STATUTORY EXCULPATION OF TRUSTEES … EXCULPATION OF TRUSTEES HOLDING LIFE INSURANCE POLICIES ... Duties to Monitor the Trust ... life insurance companies began offering an array of

STATUTORY EXCULPATION OF TRUSTEES HOLDING LIFE INSURANCE POLICIES

Trent S. Kiziah

Editors’ Synopsis: Thirteen states have enacted statutes that exculpate a trustee from any losses sustained with respect to life insurance held by the trustee. The breadth of protection varies in each state. This Article examines these thirteen statutes by noting the overarching themes and the numerous variations. This Article also examines the stated objectives of the statutes, questions those objectives, and offers suggestions for modifications to improve the statutes’ effectiveness if wisdom dictates their retention.

I. INTRODUCTION ...................................................................... 328

II. HISTORICAL DEVELOPMENT ............................................... 329

A. Life Insurance Evolution ................................................. 329

B. Evolution in Trust Investment Law ................................. 331

C. Legislative History .......................................................... 334

1. Effectuate Settlor Intent ............................................ 334

2. Attract Trust Business ............................................... 335

III. STATUTORY ANALYSIS ......................................................... 336

A. Acquisition Limitations ................................................... 336

B. Automatic Coverage v. Opting In .................................... 338

C. Waiver of Duty and Exculpation v. Sole Exculpation ...... 341

D. Limitation on the Insured ................................................ 342

E. Duties Waived ................................................................ 344

F. Effective Date ................................................................. 347

G. Fees ................................................................................ 349

H. Insurance Purchased from an Affiliate ............................. 349

IV. COMMENTARY ....................................................................... 349

A. Statutes Effectuate Antiquated Mindset ........................... 349

B. Statutes Run Counter to Core Fiduciary Principles .......... 350

C. Statutes Are Overly Broad .............................................. 354

D. Alternatives .................................................................... 356

1. Directing Otherwise–Its Limitations ......................... 356

2. Delegation ................................................................ 359

3. Trust Advisor ............................................................ 361

4. A Statutory Alternative.............................................. 363

Trent S. Kiziah is Senior Vice-President at U.S. Trust, Bank of America Private Wealth Management. The views expressed are solely the author’s and not that of U.S. Trust, Bank of America Private Wealth Management.

328 47 REAL PROPERTY, TRUST AND ESTATE LAW JOURNAL

a. Exculpation Contingent on Selection of Trust Advisor ............................................................... 363

b. Directed Trustee Relieved of all Fiduciary Duties to Monitor the Trust Advisor .................... 364

c. Specification of “Acquiring” and “Retaining” ... 364

d. Waiver of all Investment Duties and Exculpation ........................................................ 364

e. Waiver of Duty to Diversify ................................ 364

f. Notice to Qualified Beneficiaries ........................ 364

g. Retroactive Application ...................................... 365

V. CONCLUSION ......................................................................... 365

I. INTRODUCTION1

Thirteen states have enacted statutes protecting trustees from losses arising from life insurance policies held by the trustee.2 A majority of the statutes relieve the trustee from a list of enumerated investment duties and exonerate the trustee from any loss arising from the life insurance policies held by the trustee.3 A minority simply exonerate the trustee for failure to perform certain duties.4 Nearly all of the statutes permit the retention of pol-icies conveyed to the trustee.5 Many permit the trustee to purchase the pol-

1 This article assumes the reader is knowledgeable of the federal estate tax reasons

motivating settlors to establish Irrevocable Life Insurance Trusts (ILITs) and transfer life insurance policies to those trusts or, in the alternative, to establish ILITs and have the trustee purchase the life insurance policy. For more information on the estate tax reasons for ILITs, see Jon J. Gallo, The Use of Life Insurance in Estate Planning: A Guide to Planning and Drafting—Part I, 33 REAL PROP. PROB. & TR. J. 685, 710–716 (1999); Jon J. Gallo, The Use of Life Insurance in Estate Planning: A Guide to Planning and Drafting—Part II, 34 REAL

PROP. PROB. & TR. J. 55 (1999); Georgiana J. Slade, 807-2nd Tax Mgmt. Portfolio (BNA), Personal Life Insurance Trusts, at A3–A4 (2009).

2 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908 (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); FLA. STAT. ANN. § 736.0902 (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1 (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J) (2009); S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011); TENN. CODE ANN. § 35-14-105(c) (2007); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)); WYO. STAT. ANN. § 4-10-902(g) (2011); see also W.VA. CODE ANN. § 44-6-2a (2011) (an exculpation statute repealed by 2011 W.Va. Acts ch. 66, effective June 10, 2011).

3 See infra Part III.C. 4 See infra Part III.C. 5 See infra Part III.A.

FALL 2012 Statutory Exculpation of Trustees 329

icy even though the trustee has no responsibility to ensure that the pur-chased policy is a good investment.6 This article examines these thirteen statutes, hereinafter referred to as the “exculpation statutes,” by noting the overarching themes and numerous variations. It examines the stated objec-tives of the statutes, questions those objectives, and offers suggestions for modifications to improve the statutes’ effectiveness if wisdom dictates their retention.

II. HISTORICAL DEVELOPMENT

To analyze the exculpation statutes properly and address possible meth-ods to improve stated objectives, a historical perspective of the radical changes that have occurred over the last half-century in life insurance and trust investment law is in order.

A. Life Insurance Evolution

Before the 1970s, the two most prevalent types of life insurance policies offered by insurance companies were term and whole life.7 These policies are still available today. Term insurance provides temporary protection and does not have a cash value component.8 Whole life insurance, hereinafter “traditional whole life,” possesses a cash value and provides lifetime protec-tion.9 Prior to the 1970s, state laws restricted the nature of the investments that life insurance companies could invest in.10 Due to these investment lim-itations, traditional whole life policies bore low rates of return.11

With traditional whole life policies, the policy owner needs to prudently choose a financially-sound insurance company, monitor the financial stabil-ity of the chosen company, timely pay premiums, and cash in the policy if adverse circumstances warrant it.12 In reality, many policy owners of tradi-tional whole life insurance policies rarely, if ever, monitor the financial sta-

6 See infra Part II.A. 7 See Barry L. Kohler, The Sinking ILIT Policy: A Certain Disaster For Clients, A

Potential Catastrophe for Attorneys and Advisors, 21 ME. BUS. J. 160, 162 (2006); see also Lawrence J. Rybka, Insurance Policy Selection for Irrevocable Life Insurance Trusts: New Challenges for Trustees and Advisors, 141 TR. & EST. 44, 45 (2002).

8 See GEORGE E. REJDA, PRINCIPLES OF RISK MANAGEMENT AND INSURANCE 331 (8th ed. 2003).

9 See id. at 332. 10 See Rybka, supra note 7. 11 See REJDA, supra note 8, at 336. 12 See JOSEPH M. BELTH, LIFE INSURANCE: A CONSUMER’S HANDBOOK 162 (2d ed.

1985).


bility of the company.13 Policy owners view life insurance as a product to be purchased and safely stored.14 Many policy owners view traditional whole life insurance policies as passive investments.15

The inflationary period of the 1970s detrimentally affected traditional whole life insurance policies by causing a substantial reduction in the buy-ing power of the fixed death benefit amount.16 To attract investors in light of inflation, life insurance companies began offering an array of new poli-cies such as variable life, universal life, and variable universal life.17 These new policies unbundled the mortality charges, expense charges, and savings component of the policies.18 These new policies are very flexible, allowing the policy owner to modify the amount and frequency of premium payments (including the option of making a single premium payment); to cease mak-ing premium payments under certain conditions without terminating the contract; to borrow from the policy; and, in some cases, to include addition-al insureds.19 In a variable universal life insurance policy, the policy owner has numerous investment options, such as selecting among numerous stock and bond funds, which the policy owner can modify during most of the pol-icy term.20 The new life insurance policies require much more active man-agement and monitoring than traditional whole life insurance policies.21

13 See BEN G. BALDWIN, THE NEW LIFE INSURANCE INVESTMENT ADVISOR 395 (2d ed.

2002). 14 See BELTH, supra note 12, at 161-162. 15 See id. Belth recommended that insureds review their life insurance policies at least

annually, with a thorough review every two years. Notably, the recommended review solely consisted of checking the beneficiary designation and the settlement options chosen to take effect upon the insured’s demise. Interestingly, Belth notes, “[d]espite what some would have you believe, nothing is inherently wrong or immoral about replacement [of the policy].” Id. at 163. The statement is a telling indication of the mindset in place before the radical changes in the life insurance industry fully took effect.

16 See BALDWIN, supra note 13, at 53. 17 See REJDA, supra note 8, at 336–37, 343; see also Beverly R. Budin, 826-2nd Tax

Mgmt. Portfolio (BNA), Life Insurance, pt. III.G.1, at A-81 (2006) (“universal life insurance . . . was designed in the late 1970s as an investment vehicle that could compete with bank accounts, bonds, and other investments, which were then offering high yields.”).

18 See REJDA, supra note 8, at 337–38. 19 See id. at 340–41; Budin, supra note 17 (a more detailed analysis of the differences

between traditional whole life and universal life insurance policies). 20 See REJDA, supra note 8, at 343; Kohler, supra note 7; see also Rybka, supra note 7,

at 49-50. 21 See Stuart Cochran Irrevocable Trust v. KeyBank, N.A., 901 N.E.2d 1128, 1131 n.1

(Ind. Ct. App. 2009); Kohler, supra note 7, at 163.


Unfortunately, as discussed more fully in Part III.A, while life insurance policies have substantially evolved during the last half-century, policy own-ers do not realize fully the investment opportunities available because they still view life insurance as a passive investment. Ultimately, changes oc-curred in trust investment law, resulting in a clash between trustees’ invest-ment duties and settlors’ objectives in establishing ILITs.22

B. Evolution in Trust Investment Law

During the last quarter-century, trust investment law evolved to ac-commodate modern investment theories.23 Diversification stands at the core of modern prudent investing.24 Uniform Prudent Investor Act (UPIA) sec-tion 3 made diversification a fundamental tenet of prudent management.25 Forty-eight states and the District of Columbia have adopted provisions identical to UPIA section 3 or modified that section to some degree but re-tained the duty to diversify.26 Delaware does not statutorily impose a duty to

22 The term “settlor” appears throughout this article for consistency and includes

“grantor,” “trustor,” and similar terms that refer to the individual who establishes the trust. 23 See UNIF. PRUDENT INVESTOR ACT, prefatory note, 7B U.L.A. 3 (2006); John H.

Langbein, The Uniform Prudent Investor Act and the Future of Trust Investing, 81 IOWA L. REV. 641, 642 (1996) [hereinafter Langbein, UPIA].

24 David B. Chua et al., The Myth of Diversification, J. OF PORTFOLIO MGMT., Fall 2009 at 26, 26.

25 See UNIF. PRUDENT INVESTOR ACT § 3, 7B U.L.A. 29 (2006) (“A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.”).

26 Thirty-one states have adopted UPIA section 3 without changes or have made only minor editorial changes. See ALASKA STAT. § 13.36.235 (2010); ARIZ. REV. STAT. ANN. § 14-10903 (2005); ARK. CODE ANN. § 28-73-903 (2012); COLO. REV. STAT. § 15-1.1-103 (2011); CONN. GEN. STAT. ANN. § 45a-541(c) (West 2004); D.C. CODE § 19-1309.03 (LexisNexis 2008); IDAHO CODE ANN. § 68-503 (2006); IND. CODE ANN. § 30-4-3.5-3 (LexisNexis 2011); KAN. STAT. ANN. § 58-24a03 (2005) (replacing “trustee” with “fiduciary”); ME. REV. STAT. ANN. tit. 18-B, § 903 (2012); MICH. COMP. LAWS ANN. § 700.1504 (West 2002) (making several editorial changes, including replacing “trustee” with “fiduciary”); MINN. STAT. ANN. § 501B.151(3) (West 2002); MISS. CODE ANN. § 91-9-605 (Supp. 2011); MO. ANN. STAT. § 469.903 (West 2007); NEB. REV. STAT. § 30-3885 (2008); NEV. REV. STAT. ANN. 164.750 (LexisNexis 2009), N.H. REV. STAT. ANN. § 564-B:9-903 (LexisNexis 2006); N.J. STAT. ANN. § 3B:20-11.4 (West Supp. 2011) (replacing “trustee” with “fiduciary”); N.M. STAT. ANN. § 45-7-604 (LexisNexis 2004); N.C. GEN. STAT. § 36C-9-903 (2011); N.D. CENT. CODE § 59-17-03 (2010); OHIO REV. CODE ANN. § 5809.03(B) (West Supp. 2012) (replacing “the” with “a” before “trust”); OKLA. STAT. tit. 60, § 60-175.63 (2010); OR. REV. STAT. § 130.760) (2011); R.I. GEN. LAWS § 18-15-3 (2003); S.C. CODE ANN. § 62-7-933(D) (2009); TEX. PROP. CODE ANN. § 117.005 (West 2007); UTAH CODE ANN. § 75-7-903 (LexisNexis Supp. 2011); VT. STAT. ANN. tit. 14A, § 903 (2010); VA. CODE ANN. § 64.2-783 (Westlaw


diversify, but case law imposes the duty.27 Louisiana’s statute does not men-tion diversification, but the comments to the statute provide: “[D]iversification usually is necessary to reduce risk.”28 In summary, all of the states and the District of Columbia impose some duty to diversify.

