Wills, Trusts & Estates Prof Blog

ERISA, Trust Law, and the Appropriate Standard of Review

Joshua Foster (J.D. Candidate, June 2008, St. John's University School of Law) has recently published his Note entitled ERISA, Trust Law, and the Appropriate Standard of Review: A De Novo Review of Why the Elimination of Discretionary Clauses Would be an Abuse of Discretion, 82 St. John's L. Rev. 735 (2008).

Here is an abstract of his article:

Since the Supreme Court’s landmark decision in Firestone Tire & Rubber Co. v. Bruch, circuits have routinely upheld the use of discretionary clauses in insurance policies.  As the name implies, discretionary clauses allocate significant discretion to plan administrators, and decisions made by the administrators are reviewed under an arbitrary and capricious standard as opposed to de novo.  In early 2006, the New York Insurance Department issued two advisory circular letters maintaining that the use of discretionary clauses in insurance policies violates New York Insurance laws, and threatened to pass legislation banning their use.  However, allowing the New York Insurance Department to succeed in eliminating discretionary clauses will deprive the judicial system of its discretionary function in direct contradiction to the trust law the insurance scheme is built upon.  Additionally, many policy concerns including cost to policyholders and principles of judicial efficiency would be undercut by these changes.   This note argues that the legislature should not change the current scheme and consequently alter the judicial role, because the current scheme adequately protects the interested parties and is consistent with trust law that underlies ERISA and state insurance law.

Have Non-Probate Transfers Gone Too Far?

Kent Schenkel (Associate Professor, New England School of Law) has recently posted on SSRN his article entitled Testamentary Fragmentation and the Diminishing Role of the Will: An Argument for Revival.  This article is scheduled for publication in 41 Creighton L. Rev. 155 (2008).

Here is the abstract of his article:

Popularized by a desire to avoid the complexities and inefficiencies of probate, the now ubiquitous nonprobate system of transferring property at death brings a wealth of complexities and inefficiencies of its own. Our patchwork system of will substitutes, while undeniably simplifying post-death administration, requires more documentation, techniques, and tasks than ever before. On the positive side, our experiences with nonprobate transfer techniques revealed flaws in testamentary transfer laws that are now being addressed. But exposure of ancillary problems with wills laws is only a byproduct of the nonprobate revolution. If we are to reign in fragmentation and its consequent ponderousness and inefficiency we must admit that our aversion to probate, not wills, is driving the proliferation of wills substitutes. Ironically, the will, the instrument whose undesirable post-death characteristics spawned the turn towards alternative techniques, offers a simple and efficient mechanism for channeling a person's testamentary desires. The only significant impediment to reviving the will as the instrument of choice for this purpose is that wills carry the burden of probate. But because probate is now seen as largely unnecessary in many estates, legislation should focus on relieving wills from that burden.

The Life Insurance Industry--Elder Abuse Interface

Johnny Parker (Professor of Law, University of Tulsa College of Law) has recently published his article entitled Company Liability for a Life Insurance Agent's Financial Abuse of an Elderly Client, 2007 Mich. St. L. Rev. 683 (2007).

Here is an excerpt from the introduction of his article:

The purpose of this Article is to examine the life insurance industry's role in financial elder abuse. Part I explains why elders are perfect fraud victims for life insurance companies and agents. It examines the intrinsic and extrinsic considerations that make elderly people the perfect prey for predators, such as rogue life insurance agents. Part II explores the extent to which insurance agents engage in financial elder abuse. While financial elder abuse is frequently attributed to a minority of unscrupulous insurance agents, Part II demonstrates that the problem is more widespread than the life insurance industry is prepared to acknowledge. Part III describes the story of one life insurance agent's financial elder abuse case that occurred in Oklahoma and culminated in litigation in 2005. While the story is typical in many respects, it was chosen primarily because of the agent's response when the scam was finally detected. Part III demonstrates that elders who are financially victimized by their insurance agents rarely, if ever, received full financial compensation. Consequently, Part III serves as the launch pad for the primary thesis: making out a case of company liability for a life insurance agent's financial elder abuse. Part IV explores the traditional legal theories typically used to impute liability to employers for torts committed by employees. This Part explains each theory in detail with emphasis on its appropriateness in the context of financial elder abuse.

Split-Dollar Life Insurance

Joshua E. Husbands (Partner, Holland & Knight, Portland, Oregon) and J. Alan Jensen (Partner, Holland & Knight, Portland, Oregon) have recently published their article entitled Split-dollar Life Insurance Funding: You Mean People Still Do That?, Prob. & Prop., May/June 2008, at 40.

