A Safe Harbor for Trustees Holding Life Insurance
Life insurance inside a trust is different from other trust investments. A trustee managing stocks or real estate is expected to evaluate performance, diversify, and monitor returns. But life insurance does not work that way. The value of a policy depends on the insured person's lifespan, and the trustee has no control over that outcome.
A trustee may acquire or retain a contract of life insurance on the life of the settlor or the settlor's spouse, or both, without liability for a loss arising from the trustee's failure to: 1. Determine whether the contract is or remains a proper investment. 2. Investigate the financial strength of the life insurance company.
A.R.S. § 14-10908(1)-(2)This statute removes four specific sources of liability. A trustee cannot be held responsible for failing to determine whether the policy is a proper investment, for not investigating the insurance company's financial health, for not exercising nonforfeiture provisions, or for not diversifying the insurance contract.
Why This Matters for Irrevocable Life Insurance Trusts
This protection is especially relevant for irrevocable life insurance trusts (ILITs), where holding a life insurance policy is the entire purpose of the trust. Without this safe harbor, a trustee managing an ILIT could face claims that the policy was not diversified or that the insurance company was not financially strong enough.
For families who use life insurance as part of their estate plan, this statute provides reassurance. The trustee can focus on administering the trust properly without the added risk of being blamed for the inherent nature of a life insurance contract.