As stated in the comments to UPIA section 3, “nobody pays the investor for owning too few stocks.”29 An investor, therefore, receives decreased market benefit from retaining a concentration.30 Because an investor can reduce the risk of holding a concentration by diversifying but not decrease the return, holding a concentration is imprudent, unless nonmarket factors justify retaining the concentration.31 Unless special circumstances exist or the trust waives the duty to diversify, the UPIA requires a trustee to diversi-fy because prudence dictates over a fiduciary’s taking uncompensated risk.32 Thus, “[s]ound diversification is fundamental to the management of uncompensated risk.”33

The duty to diversify is not absolute.34 Diversification is not required if “the trustee reasonably determines that, because of special circumstances,

2012) (formerly cited as VA. CODE ANN. § 26-45.5 (2011)); W.VA. CODE ANN. § 44-6C-3 (LexisNexis 2010); WYO. STAT. ANN. § 4-10-903 (2011).

Seventeen states have modified UPIA section 3 to some degree but retain the duty to diversify. See ALA. CODE § 19-3B-903 (LexisNexis 2007); CAL. PROB. CODE § 16048 (West 2011); FLA. STAT. ANN. § 518.11(1)(c) (West 2007); GA. CODE ANN. § 53-12-341 (2011); HAW. REV. STAT. ANN. § 554C-3 (LexisNexis 2006); 760 ILL. COMP. STAT. ANN. 5/5(a)(3) (West 2007); IOWA CODE ANN. § 633A.4303 (West Supp. 2011); KY. REV. STAT. § 286.3-277(3) (LexisNexis 2007); MD. CODE ANN., EST. & TRUSTS § 15-114(b)(4) (LexisNexis 2011); MASS. GEN. LAWS ANN. ch. 203C § 4 (West 2004); MONT. CODE ANN. § 72-34-605 (2011); N.Y. EST. POWERS & TRUSTS LAW § 11-2.3(b)(3)(C) (McKinney 2008); 20 PA. CONS. STAT. ANN. § 7204 (West 2005); S.D. CODIFIED LAWS § 55-5-8 (Supp. 2011); TENN. CODE

ANN. § 35-14-105 (2007); WASH. REV. CODE ANN. 11.100.047 (West 2006); WIS. STAT. ANN. § 881.01(4) (West Supp. 2011).

27 See Merrill Lynch Trust Co. v. Campbell, No. 1803-VCN, 2009 WL 2913893, at *7 (Del. Ch. Sept. 2, 2009); Law v. Law, 753 A.2d 443, 447 (Del. 2000).

28 LA. REV. STAT. ANN. § 9:2127 (2005). 29 UNIF. PRUDENT INVESTOR ACT § 3 cmt., 7B U.L.A. 30 (2006). 30 See W. SCOTT SIMON, INDEX MUTUAL FUNDS: PROFITING FROM AN INVESTMENT

REVOLUTION, 165–66 (1998). 31 See Diversification and Retention of Inception Assets, PRAC. DRAFTING, 7026, 7033

(Richard B. Covey, ed., 2002). 32 See id. at 7029–32. 33 Edward C. Halbach Jr., Trust Investment Law in the Third Restatement, 27 REAL

PROP. PROB. & TR. J. 407, 437 (1992). 34 See RESTATEMENT (THIRD) OF TRUSTS § 92 cmt. d(2) (2007).


the purposes of the trust are better served without diversifying.”35 The UPIA does, however, require a trustee to consider “an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.”36 Even if the trust does not expressly waive the duty to diver-sify, a trustee may retain a concentration with a “special relationship” or “special value” to the purposes of the trust because it constitutes a “special circumstance” under UPIA section 3.37

A settlor establishes an ILIT to hold life insurance, generally contem-plating that a life insurance policy on the settlor’s life will be the sole asset of the ILIT during the settlor’s life.38 Arguably, retention of a single life insurance policy in an ILIT is a special circumstance that effectuates the settlor’s intent and therefore the duty to diversify is waived. Notwith-standing this argument, however, the strong bias in favor of diversification causes concern among trustees.39

Even if the duty to diversify is waived, the trustee has the duty to pru-dently manage the trust assets.40 The trustee must manage the “assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this stan-dard, the trustee shall exercise reasonable care, skill, and caution.”41 This duty of prudent management applies to all assets held by the trustee, includ-ing life insurance policies.42 While life insurance possesses unique charac-teristics that distinguish it from other assets, such as stocks and bonds, it is

35 UNIF. PRUDENT INVESTOR ACT § 3, 7B U.L.A. 29 (2006). Diversification can also be

waived. “The prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust.” UNIF. PRUDENT INVESTOR ACT § 1(b), 7B U.L.A. 15 (2006).

36 UNIF. PRUDENT INVESTOR ACT § 2(c)(8), 7B U.L.A. 20 (2006). 37 Id.; UNIF. PRUDENT INVESTOR ACT § 3, 7B U.L.A. 29 (2006). 38 See J. Rodney Johnson, Wills, Trusts, and Estates, 32 U. RICH. L. REV. 1405, 1412

(1998) (“Quite often, this insurance policy will be the only asset of the trust during the settlor’s lifetime. . . .”).

39 See John P.C. Duncan and Anita M. Sarafa, Achieve the Promise—and Limit the Risk—of Multi-Participant Trusts, 36 ACTEC J. 769, 777 (2011); see also Kathryn A. Ballsun, Patrick J. Collins & Dieter Jurkat, Trustee Administration of Life Insurance, 31 ACTEC J. 280, 291 (2006) [hereinafter Ballsun et al., Administration].

40 See RESTATEMENT (THIRD) OF TRUSTS § 90 (2007). 41 UNIF. PRUDENT INVESTOR ACT § 2(a), 7B U.L.A. 20 (2006). 42 See Ballsun et al., Administration, supra note 39, at 282; see also Stuart Cochran

Irrevocable Trust v. KeyBank, N.A., 901 N.E.2d 1128 (Ind. Ct. App. 2009) (holding that the corporate trustee had a fiduciary duty to prudently manage the insurance policy held by the trust and that it met that duty).


an investment and the trustee must manage it in a prudent manner unless the trust or governing law modifies the trustee’s investment duties.43

The ILIT trustee has the general investment duties: (1) to investigate the financial strength of the life insurance company issuing the policy; (2) to select the proper life insurance policy to purchase for the trust given the purposes, terms, distribution requirements, and other circumstances of the trust; (3) to monitor the condition of the policy and the life insurance carrier after purchasing the policy; (4) to determine if and when to exercise policy options available under the contract; (5) to determine whether to diversify the trust portfolio by holding multiple insurance carriers’ policies with dif-ferent investment options and terms and diversifying among other asset classes; and (6) to inquire about changes in the health or financial condition of the insured.44

Notwithstanding the complexity of life insurance policies and the evolu-tion of trust investment law, settlors generally desire that trustees passively hold life insurance policies in ILITs.45 While the UPIA arguably accommo-dates the retention of a single asset in an ILIT because it effectuates the set-tlor’s intent, trustees often insist that the trust agreement waive diversification and relieve the trustee of any duty to manage the insurance policy.46 Because many ILITs fail to contain the desired waiver language, legislatures in thirteen states have enacted legislation to provide exculpa-tion.47

C. Legislative History

The little legislative history that exists concerning the enactment of the exculpation statutes indicates that the goals of the statutes are to effectuate settlor intent and attract trust business to the state.

1. Effectuate Settlor Intent

The legislative history of Florida’s exculpation statute provides:

Since the creator of the trust chooses the insurance carrier, the policy, and whether to continue to pay premiums on the

43 See Ballsun et al., Administration, supra note 39, at 283; see also Rybka, supra note

7, at 4950. 44 See Kathryn A. Ballsun, Patrick J. Collins & Dieter Jurkat, Evidencing Care, Skill

and Caution in The Management of ILITs, 32 ACTEC J. 145 (2006). 45 See Ballsun et al., Administration, supra note 39, at 290. 46 See Duncan & Sarafa, supra note 39. 47 See infra Part II.C.


policy, it is unnecessary to charge the trustee with the duty to determine the appropriateness of those decisions. . . . . . . . . . . Imposing upon the trustee of an ILIT the duty to review the appropriateness of these decisions is considered by many to be impractical.48

The legislative history to Delaware’s exculpation statute provides:

Section 2 [the exculpation provision] addresses a problem involving irrevocable life insurance trusts. Delaware trustees who are called upon to hold life insurance policies as trust assets often have no involvement in the decision to obtain such insurance, the selection of the insurance company, the determination of the terms and investment options under a particular policy, or the application for a particular policy. Given their passive role in the procurement and retention of such assets, Section 2 is intended to protect Delaware trustees from liability for holding life insurance policies among the assets of trusts they administer.49

According to the legislative history, settlors pick the insurance compa-nies and the insurance policies.50 Because trustees are passive in the pro-curement and retention of such policies, the statutes protect the trustees from liability for holding the policies.51

2. Attract Trust Business

The Florida legislative history indicates that the exculpation statute fa-cilitates trust business.52 Similarly, Delaware’s legislative history provides: “[b]ecause other states have already adopted comparable legislation, enact-

48 PROF’L STAFF OF THE BANKING AND INS. COMM. OF THE FLA. SENATE, BILL ANALYSIS

AND FISCAL IMPACT STATEMENT, S.B. 926, 2010 Leg., Reg. Sess., at 1, 3 (2010). Legislative history does not exist in the other eleven states surrounding their enactment of life insurance exculpation statutes.

49 S.B. 123, 142nd Gen. Assembly (Del. 2003) (Synopsis). 50 See id. 51 The logic here is suspect. Settlors’ active involvement in the procurement does not

necessarily mean that settlors desire trustees to be passive throughout the term of the trust. It is not clear why trustees should necessarily be passive merely because the settlors continue to pay premiums.

52 See ADMIN OF LIFE INS. CONTRACTS, HOUSE OF REPRESENTATIVES STAFF ANALYSIS, H.B. 501, 2010 Leg., Reg. Sess., at 7 (Fla. 2010).


ment of Section 2 would help maintain Delaware’s competitive position as a favorable jurisdiction for trusts.”53

III. STATUTORY ANALYSIS

All of the exculpation statutes limit entry into exculpation. Many of the statutes have several hurdles the trustee must overcome to obtain protection.

A. Acquisition Limitations

Because all of the statutes exculpate the trustee for failing to comply with long-standing fiduciary duties of prudent management, courts may construe the provisions narrowly and, therefore, only exculpate trustees when their inaction falls within the express terms of the statute.54 Virginia’s statute specifically provides that “apart from these specific authorities, this subsection is not intended and shall not be construed to affect the applica-tion of the standard of judgment and care as set forth in this section.”55

Ten of the statutes provide that the trustee may acquire or retain life in-surance policies on certain individuals without placing any limits on how the trustee acquires the policy.56 For example, Pennsylvania’s exculpation statute provides that “a trustee may acquire or retain a contract of life insurance upon the life of the settlor or the settlor’s spouse, or both, without liability for loss.”57 The statute does not limit how the trustee acquires the policy; it mere-ly limits exculpation to life insurance policies on certain individuals.58

Alabama’s statute provides that “a trustee may retain any life insurance policy contributed to a trust by a settlor, or purchased by the trustee upon the request of the settlor.”59It does not cover a policy contributed by the set-

53 S.B. 123, 142nd Gen. Assembly (Del. 2003) (Synopsis). 54 See infra Part III.C for further development of this assumption concerning statutory

construction. 55 VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN.