Here is an excerpt from their article:

After several torturous years of notices, reflection, meetings, and debate, the IRS issued final regulations for the taxation of split-dollar financed life insurance effective for agreements entered into after September 17, 2003. * * *

Despite the gloom and doom forecasted by many in the insurance industry and the legal profession, the final regulations did not sound the death knell for split-dollar planning.  Granted, some of the luster was gone from the heady days of collateral equity split-dollar arrangements using economic benefit measured by artificially low terms rates that had never actually seen the light of day in connection with the actual issuance of a real life insurance policy.  Nonetheless, in many instances the use of split-dollar arrangements still makes great sense and ca provide a very nice tax result for clients. * * *

This article analyzes the issues that should be raised with both older arrangements and those being put in place currently.

Insurance Beneficiary Murders Insured

Primary Beneficiary was convicted of Insured’s murder in the case of In re Estate of Stafford, 244 S.W.3d 368 (Tex. App.—Beaumont 2008, no pet. h.).

Accordingly, the proceeds of the policy were paid to Contingent Beneficiary under Texas Probate Code § 41(d) and Texas Insurance Code § 1103.151.

Primary Beneficiary appealed claiming that his conviction was not final because an appeal was pending.

The appellate court affirmed.  The court explained that the Code provisions do not require that the conviction be final before forfeiture occurs.

Moral:  A beneficiary accused of murdering the insured should put forth the best case possible at the trial level because forfeiture will occur even if the conviction is subsequently reversed on appeal.

The depositor’s will can be clear and convincing evidence to defeat the joint account survivorship feature

In In re Estate of Novosielski, 937 A.2d 449 (Pa. Super. Ct. 2007), the court held that a U.S. Treasury Direct account entitled “A or B” is a joint account governed by the Pennsylvania Multi-Party Accounts Act.

If the creation of a joint account is not consistent with provisions of the depositor’s will, these provisions may act as clear and convincing evidence of the testator’s intent that the account is not to pass to the other joint holder on the testator’s death but is rather part of the testator’s probate estate.

To hold otherwise, the court explained, would be to sanction revocation of a will in a manner inconsistent with state law.

Gift of brokerage account accomplished by opening account under donee’s name and Social Security number

A father opened a brokerage account in his son’s name and Social Security number.  The son knew nothing of the account until after it was closed by someone other than the father and the property transferred to a joint account in the name of the father and another child.

The son sued the brokerage firm and was awarded the value of the account at the time it was closed plus costs.

The court in Wasniewski v. Quick and Reilly, Inc., 940 A.2d 811 (Conn. 2008), upheld the judgment, holding that the father had made a completed gift of the brokerage account and that the son was the third party beneficiary of the contract between the father and the brokerage firm.

Hidden Fees in Qualified Retirement Plans – Problem and Solution

Matthew D. Hutcheson (MS, CPC, AIFA®, CRC®, Independent Pension Fiduciary) has recently published his article entitled Uncovering and Understanding Hidden Fees in Qualified Retirement Plans, 15 Elder L.J. 323 (2007).

Here is an excerpt from the conclusion to his article:

Participant directed accounts, their management, and the associated errant industry culture are the sources of the current fee problem. To eliminate hidden fees, the nonfiduciary participant-directed IRA suitability culture must be rooted out of all ERISA-governed plans. Failure to treat all plans subject to Internal Revenue Code (IRC) § 401(a), and hence subject to ERISA's fiduciary standard, the same has now placed some 401(k) service providers and fiduciaries at risk. They find themselves in the crosshairs of highly effective litigators, the SEC, the DOL, and state Attorneys General for violations of the exclusive benefit and other fiduciary rules. Most fiduciaries have not discovered that the fee problem begins deep inside the operational structure of the industry, and until this fact is universally internalized, the problem will remain within 401(k) plans. The 401(k) industry itself is now being viewed with suspicion and has taken a serious credibility and public image hit.***

It has taken serious litigation initiatives to bring this topic into the homes of the people it affects. Regular folks get it now, and vendors should consider the consequences of an indignant public. It is likely litigation will continue as long as the 401(k) industry insists on defending an inappropriate economic and philosophical model. It is advisable for the industry to settle these lawsuits, and seek direct guidance from an independent steering committee to fix the system and restore trust with the investing public.***

EU Court Holds Surviving Life Partner Should Receive Pension Benefits

The following is from Court rules on gay marriage rights, news.yahoo.com, April 1, 2008:

EU nations that recognize same-sex unions as legal marriages must grant surviving partners the same pension rights as given to those in traditional marriages, the EU Court of Justice ruled Tuesday.***

The EU court said pension plan had discriminated against the man on the grounds of sexual orientation because the men's relationship had been recognized under German law as a legally registered life partnership equivalent to a traditional marriage.

