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Trusts & Estates - A Shot Across the Bow

A recent court ruling provides valuable guidance to ILIT trustees on how to best serve their clients while steering clear of litigation
By Barry D. Flagg and Steven S. Zeiger
Barry D. Flagg is inventor and founder of Veralytic in Tampa, and
Steven S. Zeiger is president of XRay Your Life Insurance Services in New York City.

In 2009, a ruling by the Indiana Court of Appeals, In Re Stuart Cochran Irrevocable Trust, sent a shot-across-the-bow warning to trustees trying to navigate the changing  irrevocable life insurance trust (ILIT) environment. In ruling for the trustee, the court provided valuable guidance as to how courts may apply the Uniform Prudent Investor Act (UPIA) to cases involving ILITs.

The court examined the prudence of an exchange of trust-owned life insurance (TOLI) holdings in accordance with the principals of the Indiana Prudent Investor Act. In so doing, it clarified the steps trustees should take to fulfill their fiduciary responsibilities and manage TOLI more effectively. If trustees follow a “prudent process” that incorporates information from “an outside, independent entity with no policy to sell or any other financial stake in the outcome,” then courts shouldn’t second-guess a trustee’s decision regarding an ILIT’s holding.

Trustees of ILITs had previously lacked guidance on how the courts would apply the UPIA to TOLI. Consequently, these trustees struggled to manage TOLI holdings with confidence while fulfilling their administrative duties. By following a prudent process prescribed by the UPIA, heeding the guidance provided by the court in Cochran and supplementing it with relevant parallel authority, ILIT trustees can better serve their clients, reduce litigation risk and potentially generate new fees and revenues.

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