On Trustees: When Responsibility Leads to Liability

by Jun 30, 2016

Home Page » On Trustees: When Responsibility Leads to Liability

High-net-worth families rely on Irrevocable Life Insurance Trust as their number one vehicle to manage exposure to estate taxes. Trustees are critical to the realization of these trusts. Yet being a trustee is incredibly risky. Trustees are facing lawsuits with increasing regularity claiming trustees are failing to meet their responsibilities. But often these responsibilities are outside of the trustee’s control. And this is something that grantors need to consider, as trustees becoming scarce.

After more than 30 years of experience managing ILITs, I have a laundry list of reasons why an individual or a corporate trustee should hesitate in taking on this responsibility.

Here is the short list:

  • There is no roadmap of responsibilities for the trustee
  • Failure to issue Crummey Notices and/or follow the steps in notifying the beneficiaries
  • The agent’s failure to have the ILIT implement the insurance policy
  • Improper ownership/beneficiary arrangement of the policy
  • Overwhelming use of Term insurance for what is typically a permanent exposure to estate taxes- this coverage does run out
  • Changes in financial situations prompting the grantor to invade the cash values of the trust
  • Replacement of the policies in the trust with bigger and better policies. If the grantor is older, these options may not be an option
  • Failure to pay the premium
  • Inaccurate premium projections as a result of low interest rates and their impact
  • Grantors growing tired of paying premiums or failing to pay due to incapacity
  • Some Second to Die policy premiums jump in price after the first death
  • Bad faith or self-dealing of the Trustee and the Agent
  • Non Trustee family members at odds with the Trustee and Grantor

Whether the Trustee is an individual (which is the case 90% of the time), or a corporate trustee, the opportunity to be held legally responsible increases with the accumulation of years an ILIT has been in place. The benefits of the insurance are significant but warrant a clear, continuing vigilance of both the trustee and the supporting professional advisors.

If you have questions email Kyle at or call 203.698.9342.

Written by: Steve Shepard

Founder/Principal, Shepard Insurance Group. At Shepard Insurance Group we begin every relationship with a face to face meeting with the client. In a comprehensive discussion of coverage needs, personal concerns, objectives and finally appetite for risk, we can arrive at the proper insurance solution. Understanding the client is the first step to accurate execution.

June 30, 2016

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