The court did not say, however, that all 27 EU nations must recognize same-sex unions, only that if they did they must grant life partners the same benefits.***

Amicus Brief for Met Life v. Glenn

The following is posted on this blog at the request of Prof. Melanie B. Leslie:

Professors Melanie B. Leslie (visiting Prof., Columbia Law), Stewart E. Sterk (Cardozo), James A. Wooten (Buffalo) and Maria Hylton (University of Boston) have drafted an amicus brief on behalf of trust law and ERISA law professors in support of respondent’s brief in the Supreme Court case Met Life v. Glenn. The case will be argued on April 23.  The amicus brief will be sent to the printers on March 28th.  The bulk of the brief addresses trust law issues. If are a trust or ERISA law academic and would like to consider signing on to the brief, please email Melanie Leslie at mlesli@law.columbia.edu to request a draft.

The specific questions raised in the case are 1) whether an insurance company that both determines eligibility for employee benefits and pays those benefits acts under a conflict of interest, and if so, 2) what weight should a court give that conflict when evaluating an employee’s claim that the plan administrator abused its discretion in denying the employee’s claim?

In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, (1989), the Supreme Court, citing trust law, held that beneficiaries of ERISA plans are generally entitled to de novo review of benefit denials by plan administrators. The Court then suggested, however, that a benefit plan might narrow the scope of judicial review by conferring on plan administrators “discretionary authority to determine eligibility for benefits.”   The Court, citing the Restatement (Second) of Trusts, also noted that that “if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a ‘facto[r] in determining whether there is an abuse of discretion,’” Id. at 115.

Since Firestone, most employee benefit plans expressly grant discretion to the plan administrator to interpret the plan and determine eligibility for the payment of claims.  This is true even when the administrator is the same entity that is responsible for paying the claims. The question that has plagued the circuit courts for nearly 20 years, creating an 11-circuit split of authority, is how a court should evaluate an employee’s claim that an administrator with a conflict of interest abused its discretion in denying the employee’s claim.  In our view, much of the confusion is attributable to federal courts’ misunderstanding trust law, which they purport to apply.

Retirement Distribution Rules Guide Updated

Seymour Goldberg has recently updated his book, The Advisor's Guide to the Retirement Distribution Rules, for Circular 230 and the Pension Protection Act of 2006.

Here is a description of this book:

In this competitive environment it is important to add value to your practice. A knowledge of retirement distribution planning is a subject that can enhance your practice. This is especially true today because many of your clients have accumulated considerable amounts of wealth in their retirement accounts. These retirement accounts can be transferred to your clients' heirs and can provide for decades of growth for these tax deferred accounts. This practical guide that explains many of the retirement distribution rules will help you achieve this knowledge. Your clients and their heirs need this vital information. This knowledge will help both you and them.

This guide includes coverage of such issues and materials involving:

1. What rules apply if you die before your required beginning date?
2. What rules apply if you die after your required beginning date?
3. What happens if you die and have multiple beneficiaries of your retirement account?
4. How do the heirs of your retirement account take advantage of the separate share rules?
5. If you die and fail to receive your entire required minimum distribution for the year of death, what happens to the unpaid required minimum distribution?
6. Why is a spousal rollover important in distribution planning?
7. What action should a surviving spouse beneficiary take and when?
8. What happens if a surviving spouse erroneously rolls over a required minimum distribution?
9. When must required minimum distributions commence from a Roth IRA?
10. What penalty applies to an erroneous rollover?
11. If a beneficiary subsequently dies after the death of the IRA owner, what happens?
12. May a beneficiary in pay status name a successor beneficiary?

This guide not only provides an analysis of the retirement distribution rules but also illustrates by specific examples how the retirement distributions rules work. Over sixty examples are covered in this guide.

Survey Shows Americans Prefer to Hang on to Their Retirement Accounts

The following is from Eileen Alt Powell, Americans Delay Spending IRAs, sfgate.com, Jan. 27, 2008:

Americans who have money stored in Individual Retirement Accounts tend to hang on to it for use in the later years of their retirement, according to a study being released Monday.

