Wednesday, August 31, 2011
Wealth Strategies Journal recently published an article that uses case files to help explain the law of unintended consequences and how it pertains to drafting trusts and annuities. The law of unintended consequences is an adage that typically warns “that human conduct will produce at least one unintended consequence over a course of time and during a series of activities or transactions.” The first case mentioned in the article is below:
QUERY. When you "strap" your client behind the wheel of the next annuity contract, will you do so with the assurance of delivering a safe and rewarding driving experience?
CASE #1: Exit Ramps
The advisor matches the beneficiary appointments on the annuity with those listed in the trust; three sons - all with children of their own. What could go wrong?
One son (with two children) predeceases his father (annuity owner and annuitant) who subsequently dies.
Result. The two children were pleased to receive their father's share of his inheritance through the per stirpes distribution provisions of their grandfather's trust. Unfortunately, these same siblings came up $200,000 short of their total potential inheritance.
The reason. The default contingency provision of the annuity contract beneficiary form provided that in the event of a beneficiary's death, the surviving beneficiaries shall share equally in the death benefit. The shift from a "per stirpes" to "per capita" distribution format resulted in the disinheritance. Unintended? Presumably so. Unforeseeable? Presumably not.
QUERY. Should this occurrence give rise to a potential finding of fault attributable to some member(s) of the advisory community? If so, who are the possible suspects and under what circumstances might liability arise?
[Side Bar] Recall that every annuity transaction creates a "shift" of client assets. No assumption is made that the shift will prove beneficial or detrimental. However, advisors are encouraged to envision the road ahead and assess possible outcomes.
David F. Sterling (Wealth Strategies Journal), Annuities and the Law of Unintended Consequences: The Trusts and Estates Conundrum, Wealth Strategies Journal, Aug. 29, 2011.
Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.