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For Trust Departments that offer ILIT fiduciary services, the status of in-force life insurance has never been more problematic.

Below you can find a summary and copy of the recent Nebraska Supreme Court ruling in favor of the plaintiffs in an ILIT case. This is the first court case we are aware of that ruled against an ILIT trustee.  Due to the clear direction provided by Rafert v Meyer, there has never been better time to ensure you and your client's are adequately protected. 

This case is important for the following reasons:

  • Reversed and remanded a decision of the trial court stating that a trustee has a non-waivable duty to keep beneficiaries informed about the status of life insurance policies held in the trust.
  • Held that a trustee has a non-waivable duty to act in good faith and in the best interest of the beneficiaries.
  • Held that a trustee’s authority is governed by both common law and the statutes pertaining to trusts and trustees, as well as the trust instrument itself.
  • States that no trust provision can limit a trustee's liability for breach of trust “committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries,” and no exculpatory clause in a trust is valid “unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.”
  • Court agreed that the trustee breached his duties as trustee by providing a false address to the insurers, failing to keep the beneficiaries informed of the facts necessary to protect their interests, failing to furnish annual statements, failing to communicate the terms of the trust to the grantor, and failing to act in good faith and in accordance with the terms and purposes of the trust and in the interests of the beneficiaries.
  • The Court also found untenable the trustee’s argument that the instrument expressly limited his liability for any claims related to the nonpayment of premiums.  The Court stated that this violated “the most basic understanding of a trustee's duty to act for the benefit of the beneficiaries under the trust.” 

In combination with RIC www.ricomaha.com, we provide a turn-key solution for ILIT Trustees.  Our process was created to thoroughly aid trust executives with supporting reports and guidance.  

Our process can help determine if the policy held in a trust is adequately funded to maturity (or an agreed upon target date) as well as whether to policy is competitive (as compared to what is available in the open market.)

We will save you time and provide clear direction on how to advise your client.  We document every step taken with third party reports that will defend and outline our process.  Our platform will virtually eliminate your risk of providing ILIT management services while giving you a very good reason to increase your fees.   

This is a very important case as it shines a light on the core issue of wholly and appropriately serving the client. Whether a Trust Officer has direct fiduciary (or administrative only responsibilities) action needs to be taken to oversee these ILIT owned policies. Frankly, not only is this a case that favors our cause, it just makes good sense and does right by the client. - Mike Smith

In an effort to keep fiduciaries informed on activities and best practices for ILIT trustees, following please find a summary of a recent court ruling on the responsibilities of an ILIT Trustee. This is the first court case we are aware of that ruled against an ILIT trustee.

To read the opinion visit here:https://supremecourt.nebraska.gov/sites/supremecourt.ne.gov/files/sc/opinions/scFeb27S-14-003.pdf for Rafert v. Meyer, heard in the Nebraska Supreme Court and filed in February, 2015. You may also listen to the case audio by opening the State of Nebraska Judicial Branch website at https://supremecourt.nebraska.gov/13513/rafert-v-meyer.

This case is important for the following reasons:

  • Reversed and remanded a decision of the trial court stating that a trustee has a non-waivable duty to keep beneficiaries informed about the status of life insurance policies held in the trust.
  • Held that a trustee has a non-waivable duty to act in good faith and in the best interest of the beneficiaries.
  • Held that a trustee’s authority is governed by both common law and the statutes pertaining to trusts and trustees, as well as the trust instrument itself.
  • States that no trust provision can limit a trustee's liability for breach of trust “committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries,” and no exculpatory clause in a trust is valid “unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.”
  • Court agreed that the trustee breached his duties as trustee by providing a false address to the insurers, failing to keep the beneficiaries informed of the facts necessary to protect their interests, failing to furnish annual statements,failing to communicate the terms of the trust to the grantor, and failing to act in good faith and in accordance with the terms and purposes of the trust and in the interests of the beneficiaries.
  • The Court also found untenable the trustee’s argument that the instrument expressly limited his liability for any claims related to the nonpayment of premiums. The Court stated that this violated “the most basic understanding of a trustee's duty to act for the benefit of the beneficiaries under the trust.”

Relieving a trustee of the duties referenced in this case may result in lower trustee fees, but it also leaves the trust without anyone to assure that the policy remains in effect, that it is the suitable policy for the trust, and that full advantage is being taken of policy options and elections. It also leaves the trust to determine if the policy held in the trust is adequately funded to maturity or an agreed upon target date as well as whether to policy is competitive as compared to what is available in the open market.

An appropriate approach would be to retain an independent, qualified consultant to perform policy reviews, follow a prudent process to remediate “at risk” policies while documenting every step taken. State in writing the review and remediation process as well as how often that process is followed then act accordingly on all policies under management. If you have a written process that is prudent and you follow those steps, you will be able to prove you are actively managing the policy and can defend your decisions if questioned in the future.

For more information about how to properly structure a life insurance policy review and remediation process, contact Mike Smith at mike@tfpbrokerage.com or call at 678.338.4384.

Mike is President of TFP Brokerage, a member of the PolicyCheck Network, author of Tread Lightly: A Life Insurance Guide for the Affluent Client and proud advocate of Trust Officers and their clients.

We're dedicated to continue to post new, noteworthy and effective content on Trust Central - and we also want to share found information that may be useful.  Below are a few sites that we've found to have beneficial information for Trust Officer's and clients.  

More to come! 

About the Author

Michael R. Smith is President of The Financial Partners Group LLC, the parent company of The Financial Partners & TFP Brokerage. He graduated from Virginia Tech in 1983 & began working in the financial services industry that same year. Mike's unique perspective shared in TREAD LIGHTLY has been shaped by the numerous agent & management positions he has held throughout his career and TREAD LIGHTLY is the culmination of both his industry experience and passion for protecting and educating his clients.  As a direct result of developing TREAD LIGHTLY, Mike created TreadLightlyGuide.com, an organization committed to furthering the life insurance industry through accountability and dialogue. His belief in consumer education and that there is no "one-size-fits-all" approach to financial services, is a cornerstone of both TREAD LIGHTLY and TreadLightlyGuide.com.  Mike is the proud father of two children, Nick and Kennedy, happily engaged, and has been known to sneak off to the golf course when time permits.

 

About Tread Lightly

Tread Lightly is a guide to life insurance for the affluent client.  This book (including the guides and checklists) is a resource for any buyer or Client Advocate involved in the purchase or maintenance of large insurance policies.

Tread Lightly is for any client, Client Advocate or advisor involved in the purchase or management of a large amount of life insurance.  Examples include:  estate planning attorneys, business lawyers, CPAs, Trust Offices, members and employees of family offices, insurance agents and anyone else acting in a fiduciary capacity regarding life insurance.

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Never hesitate to contact us with your concerns, questions or needs.  Our mission is to generate transparency, advocacy and clarity in the life insurance industry.

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