Uniform Prudent Investor Act: How does it impact CPA trustees?

By Jason S. Abosch, CPA/PFS, CFP, MBA

Placing a life insurance policy in trust to remove the death benefit from one’s estate is a common and effective estate planning technique. The trustee of the life insurance trust acts as a fiduciary on behalf of the trust’s beneficiaries. When acting as a CPA trustee for a life insurance trust, it is important to understand the provisions of the Uniform Prudent Investor Act (UPIA).

Adopted in whole or in part by a vast majority of states, UPIA makes five fundamental alterations to the former criteria for prudent investing. The UPIA removed much of the common law restriction upon the investment authority of trustees and like fiduciaries, and provides trustees with broader flexibility and responsibilities. This article will address the impact of the UPIA on CPA insurance trust trustees.

In UPIA, “All categoric restrictions on types of investments have been abrogated; the trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and that meets the other requirements of prudent investing.” This is an important consideration to keep in mind as one applies UPIA to the role of a CPA insurance trust trustee. The definition of investments, as it applies to UPIA, is not restricted to traditional stocks and bonds. Rather, experts believe that all types of assets, including insurance, are covered under UPIA. As such it is important for a CPA trustee to consider the underlying insurance policy’s appropriateness given the trust’s risk and return objectives. Passive insurance management could lead to a breach of one’s fiduciary duties.

It is, according to UPIA, “…the tradeoff in all investing between risk and return which is identified as the fiduciary's central consideration.” It therefore may be a prudent practice for CPA trustees to create an insurance investment policy statement (IPS). The IPS should be agreed upon by all related parties, and identify the goals and objectives of the insurance policy, the minimum acceptable criteria for selecting a carrier, and a general review policy for the trustee.

UPIA also covers diversification of trust assets. “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.” In terms of the insurance diversification requirement, a trustee should determine whether one policy or multiple policies will fulfill the trusts risk and return objectives. It is crucial for the CPA trustee to understand the trust’s objective. Without this understanding, it is difficult for one to meet the diversification requirements of UPIA.

“The standard of prudence is applied to any investment as part of the total portfolio, rather than to individual investments. In the trust setting the term "portfolio" embraces all the trust's assets.” In terms of complying with one’s fiduciary responsibilities, a trustee must consider the impact of lapse issues, non-payment of premium, and supplementary benefits like waiver of premium, in the context of the overall estate plan, not just the individual insurance policy.

Fortunately for CPA trustees, the nondelegation rule in the 1959 Restatement of Trusts which states, "The trustee is under a duty to the beneficiary not to delegate to others the doing of acts which the trustee can reasonably be required personally to perform" is reversed by the UPIA. The UPIA states that trustees are no longer forbidden to delegate investment and management functions. According to the UPIA, “A trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances.”

Licensed Insurance Advisors, not to be confused with a licensed insurance agent, may be an appropriate delegatee for CPA trustees. In Maryland, a licensed Insurance Advisor, as defined by Maryland Code, is a person who, for compensation:

examines or offers to examine a policy, annuity contract, or pure endowment contract for the purpose of giving, or gives or offers to give, advice or information about:

(i) the terms, conditions, benefits, coverage, or premium of a policy, annuity contract, or pure endowment contract; or

(ii) the advisability of changing, exchanging, converting, replacing, surrendering, continuing, or rejecting a policy, annuity contract, or pure endowment contract or of accepting or procuring a policy, annuity contract, or pure endowment contract from an insurer; or
represents to the public that the person gives or is engaged in the business of giving advice or information to holders of policies or annuity contracts by use of the title "insurance adviser", "insurance specialist", "insurance counselor", "insurance analyst", "policyholders' adviser", "policyholders' counselor", "refund company", or other similar title:

(i) in or on advertisements, cards, signs, circulars, letterheads, or elsewhere; or

(ii) in any other manner in which public announcements are made.

Experts generally believe that it is in a fiduciaries best interest to apply UPIA when acting as trustee for a life insurance trust. CPA trustees, by virtue of UPIA, have the authority to delegate fiduciary review of insurance policies to experts. Today’s insurance products are more complicated then ever. Engaging an Insurance Advisor can help ensure compliance with UPIA and prevent unnecessary disputes between trustees and beneficiaries.

Jason S. Abosch, CPA/PFS, CFP, MBA, is an associate with FranklinMorris.

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