The Investment Company Institute, a Washington, D.C.-based trade association, found that less than one-fifth of households with IRAs made withdrawals from their accounts in tax year 2006, with the typical withdrawal averaging about 6 percent of the balance.***

She said that other studies have found that people want to hang on to their IRA money as long as possible to preserve the tax advantages.***

The greatest growth has come from assets rolled over into IRAs from employer-sponsored accounts like 401(k)s, the study said. In tax year 2006, just 14 percent of U.S. households made contributions directly to IRAs, it said.***

State statute provides exclusive method for creating survivorship rights in community property.

In a case of first impression, the court in Beatty v. Holmes, 233 S.W.3d 475 (Tex. App. 2007), held that satisfying the requirements of Texas Probate Code § 452 is the sole method for creating rights of survivorship in community property, rejecting the argument that the general authorization for the creation of non-probate property in Probate Code § 450 provides an alternative method.

In a companion case, Beatty v. Holmes, 233 S.W.3d 494 (Tex. App. 2007), the court applied its prior holding to the facts of the case and held that extrinsic evidence could not be considered in determining whether a brokerage account agreement satisfied the requirements of § 452 and that if the brokerage agreement validly created survivorship rights, those rights did not apply to share certificates issued out of the account.

A Man Returns from the Dead after His Wife Collects His Life Insurance Proceeds

According to Canoeist's Wife Confesses To 'Plot', news.sky.com, Dec. 5, 2007:

John Darwin's wife has confessed to knowing he was alive after he "died" in a canoe accident five years ago, Sky News sources say.

Anne Darwin is said to have made the admission after her husband was arrested on suspicion of fraud.

Earlier, she had admitted to cashing in his life insurance policy after he was declared dead in a canoe accident in 2005.***

[T]he 57-year-old former prison officer was arrested after the emergence of a picture reportedly showing Darwin with Anne in Panama last year which investigators said "raised a lot of questions".

Mrs Darwin is said to have made the confession after being confronted with the photograph.***

Treasury Department Going Plastic

The following is from Eleanor Laise, Treasury Plans Social Security Debit Card, WSJ.com, Jan. 4, 2008:

The Treasury Department plans to introduce a prepaid debit card for Social Security recipients in an effort to provide safer and cheaper benefits payments.***

The Plan: Treasury will roll out a prepaid debit card designed for Social Security benefits recipients who don't have bank accounts.

The Motivation: The move is part of a broader effort to provide cheaper, more secure benefits payments by shifting away from paper checks.

The Outlook: The plan may require substantial marketing and education to help users understand the card. ***

Special thanks to Neil E. Hendershot, Esq. (Attorney at law, Goldberg Katzman, P.C., Adjunct Professor, Widener University School of Law) for bringing this development to my attention.  You can read more on Neil's blog at PA Elder, Estate & Fiduciary Law Blog.

You better trust your life insurance beneficiary!!

As today's (January 19, 2008) B.C. comic reminds us, "Never go rock climbing with your life insurance beneficiary."

Tentative Draft on Powers of Appointment in the Restatement (Third) of Property

Ira Mark Bloom (Justice David Josiah Brewer Distinguished Professor of Law, Albany Law School) has recently published his article entitled Powers of Appointment under the Restatement (Third) of Property, 33 Ohio N.U. L. Rev. 755 (2007).

Here is an excerpt from the conclusion to his article:

The Tentative Draft on powers of appointment is a major and important piece of work. It provides many lessons for estate planners, both in the planning and drafting areas. In connection with planning, estate planners must understand that tax concepts of powers may differ in important ways from the policy concepts adopted in the Tentative Draft. For example, although a power subject to an ascertainable standard is not a general power for transfer tax purposes, the power is a general power for property purposes with the potential adverse creditors' rights. Because the Tentative Draft greatly expands creditors' rights for general powers not created by the donor, serious consideration should be given to releasing or disclaiming such powers. ***

I have one final suggestion for ensuring acceptance of the Restatement's principles and policies for powers of appointment that otherwise may be rejected. A Uniform Powers of Appointment Law based on the Restatement (Third) of Property should be undertaken. Unfortunately, if experience is any guide, even a Uniform Powers of Appointment Law will not succeed in the enactment of principled rules in all states as too many states in a relentless race to the bottom are more interested in securing trust business.

Husband’s property transfer during marriage held fraudulent on wife’s marital rights

In Schoukroun v. Karsenty, No. 1689 (Md. Ct. Spec. App. Dec. 11, 2007), husband created a trust and designated his daughter from a previous marriage as its only beneficiary. He transferred three accounts into the trust immediately and thereafter designated the trust a beneficiary of two other accounts. These two accounts became transfer-on-death (TOD) accounts.

