Diversification, Due Care and the Duties of an ILIT Trustee
By Patrick J. Collins, Ph.D., CLU, CRA
Although the "black letter" language of the Third Restatement of Trusts (§227) emphasizes the trustee’s duty to diversify trust investments, there is scant commentary on the practical effect of this duty on the administration of Irrevocable Life Insurance Trusts (ILITs). Indeed, because most policies are purchased with the assistance of a salesperson, it is often the case that all insurance coverage is underwritten and placed with a single insurance carrier. If the demise of such companies as Executive Life and Confederation Life were not sufficient to alert the trustee to the perils of extreme asset concentration, the recent run on the bank at General American Life serves as a powerful reminder. The Missouri Insurance Department’s placement of General American under its supervision is especially noteworthy because of the company’s excellent long-term policy performance track record.
This observation raises an interesting question: Can a trustee defend the decision to place most or all of the life insurance coverage with a single carrier based on the company’s historical track record? Insurance vendors often point to past policy performance as a primary reason to select a particular insurance company. Although rational consumers might hesitate to commit their entire nest egg to a single stock or even a single mutual fund despite evidence of superior past performance, nevertheless, it is common for a trustee to eschew diversification within the insurance portfolio.