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Cochran v. KeyBank - Case Law Guidance

Wednesday, August 5, 2009 8:00:00 AM

"This case is a must-read for any individual or corporate trustee of an ILIT."

While many trustees are facing increased scrutiny of their investment performance in these difficult economic times, trustees of trusts holding life insurance (often referred to as irrevocable life insurance trusts, or "ILITs")[1] face additional challenges in their management of this "special asset". Acknowledging the potentially serious trustee liability, a few states have passed legislation that reduces the trustee's fiduciary responsibility for life insurance as an investment.[2]

However, such protective statutes do not help a trustee to determine how to manage life insurance to maximize the benefit for the trust beneficiaries.

Outside of the few states with protective statutes, the Uniform Prudent Investor Act ("UPIA") and similar statutes require as rigorous a management model for life insurance as for other types of assets.[3] However, until now trustees have had no court guidance regarding the application of the UPIA to life insurance.

A recent Indiana Court of Appeals case appears to provide some comfort to ILIT trustees (and perhaps some consternation to ILIT beneficiaries) in UPIA states by setting a low bar for investment due diligence with respect to life insurance.

However, this case is the first such case involving a claim of breach of fiduciary duty for ILIT trustees, at least the first such case known to these authors. As such, it can hardly be considered evolved case law.

This case is nonetheless instructive as to the various claims dissatisfied beneficiaries may make.

It is also instructive to examine the appropriate steps taken by the trustees and the possible additional actions they could have taken so as to provide a road map for trustee’s intent on avoiding future lawsuits.

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