The court held that even if the husband did not act with fraudulent intent, his transfer of property during marriage constituted fraud on his wife’s marital rights because it was not complete, absolute, and unconditional. Therefore, the court decreed that the assets of the trust as well as the TOD accounts must be included in the husband’s estate for purposes of calculating the wife’s statutory share.

Special thanks to Matthew B. Bogin, Esq., for bringing this case to my attention.

Living Wills in Ireland

Liz Campbell, (Lecturer, University of Aberdeen School of Law) has recently posted on SSRN her article entitled The Case for Living Wills in Ireland.

Here is an abstract of her article:

Exceptionally difficult philosophical and ethical questions arise vis-à-vis living wills. By exploring these contentious issues, this article seeks to establish whether legislation providing for living wills should be enacted in the Irish context. At present, the relevant jurisprudence indicates that such documents would be respected by the Irish courts. Nevertheless, the complexity of the issue and the need for a specific delineation of the scope of these instruments suggest that legislation may be desirable in this regard. In considering whether legislation providing for the enactment of living wills should be introduced in Ireland, this article explores the conflict between the right to autonomy and best interests, the notion of personal identity, and the author's lack of knowledge of future experience and interests.

Baby Boomers and Social Security Retirement Benefits

Francine J. Lipman, (Professor of Law, Chapman University School of Law) has recently posted on SSRN her article entitled Shrinking Boomer Social Security Retirement Benefits.

Here is an abstract of her article:

In 2008, the oldest of 78 million baby boomers will celebrate their 62nd birthdays. Before they blow out their birthday candles, they will have considered and likely decided whether to elect to take early Social Security retirement benefits (SSRBs). Recent and evolving changes in the normal retirement age under Social Security, Medicare premiums and increased exposure to income tax costs have reduced the net cash flow many senior boomers will enjoy from SSRBs. Because of the overall lack of transparency in the Social Security benefits formula and the complex interplay of continued work, Medicare, taxes, and the various timing-options, many boomers are unable to make informed decisions about critical retirement matters. This article presents these issues to assist in making informed retirement decisions.

Purchasing Life Insurance Policies – Prosperous but Controversial Business

Earlier on this blog, I discussed talk-show host Larry King’s suit against an insurance brokerage that bought policies on his life.

Liam Pleven and Rachel Emma Silverman, Betting on death in the insurance business sparks controversy, Wall St. J., newsday.com, Nov. 26. 2007, have more details on this practice:

In an arrangement known as a "life settlement," Coventry pays the holder a lump sum for the policy now, takes over paying the premiums for as long as the insured person lives, then collects the benefits -- generally worth far more -- when the person dies.***

Policyholders*** have lodged complaints. Television talk-show host Larry King filed a lawsuit in October against a Maryland insurance brokerage, claiming he got a raw deal when he sold two policies on his life, with face values totaling $15 million, for $1.4 million.***

Coventry and other firms controlled by the Buerger family make money by buying up policies and collecting the death benefits, collecting fees on policies they manage for others, and arranging loans to people who want to finance their premiums.

Authorities have challenged some deals as well.***

Coventry says it believes the few remaining claims "have no merit."***

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

Illinois Law and POD Accounts

Helen W. Gunnarsson (Highland Park, Illinois attorney and writer) has recently published her article entitled POD and TOD accounts and your estate-planning arsenal, 95 Est. Plan. Ill. B.J. 510 (Oct. 2007).

Here is an excerpt from her article:

POD and TOD beneficiary designations, like joint tenancy and living trusts, are another tool for avoiding probate of property. It couldn't be easier to set up a bank or brokerage account, or a security registration, in POD or TOD status: bank and brokerage clerks understand what they are and, lawyers report, sometimes even suggest them to their clients. Those clerks will also happily help clients set up or convert their accounts at no cost to include POD or TOD beneficiaries.

Unlike joint tenancy, the designation of a POD or TOD beneficiary has no effect on ownership until the owner's death. 815 ILCS 10/6. Under the Trust and Payable on Death Accounts Act, any holder may at any time cancel or change the designation of beneficiary without the knowledge or consent of the other holders or the beneficiaries. 205 ILCS 625/4(a). Under the Uniform TOD Security Registration Act, the sole owner or all currently surviving owners of a security may cancel or change the property's registration in beneficiary form at any time without the beneficiary's knowledge or consent. 815 ILCS 10/6.

The Trust and Payable on Death Accounts Act applies to bank, savings and loan, and credit union accounts. 205 ILCS 625/2. The Uniform TOD Security Registration Act applies to securities and security accounts, both of which the statute defines.