§ 26-45.4(G) (2011)). 56 See ARIZ. REV. STAT. ANN. § 14-10908 (Supp. 2011); DEL. CODE ANN. tit. 12,

§ 3302(d) (2007); FLA. STAT. ANN. § 736.0902 (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1(a) (2011); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J)(1) (2009); S.D. CODIFIED

LAWS § 55-5-17(a) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(1) (2007); WYO. STAT. ANN. § 4-10-902(g) (2011).

57 20 PA. CONS. STAT. ANN. § 7208 (West 2005). 58 See infra Part III.D for analysis of the insured limitation. 59 ALA. CODE § 19-3B-818 (LexisNexis 2007). The term “settlor” refers to “a person,

including a testator, who creates, or contributes property to, a trust.” ALA. CODE § 19-3B-103(16) (LexisNexis 2007).


tlor’s spouse or another party.60 It also does not apply to insurance that the trustee purchased on the trustee’s own initiative.61

North Dakota’s statute provides:

The trustee’s exoneration from duty provided in this section does not apply to the replacement policy and only applies to a policy transferred to a trust by the grantor or some other party other than the trustee or acquired by the trustee of a trust which before the acquisition of the policy had never owned any such life insurance policy.62

North Dakota’s statute applies to any policy transferred to the trust by any party “other than the trustee.”63 The statute specifically permits the trus-tee to acquire a policy, but only if before the acquisition of the policy, the trust “had never owned any such life insurance policy.”64 The statute is am-biguous about what policy it references. How can the trustee acquire a poli-cy that the trustee already owns?65 Does the statute only apply if the trust had never owned life insurance before?66 If so, the statute would only cover the first insurance policy purchased by the trustee, and a replacement policy is outside the scope of the statute. Notwithstanding the ambiguities, North Dakota’s statute clearly limits the policies covered by limiting the manner of a acquisition.

Virginia’s statute provides that “a trustee may hold any policies of life insurance acquired by gift or pursuant to an express permission or direction in the governing instrument.”67 Virginia’s statute is broader than Alabama’s statute because Virginia’s statute covers any policy acquired by gift and not solely policies contributed by the settlor.68 The phrase “pursuant to an ex-

60 See ALA. CODE § 19-3B-818 (LexisNexis 2007). 61 See id. 62 N.D. CENT. CODE § 26.1-33-44 (2010). 63 Id. The legislative intent of the phrase “other than the trustee” is unclear. Rarely

would a trustee transfer a policy to another trust, except in a decanting. Surely, the statute means that the trustee transfers in a fiduciary capacity and, therefore, would not prohibit the insured’s spouse or another family member from acquiring the policy and transferring it to himself as trustee of the trust.

64 Id. 65 This interpretation limits the term “such” to a particular policy. 66 This interpretation suggests the term “such” refers to “a” life insurance policy. 67 VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN.

§ 26-45.4(G) (2011)). 68 Compare id., with ALA. CODE § 19-3B-818 (LexisNexis 2007).


press permission or direction in the governing instrument” permits the trus-tee to hold a life insurance policy not acquired by gift, such as by purchase or exchange.69 However, the statute arguably protects only the retention, not the actual acquisition.70

South Carolina’s statute relieves a trustee of investment duties with re-spect to “acquiring a contract of insurance” but does not specifically address retention of the policy.71 Arguably, South Carolina’s statute addresses reten-tion because it provides that the trustee does not have a duty to “(a) deter-mine whether the contract is or remains a proper investment; (b) exercise policy options available under the contract; or (c) diversify the contract.”72 Because these duties are ongoing, the statute probably addresses retention; however, the statute only refers to “acquiring” a contract of life insurance.73 The absence of any reference to actual retention may cause trustees some concern in South Carolina.

As illustrated in this Part, several of the statutes limit entry into excul-pation by restricting coverage in the acquisition of the policy and possibly, in one case, the retention of the policy.

B. Automatic Coverage v. Opting In

With few exceptions, trust law is the default law.74 The default law ap-plies if the settlor does not otherwise direct.75 The thirteen exculpation stat-utes do not require the trust to contain a reference to the statute for the trustee to obtain exculpation.76 In fact, Florida, Ohio, South Dakota, and

69 VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN.

§ 26-45.4(G) (2011)). 70 See id. Thus, the trustee may have a fiduciary duty to prudently select the policy but

no continuing duty to monitor it. 71 S.C. CODE ANN. § 62-7-933(J)(1) (2009). 72 Id. 73 Id. 74 See 1 AUSTIN WAKEMAN SCOTT ET AL., SCOTT AND ASCHER ON TRUSTS § 2.2.4, at

42–49 (5th ed. 2006); John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 YALE L.J. 625, 650 (1995) [hereinafter Langbein, Contractarian]. The Uniform Trust Code provides: “[t]he terms of a trust prevail over any provision of this [Code] except” 14 provisions outlined in the code that cannot be overridden by the trust. UNIF. TRUST CODE § 105(b) (amended 2005), 7C U.L.A. 133 (Supp. 2011).

75 See Langbein, Contractarian, supra note 74. 76 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908

(Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); FLA. STAT. ANN. § 736.0902 (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1 (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208


Tennessee make it clear that their exculpation statutes operate unless the trust agreement contains a contrary direction.77 In other words the statutes apply unless the trust agreement affirmatively opts out of the statute. In the remaining nine states the settlor presumably can opt out by directing against application of the exculpation statute because trust law is the default law.78

An issue then arises regarding what language constitutes a sufficient di-rection against the application of the exculpation statutes. A specific refer-ence in the trust directing that the exculpation statute not apply would surely constitute a sufficient direction. If the trust contains elaborate provisions authorizing the trustee to manage life insurance policies, does the trust di-rect against application of the exculpation statute? If the settlor intends that the trustee not have any investment responsibilities, why would a trust con-tain elaborate provisions granting the trustee power to manage life insur-ance? If the trust contains a standard provision merely granting the trustee the power to manage trust assets, is that standard provision a sufficient di-rection against the exculpation statute application? If the settlor did not in-tend for the trustee to manage the life insurance policy, being the only asset of the trust, why would the trust contain the standard investment powers clause? Arguably, the standard powers clause applies after the insured’s death, but the standard clause rarely conditions investment powers on the insured’s demise.79 The statutes are silent as to what constitutes a sufficient direction against application.80

(West 2005); S.C. CODE ANN. § 62-7-933(J) (2009); S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011); TENN. CODE ANN. § 35-14-105(c) (2007); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)); WYO. STAT. ANN. § 4-10-902(g) (2011).

77 See FLA. STAT. ANN. § 736.0902(5)(a) (West Supp. 2012); OHIO REV. CODE ANN. § 5809.031(A) (West Supp. 2012); S.D. CODIFIED LAWS § 55-5-17(a) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(1) (2007).

78 See Langbein, Contractarian, supra note 74. 79 See RESTATEMENT (THIRD) OF TRUSTS § 90 (2003). 80 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908

(Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); FLA. STAT. ANN. § 736.0902 (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1 (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J) (2009); S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011); TENN. CODE ANN. § 35-14-105(c) (2007); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)); WYO. STAT. ANN. § 4-10-902(g) (2011).


In ten of the states, the trustee need not take any steps to receive the lia-bility coverage offered by the statutes.81 Delaware, Florida, and Wyoming, however, require the trustee to give notice to receive protection.82 Thus, the trustee in these three states must affirmatively opt in to the statute by giving notice. In Delaware and Wyoming, trustees must give notice to the insured, even if the trust limits their duties.83 Providing notice to the insured seems misplaced. Admittedly, the insured often provides the funding and selects the policy. Thus, notice to the insured will likely target the person with a substantial interest in the trust. However, Delaware and Wyoming place no time limitation on when the trustee may elect into the statute; thus, opting in can occur long after the policy contribution or purchase. Possibly, the in-sured will be incompetent at the time the trustee decides to give notice. Since the policy can also be a joint and survivor policy on the lives of the settlor and the settlor’s spouse, giving notice to the spouse after the settlor’s death may result in giving notice to a party with little concern for the bene-ficiaries, if the beneficiaries are children of the settlor’s prior marriage.84 It seems wiser for these statutes to require that the trustee give notice to the beneficiaries.

In Florida, exculpation applies if the trust instrument refers to the stat-ute or if the trustee gives notice to qualified beneficiaries.85 Unlike Dela-

81 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908 (Supp. 2011); N.C. GEN. STAT. § 36C-9-903.1 (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J) (2009); S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011); TENN. CODE ANN. § 35-14-105(c) (2007); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)).

82 See DEL CODE ANN. tit. 12, § 3302(d) (2007); FLA. STAT. ANN. § 736.0902(5)(b) (West Supp. 2012) (requiring notice unless the trust, by reference to the statute, makes the statute applicable); WYO. STAT. ANN. § 4-10-902(g) (2011). North Carolina requires notice to be given to the settlor for trusts established prior to October 1, 1995 but does not require notice to be given to trusts established after that date. N.C. GEN. STAT. § 36C-9-903.1 (2011). South Dakota requires notice to be given to the settlor of a trust established before the effective date but does not require notice to be given to trusts established after that date. S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011). See infra Part III.F for further discussion of the effective date provisions.

83 See DEL. CODE ANN. tit. 12, § 3302(d) (2007); WYO. STAT. ANN. § 4-10-902(g) (2011).

84 See DEL. CODE ANN. tit. 12, § 3302(d) (2007); WYO. STAT. ANN. § 4-10-902(g) (2011). These statutes only cover life insurance on the settlor, the settlor’s spouse, or both.

85 See FLA. STAT. ANN. § 736.0902(5)(a)(b) (West Supp. 2012). The term “qualified beneficiary” is defined in FLA. STAT. ANN. § 736.0103(14) (West 2010) and is almost identical to the definition provided in UNIF. TR. CODE § 103(13), 7C U.L.A. 414 (2006) (amended 2005).


ware and Wyoming, Florida does not require the trustee to give notice if the trust limits the trustee’s duties and references the statute.86 If the trust does not contain a reference to the statute, then the trustee can opt in to the stat-ute by giving notice to the qualified beneficiaries, the real parties in inter-est.87

C. Waiver of Duty and Exculpation v. Sole Exculpation

Of the thirteen statutes, twelve expressly exculpate the trustee from any loss sustained by the trust arising from life insurance policies owned by the trust.88 The states protect the trustee by different means: eight of the statutes relieve the trustee from listed investment duties regarding life insurance policies owned by the trust89 and the other five statutes solely exculpate the trustee from losses that may arise but do not waive the fiduciary duties.90

An exculpation clause does not alter the standard of care but rather lim-its the liability of a trustee who fails to act prudently.91 An exculpation clause is distinguishable from a clause that relieves a trustee from a particu-lar duty.92 The trustee does not commit a breach of trust by failing to do an

86 See id. 87 See id. 88 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908

(Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); FLA. STAT. ANN. § 736.0902(3) (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1(a) (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031(B) (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J)(2) (2009); S.D. CODIFIED LAWS § 55-5-17(a) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(2) (2007); WYO. STAT. ANN. § 4-10-902(g) (2011). But see VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)) (not specifically exculpating the trustee but simply stating the trustee does not have certain investment duties.).

89 See FLA. STAT. ANN. § 736.0902(1) (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1(a) (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031(A) (West Supp. 2012); S.C. CODE ANN. § 62-7-933(J)(1) (2009); S.D. CODIFIED

LAWS § 55-5-17(a) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(1) (2007); VA. CODE

ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011). 90 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908

(Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); WYO. STAT. ANN. § 4-10-902(g) (2011).

91 See 4 AUSTIN WAKEMAN SCOTT ET AL., SCOTT AND ASCHER ON TRUSTS § 24.27.1, at 1802 (5th ed. 2007) (“The effect of a provision relieving the trustee of liability for a breach of trust is not to extend the trustee’s power but to limit the trustee’s liability.”); see also RESTATEMENT (SECOND) OF TRUSTS § 222 cmt. c (1959).

