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Examining the exemption to the prudent investor rule

In the past, this blog has detailed the prudent investor rule as it applies to trustees in Miami. Simply put, it requires that trustees invest trust assets with the right amount of research and judgment one would expect from a reasonable, prudent person. This seemingly puts a lot of pressure on trustees for their investment vehicles to perform well. However, there is one major area of trust management that is exempt from this rule: life insurance.

Information shared by the National Association of Insurance Commissioners shows that in 2015, over $45.3 billion was written in life, accident and health (separate from standard health coverage) premiums in Florida alone. These numbers seem to reveal the importance that people place on having an insurance policy to help cover any expenses associated with their deaths or incapacitation.

Often, a trust settlor will designate funds for a trustee to purchase life insurance. According to the Florida Trust Code, a trustee is not liable for any financial loss linked to a contract for life insurance. This applies to any life insurance policy purchased to cover either the settlor or his or her spouse. The trust instrument should reference this section of the Trust Code, and the trustee should give notice to beneficiaries that it applies to life insurance held by the trust. Beneficiaries are allowed 30 days to object to any of the actions that the law lists as offering immunity of liability to the trustee.

The only situations that would fall outside of this statute are cases where the trustee purchases life insurance from an affiliate, or where the trustee or an affiliate receives a commission based off of the sale of a policy. In such a case, the actions of the trustee would become subject to the prudent investor rule. 

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