The April 2003 issue of Financial Advisor magazine cites one of many cases in which lawyers retained by the beneficiaries of an Irrevocable Life Insurance Trust (ILIT) successfully sought damages based on the trustee’s failure to investigate other products from similarly rated insurers, but which offered lower policy expenses, and this could have provided the beneficiaries with greater death benefits. Because these cases have been settled out of court, they do not create legal precedent.
However, the fact they have been settled out of court “without a fight” does show there is simply no defense to SECTION 7, INVESTMENT COSTS of the Prudent Investor Act which clearly states that a “trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee”, that “wasting beneficiaries’ money is imprudent” and that “trustees are obliged to minimize costs”. The fact that this and a number of other cases have settled out of court shows there is simply no defense when an ILIT trusts pays cost of insurance charges (COIs), fixed administration expenses (FAEs), cash-value-based “wrap fees” (e.g. M&Es) and/or premium loads that cannot be justified.