Who is Suing Me?!?!

Luckily no one is.  But if I were the trustee of an ILIT I would be very worried.  I have always found the selection process for trustees to be a bit of a circus.  Very little thought seems to be given to what it really means to have a fiduciary duty to the beneficiaries.  The potential for conflict with beneficiaries is not given enough consideration, and once the lucky individual is selected, no guidance is given regarding what they really need to do on a year in year out basis in order to stay out of trouble.  It is truly a recipe for disaster. 

All of this is really nothing new to any of us, as we have talked about it conceptually for years when we discuss the need for annual reviews of ILIT owned insurance and the theoretical challenges trustees face.  Usually, we are pretty happy to run an inforce ledger and make sure the Crummey letters are actually being sent out.  I'm here to tell you that is not enough, and to make matters worse, life insurance agents being actively involved make provide a false sense of security for everyone involved, even the responsible trustee who tries to do the right thing.

What the heck is the basis for this last comment?  Case law.  While I am sure there has been case law around this topic prior to last year, a case out of an appellate court last year made some very clear points regarding what is and is not enough to satisfy the legal definition of fiduciary duty.  Consider the following:

Case details here:

• ILIT funded with VUL policies placed in 1999 (these replaced previous life policies and an annuity) totaling $8mil in face amount.
• Early 2000's hit cash value hard, also make additional funding from the grantor impossible.
• In 2003 these policies were replaced with a GUL contract, single pay via 1035 exchange with a face amount of almost $2.5 mil.  This was based on an outside, fee for service review of the existing $8mil of VUL.
• Insured dies unexpectedly in January 2004.
• Beneficiaries file suit asking for accounting and alleging breach of fiduciary duty and improper delegation.
• Trustee was found to have acted in accordance with the standard established by the prudent investor rule.
• The Trustee was found to have not delegated any responsibility to the life agent who recommended the replacement in 1999 based on the fact that they hired an outside firm, Oswald, to provide an analysis and recommendations.

Pay close attention to that last point, as it makes a clear distinction between a commissioned life agent and an objective third party.  At issue is what the trustee can and can not delegate to a third party, and who is an acceptable third party?  While delegating the review of policies to a qualified expert is clearly a good thing for most trustees, just about every one of us would be a bad choice because we are commissioned salespeople, and as such, have a potential conflict of interest in the court's eyes.

As much as I have a problem with the court's opinion of life agents, the message is clear - if we are providing this service to trustees thinking we are solving the problem, we may be providing nothing more than a false sense of security.  Now, I am not saying that the ultimate recommendation is the problem.  By and large we do a great job with this type of work.  The problem is proving it in court.  I certainly have better things to do with my time, and I am sure you do as well. 

Click here to read the full opinion:

http://www.in.gov/judiciary/opinions/pdf/03020903jgb.pdf

The courts never really questioned the methods of the third party that did perform the actual review.  The beneficiaries questioned the outcome because it resulted in a smaller pay day, but the trustee's knowledge of the economic reality of the grantor and the fact that an objective third party was used kept the trustee out of trouble.

The moral of the story is clear - we need to find some qualified experts to review these policies on a periodic basis.  I have a great solution for you called Insurance Analytic.  Give me a call or send an email to find out more.