Irrevocable life insurance trusts or “ILIT’s” are a mainstay of high end estate planning for all sorts of reasons, mostly having to do with saving taxes. For tax reasons, the client usually can’t serve as trustee of his own ILIT. So often family friends (selected for their loyalty to the grantor, knowledge of family dynamics, and willingness to serve without compensation) do the job. What these unsuspecting family-friend trustees never realize is the liability minefield they’re waltzing into [click here].
What to do? Well, you could try to draft around the problem, which isn’t easy and there are no guarantees whatever fix you come up with will survive a court challenge years later before an overworked and understaffed probate judge. Or you could do things the easy way and get the law changed. That’s what Florida did.
Risk Management for ILIT Trustees: Legislative Fix: F.S. 736.0902
As explained in the Legislative Staff Analysis of CS/SB 926, effective July 1, 2010, Florida enacted F.S. 736.0902, statutorily eliminating ILIT trustee liability with respect to (1) insurable interest issues related to the ownership of life insurance and (2) investing in life insurance policies.
The “insurable interest” issues addressed by the ILIT statute are codified in F.S. 627.404. I previously wrote here about how blowing this issue in an ILIT can get you sued. The investment duties waived by the statue for ILIT trustees opting into its protections are found in Florida’s Prudent Investor Rule (F.S. 518.11) and Florida’s Trust Code (F.S. 736.0804).
How Florida’s ILIT Trustee Protection Statute Works:
Under F.S. 736.0902, an ILIT trustee will have NO duty to ensure that there exists an insurable interest in a life insurance policy if:
- the trust owns insurance on the life a “qualified person” which is a new statutory concept defined as the “insured or a proposed insured, or the spouse of that person, who has provided the trustee with funds used to acquire or pay premiums with respect to a policy of insurance” on the life of any of those individuals;
- the trust agreement does not opt out of the application of statute;
- the insurance policy is not purchased from a trustee affiliate nor will the trustee or any trustee affiliate receive commissions related to the policy purchase unless trustee investment duties were delegated to another person;
- the trustees did not know that the beneficiaries lacked an insurable interest when the policy was purchased; and
- the trustee did not have knowledge of a STOLI (stranger-owned life insurance) arrangement.
Moreover, under F.S. 736.0902 an ILIT trustee has NO duty to determine whether the life insurance policy is a proper investment, to diversify with respect to any policy, to investigate the financial strength of the issuing company, to decide whether to exercise any policy options nor to examine the financial and physical health of the insured if [a] the first three criteria above apply and [b] either:
- the trust agreement affirmatively opts in to the application of the statute, or
- the trustee gives notice to the trust beneficiaries of the trustee’s intention to opt in to the statute, and no beneficiary objects within 30 days of receipt of that notice or any written objections are withdrawn.
Practice Pointer: ILIT Trustee Statutory Protections are NOT Automatic: Must “Opt In”
The new ILIT statute isn’t self effectuating. In other words, if you want its protections you have to affirmatively opt into its application. You can do this in one of two ways. First, you can include a clause in the trust agreement affirmatively opting into F.S. 736.0902. This is the only way to guarantee the statue will apply to your ILIT. Why? Because the second way to opt into F.S. 736.0902 is by giving all of the ILIT’s beneficiaries notice and an opportunity to object. If even one person objects, the statute’s investment-duty protections will NOT apply. This is an important point. Here’s how the notice/objection regime is laid out in subsection (5)(b) of F.S. 736.0902:
- The notice of the application of this section shall be given to the qualified beneficiaries and shall contain a copy or restatement of this section.
- Notice given pursuant to any of the provisions of part III of this chapter to a person who represents the interests of any of the persons set forth in subparagraph 1. shall be treated as notice to the person so represented.
- Notice shall be given in the manner provided in s. 736.0109.
- If any person notified pursuant to this paragraph delivers a written objection to the application of this section to the trustee within 30 days after the date on which the objector received such notice, paragraphs (1)(b)-(f) shall not apply until the objection is withdrawn.
- There shall exist a rebuttable presumption that any notice sent by United States mail is received 3 days after depositing the notice in the United States mail system with proper postage prepaid.