Life Insurance Protects the People You Love
When an individual with a living trust—also known as the trustor or grantor—purchases life insurance, the purpose is typically to provide financial protection for loved ones after death. In many cases, the living trust is named as the beneficiary of the life insurance policy.
For example, John and Nancy Smith establish The John and Nancy Smith Living Trust and purchase individual life insurance policies, each with a death benefit of $1,000,000. They name their living trust as the beneficiary of both policies. Upon the death of both John and Nancy Smith, the trust receives a total of $2,000,000 in life insurance proceeds. As a result, the assets held within The John and Nancy Smith Living Trust increase by $2,000,000
Living Trust or Trustee Insurance Protects the Trustee
Using the same example, the trustee of The John and Nancy Smith Living Trust is David Jones. As trustee, David has a fiduciary responsibility to manage and administer the trust strictly in accordance with its provisions and applicable law. This means he must act in the best interests of the trust and its beneficiaries, avoid errors, and refrain from any improper personal benefit.
After John and Nancy Smith pass away, the trust’s assets increase significantly due to the $2,000,000 in life insurance proceeds. With larger asset values often comes increased scrutiny. If a beneficiary believes the trust assets have been mismanaged or that the trustee has failed to follow the terms of the trust, the beneficiary may bring a claim or lawsuit against the trustee personally.
Trustee liability insurance—sometimes referred to as living trust insurance—is designed to protect the trustee from personal financial loss arising from such allegations.
Common Claims Brought Against Trustees
Claims against trustees often arise from allegations such as:
- Breach of fiduciary duty
- Mismanagement of trust assets
- Failure to follow the terms of the trust
- Improper or unauthorized distributions
- Conflicts of interest
It is important for Trustees to discuss with their attorneys how to avoid these common claims. This will avoid tremendous grief and complications for not only the trustee, but those who are benefitting from the trust.
Living trust and life insurance are both insurance products with different purposes
Life insurance protects people you love and care about. Trustee insurance protects the trustee and allows the trustee to perform the duties they are obligated to perform on the trustor’s behalf. Both insurance products in the end provide peace of mine.