92 See RESTATEMENT (SECOND) OF TRUSTS § 222 cmt. c (1959).


act that the trust or applicable law has relieved the trustee from doing.93 A trustee who escapes liability due to an exculpation clause has still commit-ted a breach and may not receive compensation with respect to the transac-tion.94 The statutes that simply exculpate are not as effective as those that also relieve the trustee of investment duties.

D. Limitation on the Insured95

The exculpation statutes vary in the policies covered based on the in-sured. Alabama, Ohio, and Virginia provide coverage for a life insurance policy on any person; however, Alabama and Virginia also impose acquisi-tion limitations, as referenced in Part III.A.96 Florida’s statute provides cov-erage for life insurance on a “qualified person,” defined as:

a person who is insured or a proposed insured, or the spouse of that person, who has provided the trustee with the funds used to acquire or pay premiums with respect to a policy of insurance on the life of that person or the spouse of that person, or on the lives of that person and the spouse of that person.”97

Florida does not limit coverage to the settlor of the trust.98 In Florida, an insurance policy can be purchased on anyone providing funds to acquire or to pay the premiums.99

93 See id. 94 See 4 SCOTT ET AL., supra note 91. 95 Florida’s statute is the only statute of the thirteen under review that addresses

stranger-oriented life insurance—a subject beyond the scope of this article. See FLA. STAT. ANN. § 736.0902 (West Supp. 2012). For a full discussion of stranger-oriented life insurance, see Mary Mahala Gardner, Trust, We Have a Problem: Chawla ex rel. Giesinger v. Transamerica Occidental Life Insurance Company, Its Revelation of a Problem in Insurable Interest Statutes and the Subsequent Effect on Irrevocable Life Insurance Trusts, 62 OKLA. L. REV. 125 (2009); Mary Ann Mancini, The Chawla Case, Insurance Trusts and the Insurable Interest Rule: “Houston, We Have a Problem,” 31 ACTEC J. 125 (2005); J. Alan Jensen & Stephan R. Leimberg, Stranger-Owned Life Insurance: A Point/Counterpoint Discussion, 33 ACTEC J. 110 (2007).

96 See ALA. CODE § 19-3B-818 (LexisNexis 2007); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)).

97 FLA. STAT. ANN. § 736.0902(1)–(2) (West Supp. 2012). 98 See id. 99 See id.


All of the states provide exculpation coverage if the settlor is the in-sured.100 Alabama, Arizona, Delaware, Florida, North Dakota, Ohio, Penn-sylvania, Virginia, and Wyoming also provide exculpation coverage on the settlor’s spouse.101 The statutes in North Carolina, South Carolina, South Dakota, and Tennessee provide protection for insurance on “the life of the settlor, or the lives of the settlor and the settlor’s spouse.”102 Read literally, the statutes provide protection for insurance on the settlor and for a joint policy on the settlor and the settlor’s spouse.103 These four statutes do not specifically permit a policy solely on the settlor’s spouse’s life. All of the states, except North Dakota, permit a policy on the joint lives of the settlor and the settlor’s spouse.104

100 Nine states expressly provide coverage on the life of the insured while Alabama, Florida, Ohio, and Virginia do not limit coverage, and therefore, coverage is provided on the settlor, if the other conditions are met. Compare ARIZ. REV. STAT. ANN. § 14-10908 (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); N.C. GEN. STAT. § 36C-9-903.1(a) (2011); N.D. CENT. CODE § 26.1-33-44 (2010); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J)(1) (2009); S.D. CODIFIED LAWS § 55-5-17(a) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(1) (2007); WYO. STAT. ANN. § 4-10-902(g) (2011), with ALA. CODE § 19-3B-818 (LexisNexis 2007); FLA. STAT. ANN. § 736.0902(2) (West Supp. 2012); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)).

101 See ARIZ. REV. STAT. ANN. § 14-10908 (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); N.D. CENT. CODE § 26.1-33-44 (2010); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); WYO. STAT. ANN. § 4-10-902(g) (2011) (expressly permitting coverage on the settlor’s spouse; see also ALA. CODE § 19-3B-818 (LexisNexis 2007); FLA. STAT. ANN. § 736.0902(2), OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)). These statutes do not limit coverage, and therefore, coverage is provided, if the other conditions are met.

102 N.C. GEN. STAT. § 36C-9-903.1(a) (2011); S.C. CODE ANN. § 62-7-933(J)(1) (2009) (using the term “trustor” rather than “settlor”); S.D. CODIFIED LAWS § 55-5-17(a) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(1) (2007) (using the term “grantor” rather than “settlor”).

103 See id. 104 Eight states expressly provide coverage on the joint lives of the settlor and settlor’s

spouse while Alabama, Florida, Ohio, and Virginia do not limit coverage, and therefore, coverage is provided, if the other conditions are met. Compare ARIZ. REV. STAT. ANN. § 14-10908 (2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); N.C. GEN. STAT. § 36C-9-903.1(a) (2011); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J)(1) (2009); S.D. CODIFIED LAWS § 55-5-17(a) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(1) (2007); WYO. STAT. ANN. § 4-10-902(g) (2011), with ALA. CODE § 19-3B-818 (LexisNexis 2007); FLA. STAT. ANN. § 736.0902(2) (West Supp. 2012); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)) (not limiting coverage, and therefore, coverage is provided, if the other conditions are met).


North Dakota, South Carolina, and Tennessee expressly permit policies on the settlor’s children.105 North Dakota and Tennessee even permit poli-cies on the settlor’s grandchildren.106 North Dakota, South Carolina, and Tennessee permit policies on the settlor’s parents.107

E. Duties Waived

All of the statutes release the trustee from any loss arising from the duty to determine whether the life insurance policy is or remains a proper in-vestment.108 Eight of the statutes also release the trustee from loss arising from any duty to investigate the financial strength of the life insurance company.109 Four of these eight statutes specifically provide that the trustee need not examine “changes” in the financial strength of the life insurance company.110 Ten of the statutes release the trustee from loss arising from any duty to exercise policy options.111 Ohio’s statute is more expansive by relieving the trustee of any duty:

105 See N.D. CENT. CODE § 26.1-33-44 (2011); S.C. CODE ANN. § 62-7-933(J)(1)

(2009); TENN. CODE ANN. § 35-14-105(c)(1) (2007). 106 See N.D. CENT. CODE § 26.1-33-44 (2011); TENN. CODE ANN. § 35-14-105(c)(1)

(2007). 107 See N.D. CENT. CODE § 26.1-33-44 (2011); S.C. CODE ANN. § 62-7-933(J)(1)

(2009); TENN. CODE ANN. § 35-14-105(c)(1) (2007). 108 See ALA. CODE § 19-3B-818 (LexisNexis 2007) (“without regard to the terms and

conditions of the life insurance policy”); ARIZ. REV. STAT. ANN. § 14-10908(1) (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d)(1) (2007); FLA. STAT. ANN.§ 736.0902(1)(b) (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1(a)(i) (2011); N.D. CENT. CODE § 26.1-33-44(1) (2010); OHIO REV. CODE ANN. § 5809.031(A)(1) (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208(1) (West 2005); S.C. CODE ANN. § 62-7-933(J)(1)(a) (2009); S.D. CODIFIED

LAWS § 55-5-17(a)(1) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(1)(A) (2007); VA. CODE ANN. § 64.2-782(G)(i) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G)(i) (2011)); WYO. STAT. ANN. § 4-10-902(g)(i) (2011).

109 See ARIZ. REV. STAT. ANN. § 14-10908(2) (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d)(2) (2007); FLA. STAT. ANN. § 736.0902(1)(c) (West Supp. 2012); OHIO REV. CODE

ANN. § 5809.031(A)(4) (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208(2) (West 2005); S.D. CODIFIED LAWS § 55-5-17(a)(2) (Supp. 2011); TENN. CODE ANN. § 35-14-105(c)(1)(A)(ii) (2007); WYO. STAT. ANN. § 4-10-902(g)(ii) (2011).

110 See DEL. CODE ANN. tit. 12, § 3302(d)(2) (2007); OHIO REV. CODE ANN. § 5809.031(A)(4) (West Supp. 2012); S.D. CODIFIED LAWS § 55-5-17(a)(2) (Supp. 2011); WYO. STAT. ANN. § 4-10-902(g)(ii) (2011).

111 See DEL. CODE ANN. tit. 12, § 3302(d)(3) (2007); FLA. STAT. ANN. § 736.0902(1)(d) (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1(a)(ii) (2011) (“including investment options”); N.D. CENT. CODE § 26.1-33-44(2) (2007) (including “a policy option, right, or privilege available”); OHIO REV. CODE ANN. § 5809.031(A)(3) (West Supp. 2012); S.C. CODE ANN. § 62-7-933(J)(1)(b) (2009); S.D. CODIFIED LAWS § 55-5-17(a)(3) (Supp. 2011);


To exercise or not to exercise any option, right, or privilege available under the policy, including the payment of premiums, unless there is sufficient cash or there are other readily marketable trust assets from which to pay the premiums or there are other trust assets that were designated by the settlor or any other person transferring those assets to the trust to be used for that purpose, regardless of whether that exercise or nonexercise results in the lapse or termination of the policy.112

Virginia’s statute is narrower and only relieves the trustee of any duty to “exercise policy options under any such contract not essential to the con-tinuation of the life insurance provided by such contract.”113 This language requires the trustee to determine whether the option is “essential to the con-tinuation of the life insurance and” gives rise to a high degree of vulnerabil-ity.114 Arguably, many policy options, even minor ones, could impact the continuation of the policy. Arizona and Pennsylvania specifically exonerate the trustee from any loss arising from the trustee’s failure to “exercise nonforfeiture provisions available under the contract.”115

All of the statutes relieve the trustee of any duty to diversify the life in-surance contract.116 Delaware, Ohio, South Dakota, and Wyoming further

TENN. CODE ANN. § 35-14-105(c)(1)(C) (2007) (including “any policy options, rights, or privileges available under any contract of life insurance in the trust, including any right to borrow the cash value or reserve of the policy, acquire a paid-up policy, or convert to a different policy”); VA. CODE ANN. § 64.2-782(G)(iii) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G)(iii) (2011)); WYO. STAT. ANN. § 4-10-902(g)(iii) (2011).

112 OHIO REV. CODE ANN. § 5809.031(A)(3) (West Supp. 2012). 113 VA. CODE ANN. § 64.2-782(G)(iii) (Westlaw 2012) (formerly cited as VA. CODE

ANN. § 26-45.4(G)(iii) (2011)). 114 Id. 115 ARIZ. REV. STAT. ANN. § 14-10908(3) (Supp. 2011); 20 PA. CONS. STAT. ANN.

§ 7208(3) (West 2005). 116 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-

10908(4 ) (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d)(4) (2007) (including “other assets, if any, administered by the trustee”); FLA. STAT. ANN. § 736.0902(1)(e) (West Supp. 2012) (including “assets of the trust with respect to the contract for life insurance”); N.C. GEN. STAT. § 36C-9-903.1(a)(iii) (2011); N.D. CENT. CODE § 26.1-33-44(3) (2010); OHIO

REV. CODE ANN. § 5809.031(A)(2) (West Supp. 2012) (including “any other trust assets”); 20 PA. CONS. STAT. ANN. § 7208(4) (West 2005); S.C. CODE ANN. § 62-7-933(J)(1)(c) (2009); S.D. CODIFIED LAWS § 55-5-17(a)(4) (Supp. 2011) (including “other assets, if any administered by the trustee”); TENN. CODE ANN. § 35-14-105(c)(1)(B) (2007); VA. CODE

ANN. § 64.2-782(G)(ii) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G)(ii)


release the trustee from liability for any failure to “make a determination of whether to diversify such contracts relative to [one] another or to other as-sets, if any, administered by the trustee.”117

Five of the statutes relieve the trustee from any loss arising from any duty to inquire about changes in the health or financial condition of any in-sured.118

The variety of waivers provided in the statutes creates ambiguity. Every statute releases the trustee from loss arising from the duty to prudently man-age the insurance policy, hereinafter “the broad waiver.”119 All the specific duties of investigating the financial strength of the life insurance company, exercising policy options, exercising nonforfeiture provisions, and inquiring about the changes in the health or financial condition of the insured, appear to be encompassed in the broad waiver to prudently manage the insurance policy. If this is true, then why does every statute contain at least one addi-tional specific waiver? If the broad waiver does not encompass some or all of the specific duties, then the duty remains for the trustee, unless the statute specifically mentions the duty.

