Sometimes, an attorney, advisor, or other person close to the client serves as the trustee of an irrevocable life insurance trust (“ILIT”). This seems simple enough. The client contributes money and the trustee sends Crummey notices to the beneficiaries. However, even during the life of the insured, there are real fiduciary duties which a trustee takes on.
The trustee has the duty to make sure that the insurance is a reasonable policy to hold and that it does not lapse, for example. They have fiduciary duties to the beneficiaries of the trust and must keep them informed if the policy does lapse, for example. At least in Nebraska, this is the case even though the client expressly waives the liability of the trustee in those regards. In Rafert v. Meyer, the Nebraska Supreme Court overturned the trial court’s decision and remanded for further proceedings. The Nebraska Supreme Court found that a trustee had a fiduciary duty to keep beneficiaries informed about the status of the policies (e.g. if they lapse) and a duty to act in the beneficiaries’ best interests. The court found that these duties could not be waived, even if the grantor of the trust expressly attempted to do so in the document.
In the case, the attorney was the trustee of the ILIT. The trust had about $8.5 million in life insurance on the client. The beneficiaries were the insured’s four daughters. The policies lapsed for nonpayment of premium.
The Court, in applying the Nebraska law (which has adopted the Uniform Trust Code), found a trustee’s duty to keep the beneficiaries reasonably informed about material facts necessary for them to protect their own interests cannot be waived.
This is a useful case to remember if you are going to serve as trustee of an ILIT. It does not mean that you should not consider serving. It just means that you have duties, even if they are waived in the document.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com
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