The Viability of Life Insurance Trusts After Chawla

Reagan N. Clyne (2007 J.D. Candidate, University of Connecticut School of Law) has recently published her Note entitled The Chawla Decision: A Death Knell For The Use of the Life Insurance Trust in Estate Planning?, 13 Conn. Ins. L.J. 147 (2006-2007).

Here is the introduction to her Note:

Chicken Little ran around telling anyone who would listen that the sky was falling. According to some commentators today, the sky may well be falling again - at least as far as estate planners and the insurance industry are concerned. Troubling to all is a recent judgment that, if broadly read and widely applied, could render billions of dollars in life insurance policies void and eliminate the use of a widely used, basic estate planning tool: the trust funded by life insurance proceeds.

In February 2005, the Eastern District of Virginia issued a decision in Chawla v. Transamerica Occidental Insurance Co., wherein the district court denied the claim of the trustee for the proceeds of a life insurance policy owned by the trust and taken out on the decedent, a co-trustee. Although the court initially based its decision on the existence of a material misrepresentation of fact on the application, the case quickly gained notice for its alternate holding that the trust lacked an insurable interest in the life of the insured, and therefore was void.

Until the meaning of the holding is clarified on appeal, estate planners and the insurance market are in limbo as to the wisdom of using life insurance in trusts as a tool of estate planning. While there is significant disagreement over the possible effect of the decision, billions of dollars of life insurance policies could ultimately be affected if the decision is upheld and followed by other courts with statutes similar to the one governing the policy in issue.

After a review of the facts of the case and the district court decision, this Note will examine the general insurable interest requirement and the Maryland insurable interest statute at the heart of the case in order to analyze how the appellate court may decide the matter. This Note will then discuss the implications of various outcomes and possible responses.

Retirement Plan CLE

The American Bar Association Section of Real Property, Probate and Trust Law and the ABA Center for Continuing Legal Education is sponsoring a teleconference and live audio webcast on December 4, 2007 entitled How to Avoid the Top 10 Retirement Distribution Disasters.

Here is a description of the program:

As baby boomers rapidly approach retirement age, their ability to retire comfortably may depend on decisions they make in the next few years. The rules on distributions from individual retirement accounts (IRAs) and employer sponsored retirement plans are complex and it’s easy for clients to be confused about their options. In addition to trying to determine if they have sufficient income, clients also must navigate the income and estate tax rules for retirement plans. The faculty will cover the top 10 retirement issues and help you to get the most for your client.

After attending this presentation, participants will know:

• Legal and tax issues surrounding beneficiary forms
• How to work with a trust as a beneficiary
• What kind of creditor protection may be available for IRAs and inherited IRAs
• What net unrealized appreciation is and why it’s important
• Traps surrounding post-mortem transfers

Larry King Sues Insurance Company for Breach of Fiduciary Duty

On October 22, 2007, CNN host Larry King filed a complaint against Meltzer Group insurance company, alleging breach of fiduciary duty and detriment to his financial interests.

King charges that an insurance company convinced him to engage in a series of "highly complex life insurance transactions" that resulted in the CNN host's purchase and flipping of insurance policies with an aggregate value of $15 million.

In one instance cited in the lawsuit, King purchased a $10 million policy and, at Meltzer's direction, immediately sold it for a $550,000 profit. * * *

The newsman alleges that Meltzer, driven by "greed and avarice," steered him into deals that were against his financial interests, and that the insurance broker never considered his financial condition, health, and the "likelihood of his future uninsurability." * * *

King's lawsuit, which does not specify monetary damages, charges Meltzer and its principal, Alan Meltzer, with breach of fiduciary duty.

See Larry King Rooked In Life Insurance Scam?, thesmokinggun.com, Nov. 2, 2007.

California may go forward with transfer on death deeds

In 2004, Assemblyman Chuck Devore introduced a bill that would allow Californians to transfer real property upon death without resorting to legal services and completely avoiding the probate process.  Assemblyman Devore introduced this bill after meeting with Mary Pat Toups, 79, a pro bono attorney and a grandmother. Toups has spent $30,000 of her own money attending hearings, lobbying officials, and even launching her own website - www.transfer-on-death-deeds.com to support the bill.

In 2004 the California Bar's Trusts and Estates Section persuaded the Assembly Judiciary Committee to downgrade this bill into a study bill. However in June, the Assembly approved AB 250 after adding explanatory language and consumer warnings on the back of the form.

If the legislation that Toups is pushing for prevails, a standardized, one-page form no longer than a tire-rebate mailer will be available on the Internet or from retail store.  * * *

All owners would have to do would be describe the property, list the beneficiaries and indicate whether they wanted a spouse or someone else to live there as an intermediary owner until their death. * * *

Probate lawyers and others remain unconvinced.