To illustrate, if the broad waiver of the duty to prudently manage the in-surance contract encompasses the duty to determine whether to exercise policy options, then the presence or absence of the specific waiver in a state statute is immaterial, although giving rise to the question why the legisla-ture thought it important to be redundant. If the broad waiver does not en-compass the specific waiver of the duty to exercise policy options, then the trustees in Pennsylvania, Arizona, and Alabama still have the duty to exam-ine policy options, even though the statutes release them from liability

(2011)); WYO. STAT. ANN. § 4-10-902(g)(iv) (2011) (including “other assets, if any, administered by the trustee”).

117 DEL. CODE ANN. tit. 12, § 3302(d)(4) (2007). See also OHIO REV. CODE ANN. § 5809.031(A)(2) (West Supp. 2012); S.D. CODIFIED LAWS § 55-5-17(a)(4) (Supp. 2011); WYO. STAT. ANN. § 4-10-902(g)(iv) (2011).

118 See DEL. CODE ANN. tit. 12, § 3302(d)(5) (2007); FLA. STAT. ANN. § 736.0902(1)(f) (West Supp. 2012); OHIO REV. CODE ANN. § 5809.031(A)(5) (West Supp. 2012); S.D. CODIFIED LAWS § 55-5-17(a)(5) (Supp. 2011); WYO. STAT. ANN. § 4-10-902(g)(v) (2011).

119 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908 (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); FLA. STAT. ANN. § 736.0902 (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1 (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J) (2009); S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011); TENN. CODE ANN. § 35-14-105(c) (2007); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)); WYO. STAT. ANN. § 4-10-902(g) (2011).


whether the contract is or remains a proper investment.120 While the specific waivers might be simply redundant, the legislature quite possibly included the language specifically to address the issue. The absence of the specific waivers creates a construction issue and possible trustee liability in all of the states because none of the statutes contain all of the specific waivers.121

Similarly, the waiver of the duty to diversify should waive the trustee’s duty to diversify the life insurance contract even if the life insurance is the only asset held by the trust and therefore represents a concentration in a sin-gle asset and a single asset class. Delaware, Ohio, South Dakota, and Wyo-ming, however, further waive any duty to diversify into other asset classes.122 Again, the issue arises whether the language is merely redundant. From a trustee’s perspective, the redundancy provides greater comfort, but for trustees in the other nine jurisdictions, the absence of the redundancy may cause concern.

F. Effective Date

The thirteen exculpation statutes apply to all trusts executed after the applicable effective date.123 Additionally, unless the trust agreement pro-

120 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908

(Supp. 2011); 20 PA. CONS. STAT. ANN. § 7208 (West 2005). 121 See DEL. CODE ANN. tit. 12, § 3302(d)(1)–(5) (2007); FLA. STAT. ANN.

§ 736.0902(1)(b)–(f) (West Supp. 2012); OHIO REV. CODE ANN. § 5809.031(A)(1)–(5) (West Supp. 2012); S.D. CODIFIED LAWS § 55-5-17(a)(1)–(5) (Supp. 2011) (coming the closest to waiving all of the duties, by waiving five of the six duties).

122 See DEL. CODE ANN. tit. 12, § 3302(d)(4) (2007); OHIO REV. CODE ANN. § 5809.031(A)(2) (West Supp. 2012); S.D. CODIFIED LAWS § 55-5-17(a)(4) (Supp. 2011); WYO. STAT. ANN. § 4-10-902(g)(iv) (2011).

123 See ALA. CODE §§ 19-3B-818, -1204(a)(1) (LexisNexis 2007) (effective Jan. 1, 2007 and applying “to all trusts created before, on, or after January 1, 2007”); ARIZ. REV. STAT. ANN. § 14-10908, -10909(A) (Supp. 2011) (effective Dec. 31, 2008 and applying “to trusts existing on and created after July 20, 1996”); DEL. CODE ANN. tit. 12, § 3302(d) (2007) (effective June 30, 2003 and applying “to contracts of insurance whenever acquired” as long as the trustee gives notice “prior to an event giving rise to a claim”); FLA. STAT. ANN. § 736.0902 (West Supp. 2012) (effective June 1, 2010 and applying to trusts that incorporate the statute by reference or if the trustee gives notice); N.C. GEN. STAT. § 36C-9-903.1 (2011) (effective Oct. 1, 2007 and applying to all trusts before, on, or after effective date in which the trustee gives notice and the settlor does not notify trustee otherwise within 60 days); N.D. CENT. CODE § 26.1-33-44 (2010) (providing neither an effective date nor whether the statute applies to existing trusts); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012) (effective Mar. 22, 2012 and applying “to a trust established before, on, or after the effective date”); 20 PA. CONS. STAT. ANN. §§ 7208 (West 2005) (effective June 25, 1999 and applying to all actions of fiduciaries occurring on or after the effective date, regardless whether the trust was created before, on, or after the effective date); S.C. CODE ANN. 62-7-933(J)(3) (2009)


vides otherwise, the statutes apply to all action, or more accurately, inac-tion, after the applicable effective date.124 All of the statutes also apply to trusts executed on or before the effective date of the trust; however, in Del-aware, Florida, North Carolina, South Dakota, and Wyoming notice must be given to individuals of certain existing trusts.125 In a majority of the states, the statute also applies retroactively to action or inaction before the effec-tive date.126 Arguably, the statutes excuse failing to prudently select or mon-itor an insurance policy before the effective dates of the statutes. Presumably, this retroactive immunity merely confirms that the settlor never

(originally enacted as 1994 S.C. Acts 449) (effective June 16, 1994 and applying to all trusts whenever established, except as specifically provided in the trust instrument, and applying “to a life insurance policy acquired by the trustee before or after the effective date of this section”); S.D. CODIFIED LAWS § 55-5-17(b) (Supp. 2011) (originally enacted as 2010 S.D. Sess. Laws 232 at § 15) (effective Mar. 29, 2010 and applying to all trusts established after the effective date and trusts established prior to the effective date if the trustee gives notice and the settlor does not object within sixty days); TENN. CODE ANN. § 35-14-105(c) (2007) (originally enacted as 2002 Tenn. Pub. Acts 696 at § 13) (effective July 1, 2002 and applying to all trusts existing on and created after its effective date); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (originally enacted as 1998 Va. Acts 213) (effective Apr. 2, 1998 and applying “to all trusts, regardless of when established.”); WYO. STAT. ANN. § 4-10-1103(a)(i) (2011) (effective Feb. 25, 2005 and applying “to all trusts created on or after July 1, 2003”).

124 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908 (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); FLA. STAT. ANN. § 736.0902 (West Supp. 2012); N.C. GEN. STAT. § 36C-9-903.1 (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J)(3) (2009); S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011); TENN. CODE ANN. § 35-14-105(c) (2007); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(G) (2011)); WYO. STAT. ANN. § 4-10-902(g) (2011).




intended that the trustee have investment responsibility for the life insurance held in the ILIT.

G. Fees

Florida’s statute specifically provides that a trustee shall not receive compensation for investment advisory services for a policy to which the statute applies.127 The other twelve statutes do not address fees.128

H. Insurance Purchased from an Affiliate

Florida’s statute provides that exculpation protection “does not apply to any contract for life insurance purchased from any affiliate of the trustee, or with respect to which the trustee or any affiliate of the trustee receives any commission unless the duties have been delegated to another person.”129 The other statutes are silent on this issue.130

IV. COMMENTARY

A. Statutes Effectuate Antiquated Mindset

Many settlors adhere to the antiquated mindset that life insurance is a product that does not need active and professional management.131 The ex-culpation statutes honor this erroneous mindset. The legislative history to Florida’s exculpation statute explains that the trustee does not need to man-age the life insurance policy because the creator of the trust chose the poli-

127 See FLA. STAT. ANN. § 736.0902(8) (West Supp. 2012). 128 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908

(Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); N.C. GEN. STAT. § 36C-9-903.1 (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J)(3) (2009); S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011); TENN. CODE ANN. § 35-14-105(c) (2007); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE

ANN. § 26-45.4(G) (2011)); WYO. STAT. ANN. § 4-10-902(g) (2011). 129 FLA. STAT. ANN. § 736.0902(6) (West Supp. 2012). 130 See ALA. CODE § 19-3B-818 (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10908

(Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(d) (2007); N.C. GEN. STAT. § 36C-9-903.1 (2011); N.D. CENT. CODE § 26.1-33-44 (2010); OHIO REV. CODE ANN. § 5809.031 (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7208 (West 2005); S.C. CODE ANN. § 62-7-933(J)(3) (2009); S.D. CODIFIED LAWS § 55-5-17 (Supp. 2011); TENN. CODE ANN. § 35-14-105(c) (2007); VA. CODE ANN. § 64.2-782(G) (Westlaw 2012) (formerly cited as VA. CODE

ANN. § 26-45.4(G) (2011)); WYO. STAT. ANN. § 4-10-902(g) (2011). The duty of loyalty likely would prevent a trustee from purchasing from an affiliate. See UNIF. PRUDENT

INVESTOR ACT § 5, 7B U.L.A. 34 (2006). 131 See supra Part II.A.


cy.132 The focus is solely on the procurement of the policy. Similar to Flori-da’s legislative history, the primary focus in Delaware’s legislative history is the procurement of the policy; however, Delaware’s history references the retention of the policy but emphasizes the trustee’s passive role.133

Life insurance policies need active management and monitoring.134 The exculpation statutes relieve the trustee—the only party with fiduciary du-ties—of any duty to manage the life insurance policy.135 Someone should hold a legal duty to manage the insurance policies held by the trustee.136

B. Statutes Run Counter to Core Fiduciary Principles

The exculpation statutes run counter to core fiduciary principles in the enacting states. Each state that has enacted an exculpation statute imposes upon a fiduciary the duty to prudently manage trust assets.137 The exculpa-tion statutes relieve the trustee of investment duties without conditioning exculpation on another party’s having investment responsibilities.138 Reliev-ing the trustee from investment duties without ensuring that someone else possesses those duties leaves no one with investment duties over the sole asset of most ILITs.

132 See supra Part II.C.1 for the Florida exculpation statute’s legislative history. 133 See supra Part II.C.1 for the Delaware exculpation statute’s legislative history. 134 See supra Part II.A. 135 See supra Part I. 136 Arguably, the legislatures assumed the settlor or the beneficiaries would monitor

and manage the policies, but they are not legally bound to do so. See infra Part IV.B for problems arising from placing investment duties on the settlor and the beneficiaries.

137 See ALA. CODE § 19-3B-902(a) (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10902(A) (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(a) (2007); FLA. STAT. ANN. § 518.11(1)(a) (West Supp. 2012); N.C. GEN. STAT.§ 36C-9-902(a) (2011); N.D. CENT. CODE § 59-17-02(1) (2010); OHIO REV. CODE ANN. § 5809.02(A) (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7203(a) (West 2005); S.C. CODE ANN. § 62-7-933(C)(1) (2009); S.D. CODIFIED

LAWS § 55-5-6 (Supp. 2011); TENN. CODE ANN. § 35-14-104(a) (2007); VA. CODE ANN. § 64.2-782(A) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(A) (2011)); WYO. STAT. ANN. § 4-10-902(a) (2011).

138 See ALA. CODE § 19-3B-902(a) (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10902(A) (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(a) (2007); FLA. STAT. ANN. § 518.11(1)(a) (West Supp. 2012); N.C. GEN. STAT.§ 36C-9-902(a) (2011); N.D. CENT. CODE § 59-17-02(1) (2010); OHIO REV. CODE ANN. § 5809.02(A) (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7203(a) (West 2005); S.C. CODE ANN. § 62-7-933(C)(1) (2009); S.D. CODIFIED

LAWS § 55-5-6 (Supp. 2011); TENN. CODE ANN. § 35-14-104(a) (2007); VA. CODE ANN. § 64.2-782(A) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(A) (2011)); WYO. STAT. ANN. § 4-10-902(a) (2011).


Presumably, the settlor will monitor the insurance policy because the settlor will want to avoid wasting the contributed funds. Unfortunately, many settlors are of the mindset that life insurance does not need manage-ment. Other settlors may suffer a long period of incapacity and thus not be able to perform the needed investment oversight. A surviving spouse may not have any interest in monitoring a joint and survivor policy held in an ILIT that solely benefits children from the deceased spouse’s prior mar-riage.

