It is not often that you run across a Trust Owned Life Insurance (TOLI) case in the courts. Most disputes around life insurance trusts are settled on the down-low, with a check changing hands and little publicity. That is the point. We do have the Cochran case, which provided those of us who manage these assets with some guidance, but most admit the court set the bar pretty low in that instance. Now, we have Rafert v. Meyer, a case whose lower court decision seems to set the bar so low it would be hard for a trustee to squeeze under it.
A little background: In March 2009, Jlee Rafert created an irrevocable trust for the benefit of her four adult daughters. The trustee signed for three life insurance policies correctly, naming Rafert as the insured and the trust as the owner of the policies. However, on the applications, the trustee gave the insurers a “false address.”
The three policies were issued, and in 2009 all policy premiums were paid. However, in 2010, the carriers sent premium notices to the false address. Follow-up grace period and lapse notices were also sent to the same address.
A suit was filed alleging that the trustee “breached his fiduciary duties as trustee” and, as a result, “the policies lapsed, resulting in the loss of the initial premiums.” It alleged that the settlor’s daughters, “as qualified beneficiaries, had an immediate interest in the premiums paid” and that, as a result of the trustee “providing the insurers with a false address, Appellants did not receive notices of the lapses of the three policies until August 2012.”
The twist in the case was that the trustee was an attorney, the same attorney who wrote the trust document. His defense contended that his duties were limited by language in the trust document. In regards to the premium payment, he specifically pointed to Article II of the document, which states: “The Trustee shall be under no obligation to pay the premiums which may become due and payable under the provisions of such policy of insurance, or to make certain that such premiums are paid by the Grantor or others, or to notify any persons of the noon-payment [sic] of such premiums, and the Trustee shall be under no responsibility or liability of any kind in the event such premiums are not paid as required.” In addition, the trustee claimed that he “had no obligation as trustee to monitor or notify any person of the nonpayment of premiums.”
The lower court agreed with the trustee, and the case was appealed to the Nebraska Supreme Court. In his defense there, the trustee pointed to the fact that “the district court correctly relied upon the language of Article II in dismissing Appellants’ action.” Unfortunately for him, the Nebraska Supreme Court disagreed, remanding “the cause for further proceedings consistent with this opinion.”
While the final verdict is not yet in, the court clearly ruled that the exculpatory language in the trust document did not relieve the trustee of all of his duties. Citing “common law rules,” the court stated: “As a general rule, the authority of a trustee is governed not only by the trust instrument but also by statutes and common-law rules pertaining to trusts and trustees,” and laid out some of those duties:
- “A trustee must administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries.
- A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.”
What does this mean for you as a TOLI trustee? Just as in the Cochran case, communication is the key. In that case, had the beneficiaries been made aware of (and signed off on) the purchase of a new policy with a significantly lower death benefit, the case may have never come to fruition. In this case, the trustee’s actions (or lack of action) seem less defensible, as the policies really had no chance of survival because of the communication breakdown. Further, the trust document language will apparently not help. The court said, “An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.”
Keeping the grantor and beneficiaries aware of the condition of the policy seems like a prerequisite to prudent policy management in a trust setting, and certainly making sure communication with the carrier is sufficient to provide delivery of all pertinent information around the policy should be a minimal requirement of a trustee.
This was a perplexing case for other reasons. For example, why did the trustee give a false address? That was never answered. And apparently after the policies lapsed, the settlor “paid additional premiums in the amount of $252,841.03 … directly to an insurance agent by issuing checks to a corporation owned by the agent.” However, “the premiums were never forwarded to the insurers by the agent or his company, and Appellants do not know what happened to the premiums.” There is never any mention of where the money went.
This will be an interesting case to follow, and I will update the Insurance Trust Monitor Blog as this unfolds.