I am in the process of wrapping up a 1035 exchange case with one of my producers out of New Jersey this month.  Given that it was a New York case and therefore subject to Reg 60, this has been in the works for a while.  As pleased as I was with the outcome of this case, it serves as a bit of a cautionary tale in two very important ways.

The first is that despite the fact that the Trustee technically has a fiduciary duty to the beneficiaries, it is often the agent that either ends up being the hero or the villain in these stories.  Strangely, in this particular case the agent ends up being both while the Trustee is reduced to more or less a bystander.  How is it possible for the agent to be both hero and villain?  Simple.  Two agents.

The original writing agent on the ILIT owned policy may have done excellent work at the beginning for all I know.  This was an old policy, and the breadth of product available today was certainly not available at the time it was issued.  Where he fell down is the Achilles Heel of many advisors - the periodic review of the insurance.  In fact, he may have taken this to new heights, as the policy was from an old mutual company that de-mutualized a number of years ago.  The distribution of company stock to policy owners resulted in the trust sitting on a bunch of stock for years.  This stock, along with about $20K in cash, had not been touched or even thought of since.

Along comes a new advisor, my producer, and all of the sudden some attention is being paid to the policy and the ILIT.  The end result was the new insurance policy mentioned above and the 1035 exchange.  That transaction increased the guaranteed death benefit from $800K to over $1.3 mil.  Great work!  But what about the rest of the trust assets?  What if we liquidated that stock position and dropped the net proceeds and the cash into the new policy?  That $1.3 grows to $2.3!  Given that the combination of stock as cash was roughly $145K, I would say that is some pretty nice leverage!

The bottom line on this case is that there was approximately $1 mil that would have potentially been left on the table if the new agent, the hero in this story, had never arrived on the scene.  Even more importantly, our design does not require any further premium payments.  The original contract was not guaranteed and the client would have been required to resume premium payments to maintain the death benefit guarantees. 

So how else is this story a cautionary tale?  Very simply, the former trustee would almost certainly face some questions and perhaps even some liability for his lack of attention to the trust assets.  This may not really have been the trustee's fault.  Think about the trust owned insurance you have on the books.  Now think of how the trustee selection process played out.  Is there potential for similar issues?  You bet!  Most trustees think it is simply a matter writing the check to the insurance company on behalf of their friend or relative because that is all they are told.  We all know there is much more to the story.

Enjoy your weekend.