Presumably, beneficiaries will also want to insure proper management of the life insurance. However, beneficiaries may not be competent to per-form investment reviews. In addition, they may not even be aware that the trustee is not monitoring the life insurance policy.139 Beneficiaries may as-sume the settlor is monitoring the policy, when in fact the settlor may not be doing so.

Because prudence dictates the management of life insurance policies, a court may find it difficult to release a trustee from investment duties unless someone else possesses those investment responsibilities. As illustrated in McGinley v. Bank of America140 and Rollins v. Branch Banking and Trust

139 See supra Part III.B for discussion of how most of the insurance exculpation statutes do not require trustees to give notice to the beneficiaries.

140 109 P.3d 1146 (Kan. 2005). A seventy-nine-year-old grantor created a revocable trust in November 1990, appointing Bank of America as trustee. Section VIII.A of the trust provided that during the grantor’s lifetime, “the Grantor shall be consulted by the Trustee as to any purchase or sale, and the Trustee shall abide by the Grantor’s decision.” Id. at 1154. She later transferred Enron stock to the trust. Seven months after establishing the trust, the bank sent a retention letter to the grantor for her signature providing:

I hereby direct you to continue to retain the following securities as assets of the above referenced account: [the Enron stock was listed]. . . . I understand that you do not monitor these securities, and I hereby agree to exonerate, indemnify and hold the Bank harmless from any and all loss, damage and expense sustained or incurred by the Bank for continuing to retain these securities as assets of this account. I also relieve the Bank from any responsibility for analyzing or monitoring these securities in any way. Id. at 1149–50.

By December 29, 2000, the Enron stock held by the trust had a value of nearly $790,000 and represented seventy-seven percent of the value of the trust. One year later, the stock had decreased to a value of $4,800. The grantor was competent during the entire period of time. The grantor sued the trustee, arguing: (1) “[t]he letter and its exculpatory provision were invalid because the Bank failed to adequately communicate and explain them to [the grantor]”; (2) the letter did not constitute a trust amendment because there is no evidence that she intended it to serve as one; (3) “[t]he exculpatory provision [was] invalid because of the Bank’s failure to adequately communicate its contents [to the grantor]”; and (4) “[e]ven if the exculpatory provision [was] valid, the Bank’s failure to recommend portfolio diversification lacked good faith and was indifferent to [the grantor’s best interest].” Id. at


Co. of Virginia,141 courts have imposed a continuing duty on trustees to in-form the beneficiaries, even when the trust agreement or directions from the beneficiaries relieve the trustee of all investment responsibilities. The courts in McGinley and Rollins suggested the trustee had some type of continuing obligation to keep the beneficiaries informed about developments in the stock held by the trustee despite the trustee’s relief from any liability for holding the stock.142

Many potential fact patterns exist in which a court may impose a fiduci-ary duty on the ILIT trustee even though an exculpation statute releases the trustee from investment duties. For example, assume the ILIT trustee fails to receive annual cash contributions from an elderly settlor for several years, does not inquire as to nonreceipt of the payments (the inquiry would have revealed that the settlor is incompetent), and fails to make the annual premium payments for several years, which results in the policy’s lapsing. Does the trustee have the responsibility to inform the beneficiaries about the failure to make a premium payment? Does the trustee have the duty to in-form the beneficiaries of the need to examine policy options in light of the

1153–57.The prudent man rule applied during the beginning years of the trust administration, and the Uniform Prudent Investor Act applied to the balance. The district court granted summary judgment in the bank’s favor. The Kansas Supreme Court affirmed the district court’s summary judgment but did not base its opinion on the retention letter; rather, the Court noted that the letter served as a direction to the trustee in accordance with Article VIII.A of the trust agreement. The Court held that Article VIII.A reduced the bank’s responsibilities under the prudent investor rule. See id. at 1146. The court stated that the letter was consistent with Article VIII.A and did not need to serve as a trust amendment. See id. at 1154. As to the letter, the Court noted in passing:

Clearly the better practice for the Bank would have been to have communicated to McGinley the letter’s contents and effect before she signed it, and to have notified her of evolving circumstances, e.g., steady decreases in Enron’s value which reduced the investment portfolio’s overall worth, or steady increases, though desirable, which unbalanced the portfolio. Id. at 1156.

141 No. CH 00-488, 2001 WL 34037931 (Va. Cir. Ct. Oct. 21, 2002). The trust clearly imposed upon the beneficiaries investment duties with regard to a significant concentration of stock of a publicly held company held by the trust. In light of the provisions of the trust and Virginia’s directed trustee statute, the court held that the trustee had no investment duties and did not breach a duty to diversify. However, the court held that the trustee breached his fiduciary duty to advise the beneficiaries of all facts that came to the trustee’s knowledge and that were material for the beneficiaries to know to protect their interests. See id. at *3.

142 For further discussion of this issue, see Dennis I. Belcher, Not My Fault—The Devil Made Me Do It! Responsibilities and Duties of a Delegating or Directed Trustee, 41 HECKERLING INST. ON EST. PLAN. 13-1 (2007).


nonpayment of premiums? Will a court presented with these facts impose upon the trustee at least the duty to inform the beneficiaries?

Courts may find it difficult to relieve a trustee from investment respon-sibilities if no one else possesses those duties. The court may construe the inaction as outside the scope of the exculpation statute. A court may hold that the trustee’s inaction constitutes reckless indifference to the beneficiar-ies, and is, therefore, nonexculpatory under the public policy of the state.143

143 Generally, it is against public policy to exculpate a trustee for gross negligence. See

UNIF. TRUST CODE § 1008 (amended 2005), 7C U.L.A. 654 (2006). Section 1008 provides: (a) A term of a trust relieving a trustee of liability for breach of trust

is unenforceable to the extent that it: (1) relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or (2) was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor.

(b) An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.

See UNIF. TRUST CODE § 105(b)(10) (amended 2005), 7C U.L.A. 428 (Supp. 2011) (providing that the terms of the trust cannot reduce the standard of care below the standard set forth in Uniform Trust Code section 1008; RESTATEMENT (THIRD) OF TRUSTS § 96 (2012), which provides:

(1) A provision in the terms of a trust that relieves a trustee of liability for breach of trust, and that was not included in the instrument as a result of the trustee’s abuse of a fiduciary or confidential relationship, is enforceable except to the extent that it purports to relieve the trustee

(a) of liability for a breach of trust committed in bad faith or with indifference to the fiduciary duties of the trustee, the terms or purposes of the trust, or the interests of the beneficiaries, or (b) of accountability for profits derived from a breach of trust.

See also Melanie B. Leslie, Trusting Trustees: Fiduciary Duties and the Limits of Default Rules, 94 GEO. L.J. 67, 96 (2005) (noting that the Uniform Trust Code section 1008 follows the trend of a number of state legislatures; footnote 142 cites twenty-seven state statutes that have adopted “provisions expressly authorizing exculpatory clauses in trust instruments.”).

Arguably, the thirteen exculpation statutes establish that a trustee’s total disregard of the sole asset of the trust is not against the public policy of the state. See ALA. CODE § 19-3B-902(a) (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10902(A) (Supp. 2011); DEL. CODE

ANN. tit. 12, § 3302(a) (2007); FLA. STAT. ANN. § 518.11(1)(a) (West Supp. 2012); N.C. GEN. STAT.§ 36C-9-902(a) (2011); N.D. CENT. CODE § 59-17-02(1) (2010); OHIO REV. CODE

ANN. § 5809.02(B) (West Supp. 2012) (providing the exculpation of the trustee against any loss except in the case of fraud); 20 PA. CONS. STAT. ANN. § 7203(a) (West 2005); S.C. CODE

ANN. § 62-7-933(C)(1) (2009); S.D. CODIFIED LAWS § 55-5-6 (Supp. 2011); TENN. CODE


In other words, a court may read into the exculpation statutes an exception for reckless disregard. On the other hand, a court may hold that the exculpa-tion statutes express the public policy that trustees need not manage life in-surance policies even if the policy is the sole asset of the trust.

A court will more likely exculpate the trustee if the investment respon-sibilities lie with some other party, either because the trustee delegates the investment duties to some other party or because the trust bifurcates the in-vestment duties between a directed trustee and a trust advisor.144

C. Statutes Are Overly Broad

While it may be rational to relieve the trustee of any duty to examine a policy that the settlor has purchased and contributed to the trust, the statutes are overly broad to exculpate the trustee when the trustee purchases the life insurance policy. Arguably, if the trustee selects the policy, the trustee should be prudent in doing so. While the settlor may guide, ultimate respon-sibility should rest on the trustee. At the very least, the legislatures should amend the statutes to relieve trustees from investment responsibility only if the settlor is involved in the selection process, similar to the requirement in Alabama’s statute.145

The statutes are also overbroad in possibly exculpating the trustee for gross negligence. For example, if in year eight of the trust, the trustee re-ceives the annual premium payment from the settlor, fails to make the pre-mium payment, and causes the policy to lapse, does the statute protect the trustee from this act of negligence?146

ANN. § 35-14-104(a) (2007); VA. CODE ANN. § 64.2-782(A) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(A) (2011)); WYO. STAT. ANN. § 4-10-902(a) (2011).

144 See infra Part IV.D.2–3 for further discussion. 145 See ALA. CODE § 19-3B-818 (LexisNexis 2007). 146 Arguably, the exculpation statutes do not relieve the trustee from the duty to pay

premiums if the trust has available cash. See ALA. CODE § 19-3B-902(a) (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10902(A) (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(a) (2007); FLA. STAT. ANN. § 518.11(1)(a) (West Supp. 2012); N.C. GEN. STAT. § 36C-9-902(a) (2011); N.D. CENT. CODE § 59-17-02(1) (2010); 20 PA. CONS. STAT. ANN. § 7203(a) (West 2005); S.C. CODE ANN. § 62-7-933(C)(1) (2009); S.D. CODIFIED LAWS § 55-5-6 (Supp. 2011); TENN. CODE ANN. § 35-14-104(a) (2007); VA. CODE ANN. § 64.2-782(A) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(A) (2011)); WYO. STAT. ANN. § 4-10-902(a) (2011); see also OHIO REV. CODE ANN. § 5809.031(A)(3) (West Supp. 2012). The Ohio statute excludes the trustee from the following duty:

To exercise or not to exercise any option, right, or privilege available under the policy, including the payment of premiums, unless there is sufficient cash or there are other readily marketable trust assets from which to pay the premiums or there are other trust assets that were


The legislatures intended that the statutes relieve the trustee from the failure to act, but they are not limited to inactivity. The statutes also excul-pate the trustee for affirmative acts. Most of the statutes specifically excul-pate the trustee from loss arising from the acquisition of a policy, an affirmative act.147 Because most of the statutes exculpate the trustee for pol-icies they acquire, the statutes may also protect the trustee from affirmative actions taken after the acquisition of the policy. For example, the statutes relieve the trustee from any fiduciary duty to prudently exercise a policy option. Were the legislatures assuming that the trustee would only act upon suggestions made by the settlor? The statutes are overbroad in protecting trustees from affirmative actions taken on their own initiative after acquir-ing the policy. At a minimum, the statutes should only protect actions taken upon guidance from the settlor or the beneficiaries.

On occasion, settlors change their minds about former goals in estab-lishing an ILIT. A settlor may determine that the dispositive provisions of the ILIT no longer comply with the settlor’s current goals and could harm the beneficiaries. For example, the ILIT may direct outright distribution to a beneficiary upon the settlor’s demise, but after establishing the ILIT, an out-right distribution may become nonbeneficial to a beneficiary who now has a drug addiction or is on governmental assistance. Thus, a settlor may wish to cancel the policy to prevent the insurance proceeds from passing to the ben-eficiary. Can the ILIT trustee follow the settlor’s direction to cancel the in-surance policy to accomplish the settlor’s impression of what is beneficial to the beneficiary?

Finally, the statutes are overbroad in exculpating the trustee for acquir-ing and maintaining a policy in trust that would not be characterized as an ILIT.148 For example, the statute covers the purchase of a policy in a dynas-

designated by the settlor or any other person transferring those assets to the trust to be used for that purpose, regardless of whether that exercise or nonexercise results in the lapse or termination of the policy.

