could minimize my need to make contributions to the trust. You should consider entering into split-dollar agreements, loan agreements and related agreements when appropriate.
I recognize that, to ensure proper management of the trust-owned policies, I may need to make contributions to the trust to enable you to adequately compensate life insurance professionals who you might engage or to whom you might delegate responsibility in carrying out your duty to manage the policies. If management responsibilities are delegated and there are costs incurred in your engaging an agent, your fee structure for serving as trustee may need to be adjusted.
Types of Suitable Life Insurance Policies. I recognize that there are many different types of life insurance policies available to you, as well as various different funding patterns available with some product types.
Among the objectives of the trust are to have the trust make available, when appropriate, life insurance death benefit proceeds to the beneficiaries, and to diversify some portion of my overall investment portfolio into an investment asset class, such as life insurance, that is not correlated with traditional investments such as publicly traded stocks and bonds. I do not intend policy cash value and cash value growth to be of primary importance to the beneficiaries except to the extent possibly necessary to offset future premiums that would support the life insurance death benefit.
Delegation. You may not believe that you possess the knowledge and experience to evaluate different life insurance policies. Inasmuch as life insurance is a complex investment, I recognize that you may desire professional advice before making any decision about the performance or suitability of any life insurance policy currently held by the trust or to be potentially acquired in the future. I would encourage you to have life insurance professionals experienced in evaluating life insurance policies involved in analyzing the existing policies and make periodic recommendations to you on policy suitability and alternatives. I would anticipate that the life insurance professional may make recommendations to you for your consideration in deciding how best to manage the trust-owned life insurance portfolios.
Policy Performance. I understand that the illustrations for the policies owned by trust are projections based on many assumptions. I recognize that assumptions projected by the carriers at or after issuance of the policies, including interest rates, mortality rates and costs of insurance, may turn out to be wrong. I recognize that policy performance may change over time, and the longer I and/or my spouse are alive, the greater the potential for change in policy performance.
New Policies. I recognize that new products and policy types are always being developed by the carriers and new product or policy types may become available after the policies currently owned by the trust are issued. I recognize that through medical advances and increasing life expectancies, new policies may have lower premiums and/or more flexible underwriting.
Existing Policies. I recognize that without an outlay of additional funds by me or a related person, policies currently owned by the trust may lapse in the future, and this may diminish the future assets of the trust. You should monitor this situation.
Carrier Quality. I recognize that carrier financial solvency and a carrier's future claims-paying capacity may vary over time and in relation to other carriers. You should monitor this situation.
Monitoring; Procedures. I suggest you regularly monitor the trust's policies. I suggest you consider adopting and maintaining a written investment policy statement for the trust.
*This form is adapted from “Sample Administrative Provisions for Wills and Trusts,” JPMorgan Private Bank (2005), at pp. 18-23. For additional samples, see Sebastian Grassi, Jr., “A Practical Guide to Drafting Irrevocable Life Insurance Trusts,” ALI-ABA (2007) at pp. 657-663.