Southwestern Law School professor Ira Shafiroff, who believes the “overwhelming number" of wealthy people handle property disposition with customized living trusts, opposes the bill. He thinks the concept is anti-lawyer oversimplification.

"We're talking about real estate -- for most people, their most significant asset -- and to transfer this with a commercial form is asking for trouble," he said. "It's a complex area of the law. To [believe] that a TOD deed would take care of it is like trusting a lay person to perform an appendectomy." * * *

See Chip Jacobs, Crusader pushes for simpler inheritance rules, latimes.com, Nov. 4, 2007.

Note that at least eight states already have special provisions dealing with transfer on death deeds, also called beneficiary deeds (Arizona, Colorado, Kansas, Missouri, Nevada, New Mexico, Ohio, and Wisconsin).

In addition, the National Conference of Commissioners on Uniform State Laws is drafting a Uniform TOD for Real Property Act. 

Mutual Fund Companies are Stepping in to Assist Baby Boomers with Retirement Planning

New Funds for Retirement Payouts, smart money, WSJ.com, Oct. 14, 2007, discusses several approaches to managing retirement accounts that are offered by various mutual-fund companies.  Here is the introduction to this article:

How can you make your retirement savings last as long as you do? That's the trillion-dollar question, as millions of baby boomers start to decide what to do with their workplace savings accounts.

For decades, financial planners and insurance salesmen have offered answers -- and products and services. Now the mutual-fund industry has jumped into the fray.

This fall, Fidelity Investments launched 11 Income Replacement Funds, followed by Vanguard Group, which announced plans to offer three Managed Payout funds.

Both companies have paired investment portfolios with monthly withdrawal plans. They've also replaced the traditional focus on guaranteed income with payment streams that could vary from year to year -- a novel idea, and one that may give retirees more spending power.

But that's where the similarities end.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

A binding agreement revoked beneficiary designations

Prior to divorce, the spouses entered into a “mediated settlement agreement” pursuant to state law which divided their community property and released each other from all future claims related to the marriage. The wife died before the final decree of divorce could be issued.

The court held as matter of first impression that the agreement was binding even though divorce did not occur before the wife’s death and that the language of the agreement was sufficient to revoke her designations of the husband as the beneficiary of the wife’s nonprobate property.  Spiegel v. KLRU Endowment Fund, 228 S.W.3d 237 (Tex. App. 2007).

Irrevocable life insurance trusts – are they still appealing?

In his article The ILIT Remixed, A Workshop With Vincent M. D'Addona, Est. Analyst (Sept. 2007), Robert L. Moshman discusses the irrevocable life insurance trusts technique. Moshman explains that:

In the early 1990s, estate-planning professionals learned a new technique and before long, irrevocable life insurance trusts utilizing survivor life policies became a mainstream approach. Has the ILIT lost some of its magic?

Even if that is so, estate planners may be reluctant to stray from the reliable ILIT. What might change that mindset and remix estate planning by keeping life insurance inside the estate?

Let us take calculator in hand and adjourn to our ILIT workshop without further adieu. Fortunately, we are accompanied by wealth strategist Vincent M. D'Addona, whose number crunching led to revelations about the ILIT's future role in estate planning.

You can read more on this subject in Robert L. Moshman’s article Have ILITs Lost Their Magic? An Interview with Vincent M. D'Addona, Est. Analyst (Aug. 2007).

Remainderman was not entitled to proceeds of insurance policy paid for by life tenant

In Opha L. Keith Estate ex rel. Buckland v. Keith, 647 S.E.2d 731 (W. Va. 2007), the court held as a matter of first impression that the life tenant is entitled to all of the proceeds of an insurance policy insuring the property against loss where the life tenant obtains the policy in the life tenant’s name for the life tenant’s benefit and pays for the policy, absent a requirement in the instrument creating the life estate that the life tenant insure for the benefit of the remainder beneficiary, an agreement to that effect between the life tenant and the remainder beneficiary, or the existence of a fiduciary relationship between the two.

Bank of America Refuses to Cash Eighty Year Old Woman’s Bond

In April of 1984, Bette Miller and her now deceased husband Laurence entrusted their $5,000 to Rainier Bank by purchasing a bond. Because the bond on its face indicated that it would be automatically reinvested every two years, the Millers never cashed it and allowed it to accrue interest. Subsequently, Rainier Bank changed several names and owners and was eventually acquired by Bank of America. When in April of 2005 Bette Miller attempted to cash the bond, Bank of America refused, asserting that it had no records of the transaction.