147 See J. Rodney Johnson, Wills, Trusts, and Estates, 32 U. RICH. L. REV. 1405, 1412 (1998) (noting that Virginia’s exculpation statute is too broad in that it applies to insurance purchased by the trustee). See generally ALA. CODE § 19-3B-902(a) (LexisNexis 2007); ARIZ. REV. STAT. ANN. § 14-10902(A) (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(a) (2007); FLA. STAT. ANN. § 518.11(1)(a) (West Supp. 2012); N.C. GEN. STAT.§ 36C-9-902(a) (2011); N.D. CENT. CODE § 59-17-02(1) (2010); OHIO REV. CODE ANN. § 5809.02(A) (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7203(a) (West 2005); S.C. CODE ANN. § 62-7-933(C)(1) (2009); S.D. CODIFIED LAWS § 55-5-6 (Supp. 2011); TENN. CODE ANN. § 35-14-104(a) (2007); VA. CODE ANN. § 64.2-782 (Westlaw 2012) (formerly cited as VA. CODE

ANN. § 26-45.4 (2011)); WYO. STAT. ANN. § 4-10-902(a) (2011). 148 See Johnson, supra note 147 (noting Virginia’s life insurance exculpation statute is

too broad in that it is applicable to all trusts and not just to ILITs.); see also FLA. BILL


ty trust that had substantial other assets. Few would characterize this type of trust as an ILIT, and few would argue that the law should exonerate the trustee for failing to make a prudent investment decision when the settlor has provided no guidance. Is it possible that a court would hold that such purchases are outside the scope of the statute?

D. Alternatives

The thirteen exculpation statutes effectuate an antiquated mindset, run counter to core fiduciary principles, and are overly broad. Legislatures need to find alternatives.

1. Directing Otherwise–Its Limitations

At first glance, the exculpation statutes are seemingly unnecessary be-cause the settlor can simply relieve the trustee of any investment responsi-bilities over the insurance policy in the trust agreement. In other words, why do we need a statute to express what the settlor can just as easily express in the trust agreement?

A trustee must effectuate the settlor’s intent as expressed in the terms of the trust.149 The UPIA permits a settlor to waive its provisions.150 According to the UPIA section 1(b), the prudent investor rule “may be expanded, re-stricted, eliminated, or otherwise altered by the provisions of a trust.”151 Thus, the trust agreement may modify the trustee’s investment duties.152 A trustee is not liable to a beneficiary of the trust to the extent that the trustee acted in reasonable reliance on the provisions of the trust.153 For example, if the trust expressly relieves the trustee of any duty to monitor the financial

ANALYSIS, at n.17 (stating that “[a]lthough the bill governs any life insurance owned by an irrevocable trust, 99 percent of the time it will be an ILIT.”).

149 See RESTATEMENT (THIRD) OF TRUSTS § 90 cmt. b (2005) (“Trustees have a general fiduciary duty to comply with the terms of their trusts. . . . The nature and extent of a trustee’s duties and powers are primarily determined by the terms of the trust.”).

150 See UNIF. PRUDENT INVESTOR ACT § 1(b), 7B U.L.A. 15 (2006). Like most statutory trust provisions, the duty to diversify is a default provision; see also 1 SCOTT ET AL., supra note 74; Langbein, Contractarian, supra note 74. The Uniform Trust Code provides that “[t]he terms of a trust prevail over any provision of this [Code] except” . . . 14 provisions that cannot be overridden by the trust. UNIF. TRUST CODE § 105(b) (amended 2005), 7C U.L.A. 133 (Supp. 2011).

151 UNIF. PRUDENT INVESTOR ACT § 1(b) cmt., 7B U.L.A. 15 (2006). (“Almost all of the rules of trust law are default rules, that is, rules that the settlor may alter or abrogate. Subsection (b) carries forward this traditional attribute of trust law.”).

152 See id. 153 See id.


strength of the insurance company that wrote a policy owned by the trust, then the trustee’s reliance on the trust provision absolves him from liability for failing to monitor the insurance company if his reliance was reasona-ble.154

While a settlor can modify, restrict, or eliminate most of the provisions of the Uniform Trust Code (UTC),155 UTC section 105(b)(3) provides that the terms of the trust prevail over the provisions of the Code, except “the requirement that a trust and its terms be for the benefit of its beneficiaries, and that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve.”156 The UPIA provides that “[a] fiduciary cannot be prudent in the conduct of investment functions if the fiduciary is sacrificing the interests of the beneficiaries.”157 Yale Law Professor John H. Langbein predicts that, in the future, the benefit-the-beneficiaries preemption doc-trine, as set forth in UTC section 105(b)(3),158 will prevent the settlor from imposing unreasonable restraints on diversification such as directing the retention of a concentration in a publicly held company.159 Langbein argues that “[t]he advantages of diversifying an investment portfolio broadly are so great that it is usually folly not to do it, and folly is not how to benefit bene-ficiaries.”160

Quinnipiac University Law School Professor Jeffrey A. Cooper vehe-mently disagrees with Langbein’s assertion that a settlor who waives the duty to diversify is acting foolishly.161 He refers to the numerous reasons—income tax gain, family-controlled entities, and special purpose trusts—why investment concentrations are reasonable in certain circumstances.162

154 See id. 155 See UNIF. TRUST CODE art. 1 cmt., 7C U.L.A. 410 (2006) (“The Uniform Trust Code

is primarily a default statute. Most of the Code’s provisions can be overridden in the terms of the trust.”).

156 UNIF. TRUST CODE § 105(b)(3) (amended 2005), 7C U.L.A. 428 (Supp. 2011). 157 UNIF. PRUDENT INVESTOR ACT § 5 cmt., 7B U.L.A. 34 (2006). 158 See UNIF. TRUST CODE § 105(b)(3) (amended 2005), 7C U.L.A. 428 (Supp. 2011). 159 See John H. Langbein, Mandatory Rules in the Law of Trusts, 98 NW. U. L. REV.

1105, 1111 (2004) [hereinafter Langbein, Mandatory Rules]; see also Trent S. Kiziah & Lori J. Campbell, Drafting to Effectuate Grantor’s Retention Desires With Respect to Publicly Held Securities, 46 REAL PROP. TR. & EST. L.J. 200, 251–53 (2011) (discussing how the courts have analyzed the benefit-the-beneficiaries preemption doctrine).

160 Langbein, Mandatory Rules, supra note 159, at 1114. 161 See Jeffrey A. Cooper, Empty Promises: Settlor’s Intent, The Uniform Trust Code,

and the Future of Trust Investment Law, 88 B.U. L. REV. 1165, 1175 (2008). 162 See id. at 1181.


Langbein notes that special circumstances can justify a concentration.163 But he argues that the law should not honor a dead person’s emotional attach-ment to a publicly held stock.164 Cooper notes: “Viewed through the narrow lens of modern portfolio theory, the investment of an entire trust portfolio in life insurance policies is no more prudent than a decision to retain an undi-versified stock portfolio.”165 Langbein responds: “[t]here need be nothing in tension with the duty to diversify when a single-asset trust is deployed as part of a suitably diversified, multi-asset estate plan.”166

Arguably, the law honors a direction in an ILIT that restricts the trustee to a single life insurance policy during the settlor’s lifetime if the life insur-ance represents a part of the settlor’s well-diversified portfolio. Should the law, however, honor a settlor’s direction that the trustee not manage the sole asset of the trust? The exculpation statutes answer that question in the af-firmative.167 In fact, the exculpation statutes create a legal presumption that settlors do not want trustees to manage life insurance policies at all. In the states that have exculpation statutes, settlors must affirmatively elect into investment management by negating the exculpation statutes.168 The excul-pation statutes, thus, completely reverse the legal presumption.169

In response to the question whether the law should honor a settlor’s di-rection that the trustee not manage the sole asset of the trust, the benefit-the-beneficiary preemption doctrine answers the question in the negative.170

163 See Langbein, UPIA, supra note 23, at 665. 164 See Langbein, Mandatory Rules, supra note 159, at 1115. 165 Cooper, supra note 161, at 1197–98. 166 John H. Langbein, Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power

to Direct Investments, 90 B.U. L. REV. 375, 393 (2010). 167 See generally ALA. CODE § 19-3B-902(a) (LexisNexis 2007); ARIZ. REV. STAT.

ANN. § 14-10902(A) (Supp. 2011); DEL. CODE ANN. tit. 12, § 3302(a) (2007); FLA. STAT. ANN. § 518.11(1)(a) (West Supp. 2012); N.C. GEN. STAT.§ 36C-9-902(a) (2011); N.D. CENT. CODE § 59-17-02(1) (2010); OHIO REV. CODE ANN. § 5809.02(A) (West Supp. 2012); 20 PA. CONS. STAT. ANN. § 7203(a) (West 2005); S.C. CODE ANN. § 62-7-933(C)(1) (2009); S.D. CODIFIED LAWS § 55-5-6 (Supp. 2011); TENN. CODE ANN. § 35-14-104(a) (2007); VA. CODE

ANN. § 64.2-782(A) (Westlaw 2012) (formerly cited as VA. CODE ANN. § 26-45.4(A) (2011)); WYO. STAT. ANN. § 4-10-902(a) (2011).

168 See supra Part III.B. 169 See id. 170 Arguably, exculpating ILIT trustees benefits the beneficiaries because the

exculpation: (1) seeks to ensure the availability of persons willing to serve as trustees of ILITs and (2) reduces trustee fees because the trustee will not charge an investment management fee under the statutes. In fact, in Florida, the trustee cannot charge an investment management fee on the ILIT. See supra Part III.G.


This doctrine imposes investment duties on the trustee even if the trust agreement relieves the trustee of these duties because the settlor’s direction is not beneficial to the beneficiary. In fact, the trustee may have duties to ignore exculpation, manage the insurance policy, and seek judicial relief.171

Legislatures are finding it necessary to statutorily carve out life insur-ance from the trustee’s general investment duties because of fear that courts will not honor an express direction in the trust agreement that relieves the only party with fiduciary powers from fiduciary duties with respect to the only asset of the trust.172 The exculpation statutes represent the legislature’s tilting the balance in favor of the settlor’s intent rather than in favor of the benefit-the-beneficiaries preemption doctrine.

2. Delegation

Under the UPIA, a trustee may delegate investment functions to an in-vestment agent.173 The trustee is not liable to the beneficiaries or the trust for the decisions or actions of the investment agent if the trustee uses “rea-sonable care, skill, and caution in: (1) selecting an agent; (2) establishing the scope and terms of the delegation . . .; and (3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.”174 Can a court hold the trustee liable if the agent maintains the life insurance policy as the sole asset of the trust? Has

171 See Restatement (Third) of Trusts § 66 (2003). (1) The court may modify an administrative or distributive provision

of a trust, or direct or permit the trustee to deviate from an administrative or distributive provision, if because of circumstances not anticipated by the settlor the modification or deviation will further the purposes of the trust.

(2) If a trustee knows or should know of circumstances that justify judicial action under Subsection (1) with respect to an administrative provision, and of the potential of those circumstances to cause substantial harm to the trust or its beneficiaries, the trustee has a duty to petition the court for appropriate modification of or deviation from the terms of the trust.

172 See Ballsun et al., Administration, supra note 39, at 283 warning: With the increased risk of a legal challenge based upon a trustee’s failure to satisfy investment management criteria for trust-held life insurance policies, the status quo of a “passive” ILIT administration during the settlor’s lifetime may no longer function as an adequate shield against beneficiary dissatisfaction. The search should be for new ILIT operating models which would enable a trustee to comply with the UPIA investment management requirements.

173 See UNIF. PRUDENT INVESTOR ACT § 9(a), 7B U.L.A. 39-40 (2006). 174 Id.


not the agent’s retention of a single life insurance policy fallen below a pru-dent standard of care given the duty to diversify? If the trustee must monitor the agent, then does that duty require the trustee to independently determine that the agent is monitoring the financial stability of the life insurance compa-ny? A trustee’s delegation of investment functions may be insufficient to shift the trustee’s investment duties over the life insurance policy.175 Delegation of investment function, thus, does not effectively resolve the liability issues.

Florida has taken a unique approach in its adoption of an exculpation statute. In addition to providing exculpation, Florida modified its trustee delegation statute by permitting a trustee who administers an insurance con-tract to delegate certain investment functions related to an insurance policy to an agent “without any continuing obligation to review the agent’s ac-tions.”176 Florida’s statute is a marked improvement over the other exculpa-tion statutes because it provides a mechanism that insures that someone manages and monitors the insurance policies.

