WSJ Article on Recent Court Case Highlights a TOLI Trustee Problem

A recent Wall Street Journal (WSJ) article (1) highlighted a problem we reported back in 2013 in a blog post entitled, So…What Happens at Age 100. The WSJ article tells the story of a Florida resident turning 100 years old who has an irrevocable life insurance trust (ILIT) that holds $3.2 million in death benefit. Because of contract language in his universal life policies, the trust will not receive the death benefit at age 100 when the policy matures, but only the cash value in the policy – a much lower amount. While the article states this is a “standard feature of permanent life insurance,” the insured/grantor and trustee are suing the carrier, Transamerica.

As we pointed out in our blog, the “age 100 issue” is present in older policies only, since today’s policies do not mature until age 120 or beyond. But, as we have found in our TOLI Survey (2), 30% of TOLI policies are at least 20 years old and often subject to this policy issue.

Policies that mature for the cash value create two issues – a lower benefit, as mentioned, and a tax issue. If the policy matures for the cash value, not the death benefit, the proceeds could be subject to taxation, just as if the policy were surrendered, with the amount received over cost basis taxed at income, not capital gains, rates. Some universal life policies extend the death benefit past the policy maturity date, alleviating the tax issue, but still only pay out the cash value at death.

The WSJ article referenced the Lebbin-Spector Family Trust which houses two Transamerica second to die universal life policies (one for $2M, one for $1.2M) purchased in the early 1990s. Per the lawsuit, Transamerica, “in breach of its representations, promises and commitments,” will terminate the coverage because the insured is “obtaining the age of 100.” There is only one insured left on the policy, as the female insured passed away. In fact, that is one of the issues noted in the complaint, as the Lebbins originally wanted to purchase single life policies, but were told by the Transamerica agent that the survivorship policy would be a “better deal.” Since Mrs. Lebbin has passed away, and the trust would have collected some death benefit at that time, the suit claims the “better deal” representations were “false and misleading.” There is no specific mention in the suit as to how the death benefit would have been split had single life policies been purchased, but it does claim that Transamerica will continue to “unjustly and inequitably” enrich itself by collecting premiums on the survivorship policies after Mrs. Lebbin’s death.

The lawsuit notes the policies were “marketed, sold and represented” then, and to this day, as “a type of permanent life insurance that provides coverage for life.” The lawsuit includes a duplicate contract of the policy that on the cover page states, Transamerica will only pay “the net cash value, if any, to the owner on the policy anniversary nearest joint Equal Age 100 if both or either Joint Insured is living on that date,” but the lawsuit states it was not until 2016 that the plaintiffs “first became aware” of the fact that Transamerica would “terminate” the policies and only pay the cash value if one of the insureds lived to policy maturity.

The suit also notes that the policy is made up of two parts, the death benefit, and the cash value with cash value earnings that “grow tax-deferred, meaning no tax will be due until they are withdrawn.” The decision to withdraw the cash value was “represented by Transamerica to be within the control of the policy owner.” According to the suit, since the carrier will “terminate” coverage and distribute “taxable distributions to the Plaintiffs, Transamerica has breached its contractual duties and obligations owed to the Plaintiffs under the Policies.” It is unknown what the exact tax consequences would be upon policy maturity. The lawsuit states that the plaintiffs have “paid over $1.5 million in premiums,” but the cash value of the policies is not stated in the lawsuit. In the WSJ article, a lawyer for the family said it was unclear how much money was in the policies.

As we mentioned, the age 100 issue does not exist with newer policies. The policies in this case were based on the 1980 mortality tables which had a terminal age of 100. Policies issued after the mid-2000s, use 2001 mortality tables with a terminal age of 120. The lawsuit states that Transamerica continued to use the old table on existing policies even though “it was outdated and not an accurate reflection of the actual life expectancies of its customers.” Thus, “after faithfully paying premiums for permanent universal life insurance coverage, Transamerica’s insureds began to be penalized for living such long lives.”

The case was filed in the United States District Court for the District of Maryland, and accuses Transamerica of “unfair and deceptive trade practices” under Maryland’s Consumer Protection Act, stating that Transamerica, “misrepresented and intentionally concealed the tax implications and consequences of the Policies” by asserting that the policies were “suitable” and “would insure the Lebbins for life.”

Whether this case will result in any financial settlement for the plaintiffs remains to be seen. It is a cautionary tale for trustees as it reminds them of the need to be one step ahead of issues regarding life insurance policies, and exemplifies the need to make clients aware of policy and contractual details that may create issues well before they occur. In this instance, the insured and the trustee received a contract at policy issue almost thirty years ago that clearly spelled out what would happen at age 100 in at least two separate places, yet it was not until the last year or so that the plaintiffs “first became aware” there even was an issue.

As a TOLI trustee, you should create a document signed by the grantor that outlines the contractual details, expectations, and obligations of a policy as soon as the policy is incorporated in the trust. The document should be a live document, and updated throughout the life of the trust. This will ensure all pertinent parties are informed of the policy’s condition, possible outcomes, and options. Doing so will help keep you out of court.

1. Happy 100th Birthday! There Goes Your Life Insurance, Leslie Scism, The Wall Street Journal, July 20, 2017
2. The ITM TwentyFirst TOLI Survey, 2015, ITM TwentyFirst, Minneapolis, MN

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