According to Bank of America’s spokesperson, an unpaid bond would have escheated to the state as unclaimed property. However, the fact that Bette Miller still has the certificate proves that the bond has not been paid; the certificate must be surrendered in order for the bond to be honored. Furthermore, the State was unable to produce any records regarding the bond’s escheat. The Millers’ friend and elder law attorney speculates that Bank of America is either waiting for Bette Miller to die or for the statute of limitations to run out.

Bette Miller’s son, Greg Miller, plans to continue fighting by his mother’s side to help her recover this investment, now valued at $30,000.

See Herb Weisbaum, 'I want my money', komotv.com, Sept. 25, 2007; see also Greg Miller’s letter providing more details on this story in Family Says Bank Of America Refuses to Cash Bond Worth $30,000, komotv.com, Oct. 1, 2007.

401(k) CLE

The National Constitution Center is sponsoring a 60-minute audio conference on October 3, 2007 entitled Dramatic 401K and Defined Benefit Plan Changes: Are you ready?

Here is a description of the program:

Do you know what you need to do today to ensure that your plans are compliant? Are you prepared for your 2007 and 2008 deadlines? Last year, Congress passed the most comprehensive legislation impacting retirement plans in thirty years -- the Pension Protection Act. Join us for a 60-minute audio conference where you will discover:

• New accelerated vesting rules for employer contributions to 401(k) plans
• Required retirement plan amendments for 2007 and beyond
• How the new law impacts your finances
• Tips for avoiding fiduciary responsibility for default investment funds

Life Insurance CLE

The American Bar Association Section of Real Property, Trust and Estate Law and the ABA Center for Continuing Legal Education are sponsoring a teleconference and live audio webcast on October 2, 2007 entitled Effective Use of Life Insurance in Estate Planning.

Here is a description of the program:

Life insurance is an important part of many clients’ estate plan. Its uses include providing liquidity to pay estate taxes, final expenses, and the cost of administration; equalizing the value received by heirs; and providing cash for the purchase of a business interest as part of a buy-sell arrangement.

With the continuing uncertainy in federal estate tax laws, clients want flexibility in their estate plans. Life insurance in conjunction with carefully drafted life insurance trusts can help provide that flexibility.

With proper planning, life insurance death benefits can be received without being subject to either federal estate tax or income tax. Mistakes can cause unexpected income tax, gift tax, or estate tax liabilities.

Life insurance policy features are constantly evolving. A familiarity with the types and features of policies available is crucial to help your clients select the right product to accomplish their objectives.

Attend this program to learn:

• Tips and techniques for using life insurance and life insurance trusts to provide flexibility in estate planning
• Some life insurance tax traps to avoid
• New rules for employer-owned life insurance
• Recent life insurance product developments and how to examine insurance policy features

Organized Life Insurance Scams Call for Fraud Prevention and Litigation Plans

David T. McDowell (Attorney at Law, Bracewell & Giuliani LLP) has recently published his article entitled Recognizing and Combating Organized Fraud in the Sale of Life Insurance, 36 Brief 22 (2007).

Here is the introduction to his article:

Fraud is a costly problem for the life insurance industry, borne by insurance companies in the short run and by consumers in the long run. Traditionally, life insurance fraud is perpetrated on an individualized basis. Someone provides false health information to a company in an attempt to obtain life insurance coverage to which he or she would otherwise not be entitled. In recent years, however, many companies are discovering that they have issued a sizable amount of life insurance coverage to organized fraud rings. These rings rely on a fairly sophisticated scam designed to procure and fund life insurance policies insuring the lives of either fictitious or unhealthy persons.

The amounts of fraudulently obtained coverage often at issue justify the creation and implementation of an aggressive fraud prevention and litigation plan by life insurance companies to reduce their exposure to organized fraud. The primary goal of any such plan is to eliminate fraudulently obtained life insurance policies from a company’s in-force ledger and to keep theses risks off the books in the future. Once the scam itself is understood, a litigation plan typically will seek to achieve these goals through a process of identification, investigation, and elimination.

Change of beneficiary must comply with required procedures

A wife, a retired teacher, designated her husband as the beneficiary of her “optional annuity” from the state teacher retirement system which in effect created a joint and survivor annuity.

State law provided that a beneficiary designation of the retiree’s spouse can be changed only by the notarized consent of the beneficiary or an order of a court “with jurisdiction over the marriage.”

They divorced and while the divorce decree divested the husband of claims to his wife’s retirement benefits, it did not specifically mention the optional annuity.  The wife attempted to change the beneficiary to her son and daughter-in-law, but never o