Florida’s amended delegation statute shifts investment responsibilities to the agent and relieves the trustee from monitoring the agent.177 It does not exculpate the trustee for purchasing the insurance policy at the beginning of the trust unless the trustee, after giving notice to the qualified beneficiaries, delegates investment functions to the agent before purchasing the policy.178 The statute lists those duties that the trustee may delegate.179 The trustee still faces exposure if a duty falls outside the scope of the delegable functions.180

The trustee in Florida may still have the continuing duty to ensure that the agent is competent to act. For example, if the trustee delegates invest-ment responsibility to the settlor and later learns the settlor has become in-competent, in all likelihood, the trustee has a duty to resume its investment duties or select another agent. A delegation always suffers the risk that the transferred investment duties will return to the trustee. On the other hand, a trust agreement that places upon a trust advisor sole investment responsibili-ties over life insurance policies and relieves the trustee of those duties avoids the issues of delegation because, with a trust advisor, the directed trustee never had investment duties.

175 See id. at § 9(b). 176 FLA. STAT. ANN. § 518.112(2)(a) (West Supp. 2012). 177 See id. 178 See id. at (3)(b). 179 See id. at (2)(b). 180 See id.


3. Trust Advisor

A trust can shift the duties to monitor and manage an insurance policy to a trust advisor.181 A trust can provide that the directed trustee has no in-vestment duties over the insurance policy. The directed trustee takes direc-tion from the trust advisor with respect to all matters concerning the life insurance policy.182 “The duties that a directed trustee has under these cir-cumstances depend on the characterization of the trust advisor’s power.”183 Under the UTC, a trust advisor is presumptively a fiduciary.184

The directed trustee has a duty to follow the direction of the trust advi-sor who has fiduciary duties “unless the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust.”185 If the directed trustee has no investment responsibility and receives direction from the trust advi-sor to exercise a policy option, does the trustee risk liability for following the direction if the exercise appears unwise? Can the directed trustee blindly follow the directions of what appears on its face to be obvious bad advice? If the trust does not waive the duty to diversify, and the trust advisor retains the insurance policy as the only asset of the trust, has a serious breach of trust occurred? If the trust waives the duty to diversify and the trust advisor retains the insurance policy even after several analysts have expressed con-cerns about the financial stability of the insurance company of which the

181 Alexander A. Bove Jr. argues that the terms trust advisor, trust consultant, trust director, and trust protector are all interchangeable terms. See Alexander A. Bove Jr., The Protector: Trust(y) Watchdog or Expensive Exotic Pet?, at SII-3-AAB (2003), available at http://www.actec.org/Documents/CLEMaterials/ProtectorBove.pdf (presentation at the 2003 ACTEC annual meeting).

182 See Belcher, supra note 142 (providing an excellent discussion of the law concerning the directed trustee); see also Henry Christensen III, The Use of Trust Protectors or Boards of Advisors in Long-Term Irrevocable Trusts, at E-23-MLG/HCIII (2007), available at http://www.actec.org/Documents/CLEMaterials/SemEGrahamChristensen100 years.pdf (seminar at the 2007 ACTEC annual meeting).

183 Belcher, supra note 142, at 13-30; see also Bove Jr., supra note 181, at SII-9-AAB.

184 See UNIF. TRUST CODE § 808(d), 7C U.L.A. 604 (2006). Bove Jr. asserts “[i]f the protector is someone in an advisory capacity to the settlor . . . or someone the settlor would be unlikely, under normal circumstances, to name as a beneficiary, the power will most likely be a fiduciary one.” Bove Jr., supra note 181, at SII-10-AAB to 11-AAB.

185 UNIF. TRUST CODE § 808(b), 7C U.L.A. 604 (2006). The Restatement requires the trustee to follow the directions of the trust advisor “unless the attempted exercise is contrary to the terms of the trust or power or the trustee knows or has reason to believe that the attempted exercise violates a fiduciary duty that the power holder owes to the beneficiaries.” RESTATEMENT (THIRD) OF TRUSTS § 75 (2007).


directed trustee is aware, has a serious breach of trust occurred? If the an-swers to these questions are yes, then under the UTC, the directed trustee will not have protection from exposure.186

In some jurisdictions, if the trust advisor’s power is personal, the di-rected trustee has no duty to review the exercise of the power.187 However, the directed trustee may have other duties that require the trustee to act and thus give rise to the trustee’s exposure.188

Some jurisdictions have provided additional protection to the directed trustee.189 For example, the Delaware Code provides:

If a governing instrument provides that a fiduciary is to follow the direction of an adviser, and the fiduciary acts in accordance with such a direction, then except in cases of wilful [sic] misconduct on the part of the fiduciary so directed, the fiduciary shall not be liable for any loss resulting directly or indirectly from any such act.190

The term willful misconduct is defined in the Delaware Code as “inten-tional wrongdoing, not mere negligence, gross negligence or reckless-ness.”191 Notably, the Delaware statute relieves the directed trustee of liability for gross negligence and recklessness.192 The Delaware statute pro-vides greater protection to the trustee than the UTC and the common law,

186 See Bove Jr., supra note 181, at SII-8-AAB; see also RESTATEMENT (THIRD) OF

TRUSTS § 75 cmt. d (2007) (indicating that even when the trust advisor’s power is personal, “if the trustee knows or has reason to believe that an attempted exercise exceeds the scope [of the advisor’s power] or would otherwise constitute an abuse of the power, the trustee would have a duty not to comply with the direction given by the holder of the power.”).

187 See Belcher, supra note 142, at 13-30. Bove Jr. notes that if the trust advisor “is a beneficiary or a person who would likely be an object of the settlor’s bounty,” the power may be personal. Bove Jr., supra note 181, at SII-10-AAB.

188 See Belcher, supra note 142, at 13-24; see also Rollins v. Branch Banking & Trust Co. of Va., No. CH 00-488, 2001 WL 34037931 (Va. Cir. Ct. Oct. 21, 2002). In Rollins, the trust clearly imposed upon the beneficiaries the investment duties with respect to a concentration in a publicly held company. See id. at *2. In light of the provisions of the trust and Virginia’s directed trustee statute, the court held that the trustee had no investment duties. See id. However, the court noted that “the trustee has a duty to fully inform beneficiaries of all facts . . . which come into the trustee’s knowledge and which are material for the beneficiary to know for the protection of his interests.” Id. at *3.

189 See Belcher, supra note 142, at 13-20. 190 DEL. CODE ANN. tit. 12, § 3313(b) (2007). 191 DEL. CODE ANN. tit. 12, § 3301(g) (Supp. 2010). 192 See id.


which do not permit waiver of gross negligence and recklessness.193 In most states, the directed trustee may have lingering fiduciary duties even if the trust agreement imposes upon the trust advisor all investment responsibili-ties with respect to the insurance policies owned by the trust.194

4. A Statutory Alternative

Because of the possible lingering fiduciary duties of a trustee even if the trust agreement waives investment duties,195 the trustee delegates the in-vestment duties to another party,196 or the trust imposes upon a trust advisor investment duties,197 legislatures have determined that settlors want to re-lieve trustees of any investment duties with respect to life insurance. Argua-bly, the exculpation statutes are unwise because the standard set by a statute should serve as a guidepost for prudence. Alternatively, the exculpation statutes are a reaction to the benefit-the-beneficiaries preemption doctrine. Both points have merit, but they address different issues.

The benefit-the-beneficiaries preemption doctrine addresses the settlor’s ability to set the standard of care in the trust agreement. Should the law honor a trust provision that seems harmful to the beneficiaries? The other issue is whether the law should establish, as the default law, a presumption that settlors do not want trustees managing life insurance. Trust default law should weigh in favor of prudence, to wit, that settlors want the trustee to manage the only asset of most ILITs. If legislatures find it necessary to honor the intent of the settlors who do not want trustees managing life in-surance policies, the exculpation statutes should state that the law honors an expressed direction in the trust agreement. The default law should not as-sume an intent that is harmful to the beneficiaries. However, the law should only honor a direction relieving the trustee of investment duties if another party is burdened with the investment duties.

a. Exculpation Contingent on Selection of Trust Advisor

Exculpation should only apply when another party, such as a trust advi-sor, has investment responsibilities. Settlors can draft ILITs to divide in-

193 The Delaware statute provides protection that may not be available even in some of

the states that have enacted additional protection for directed trustees. See Belcher, supra note 142, at 13-20; see also Benjamin H. Pruett, Tales from the Dark Side: Drafting Issues from the Fiduciary’s Perspective, 35 ACTEC J. 331, 357 (2010).

194 See Belcher, supra note 142 at 13-24. 195 See supra Part IV.D.1. 196 See supra Part IV.D.2. 197 See supra Part IV.D.3.


vestment responsibilities between the directed trustee and a trust advisor. To address existing ILITs that may not contain a trust advisor, the exculpation statutes could establish a mechanism allowing beneficiaries to appoint a trust advisor. The trust advisor would have the duty to determine whether the insurance policy is or remains a proper investment, including, but not limited to, the specific duties of monitoring the financial health of the insur-ance company and the other specific duties referenced in Part III.E.

b. Directed Trustee Relieved of all Fiduciary Duties to Monitor the Trust Advisor

For the exculpation statutes to operate effectively, they must relieve the directed trustee of absolutely all duties to monitor the trust advisor. The ex-culpation statutes should expressly provide that a directed trustee can rely upon the direction of the trust advisor and has absolutely no duty to deter-mine whether the direction is reasonable. The statutes should provide that the trustee has no duty to inform the beneficiaries of a direction received from the trust advisor. The statutes should shift the duty to monitor and re-place the trust advisor to the beneficiaries.

c. Specification of “Acquiring” and “Retaining”

The exculpation statutes should clearly specify that they exculpate the directed trustee for acquiring a policy that the trust advisor directed the trus-tee to purchase. Furthermore, the statutes should provide exculpation for the directed trustee’s retention of the insurance policy.

d. Waiver of all Investment Duties and Exculpation

The exculpation statutes should exculpate the trustee and relieve the di-rected trustee from all duties referenced in Part III.E to determine whether the insurance policy is or remains a proper investment. The directed trustee would never have investment powers over the life insurance policies; rather, the trust advisor would possess all investment duties and powers.

e. Waiver of Duty to Diversify

The statutes should provide that the trust advisor has no duty to diversi-fy, even though an insurance policy issued by a single company is the only asset of the trust.

f. Notice to Qualified Beneficiaries

The statutes should require notice to all qualified beneficiaries before granting exculpation protection. As indicated in Part III.B, notice to the set-tlor does not adequately protect the beneficiaries in all cases. Even if the


trust agreement divides investment responsibilities between a directed trus-tee and a trust advisor, requiring the directed trustee to notify the beneficiar-ies of the exculpation protection that the trustee seeks is wise. If the trustee believes that a well-drafted trust agreement provides adequate protection, the trustee can rely upon the trust agreement. If the directed trustee wishes to obtain the added protection of an exculpation statute, requiring the di-rected trustee to notify the beneficiaries that the directed trustee seeks the additional protection is reasonable.

g. Retroactive Application

Because notice should be a prerequisite for exculpation, the statutes should only protect action or inaction after the trustee gives the required notice. If legislatures wish to provide exculpation coverage for past inac-tion, the statutes should only provide such protection when the trustee has selected the policy upon the request of the settlor.198

V. CONCLUSION

Legislatures that wish to retain the default standard of no responsibility, as currently contained in the thirteen exculpation statutes, should amend their statutes to: (1) specify what language waives the default standard,199 (2) clarify whether the specific waivers are in addition to the broad waiv-er,200 (3) provide that notice is required to be given to the beneficiaries,201 (4) specify that the statutes cover the “acquisition” and “retention” of the policy,202 (5) waive the duty of care in addition to merely exculpating the trustee,203 and (6) resolve other ambiguities specific to certain states as set forth in Part III.

The revisions set forth in the preceding paragraph are not sufficient. The statutes should exculpate trustees for following the directions of the trust advisor. The statutes should not relieve a trustee of investment respon-sibilities unless the trust agreement or the law has imposed upon another individual investment responsibilities. The default standard should assume what effectuates the real intent of the settlor—to benefit the beneficiaries.

198 See supra Part III.B. 199 See supra Part III.B. 200 See supra Part III.E. 201 See supra Part III.B. 202 See supra Part III.A. 203 See supra Part III.C.