In our last post, we reviewed three court cases that guide TOLI trustees dealing with the liability that managing life insurance brings.  In this post, we will review three more cases that will add to that guidance.

French, et al. v. Wachovia Bank N.A.
The Wachovia case grew out of a policy replacement that generated a large commission for Wachovia’s insurance affiliate and centered on the beneficiaries claim that Wachovia was “self-dealing.”

The grantor of an ILIT approached Wachovia after growing disillusioned with his existing trustee. The ILIT held two “underperforming” whole life policies. Wachovia insurance advisors developed a proposal to exchange the two existing policies for a John Hancock Guaranteed Universal Life policy providing “the same death benefit but at a much lower premium.” Documentation was created outlining the pros and cons of the transaction – the new policy would have no premium flexibility and little cash value; while the existing whole life policies had some premium flexibility and develop significant cash value.

The grantor signed the policy application but balked when provided with a release waiver that  disclosed Wachovia would receive compensation for the transaction. Nevertheless, Wachovia moved ahead with the policy replacement without obtaining a signature on the waiver.

Later the grantor and beneficiaries complained about the “process surrounding the insurance exchange” and attempted to reverse the transaction, which could not be done.  The beneficiaries moved ahead and sued Wachovia claiming the replacement “violated the prudent-investor rule” and was made “in bad faith.”  The court disagreed citing an “express conflicts waiver” in the trust document that allowed the trustee to operate “without regard to conflicts of interest.”
The beneficiaries claimed the transaction  was such a poor investment “it amounted to
a violation of the bank’s duty of prudence,” but again the court disagreed since the new policy maintained the same death benefit in the trust while saving the trust over $600 thousand in premiums. The court noted that the new policies lacked the high cash value of the whole life policies, but “the trust did not need life insurance cash value as a tool; the trust was well diversified in other assets.”

The courts found in favor of the bank on all counts and awarded the bank over $700,000 in attorney’s fees.


Key Takeaways from the Wachovia Case

  • The case guides those trustees with an affiliate receiving compensation from a transaction occurring within the trust.
  • While the trust document language allowed self-dealing and overrode the prudent investor rules because of its specific language, the bank still had to show it acted in good
    faith and it could because it undertook a rigorous review headed up by experienced life insurance professionals. The grantor/insured and the beneficiaries met with the advisors on numerous occasions and were provided with documentation outlining the advantages and disadvantages of the existing and replacement policies.
  • While the new policy did not develop the high cash value of the existing policy, there were other significant assets, making the decision to purchase a more efficient death benefit at the expense of cash value a prudent one.
  • Documentation that occurred throughout the process was vital in showing the reasons for the transaction. The commission paid was large and the beneficiaries were troubled by that. However, the analysis and memos, along with the numerous conferences with grantor,
    beneficiaries, and advisors, showed that the bank showed good faith, made a prudent decision, and was worthy of a large commission.


Rafert v. Meyer
The Rafert case was a 2015 breach of trust case, in which the trustee’s lack of action was not held defensible because of exculpatory language in the trust document.

Jlee Rafert had an ILIT drafted by her attorney who named himself trustee.  The document contained language that said the trustee had “no duty… to pay the insurance premiums…notify the beneficiaries of nonpayment of such premiums…and had no liability for any nonpayment.”

While the drafting attorney, as trustee, signed applications for all policies in the trust, he provided an incorrect address as his contact point as trustee. Two hundred fifty thousand dollars was sent to the carrier to start the coverage, but premium and lapse notices were sent to the false address. Although another $250 thousand in premiums was paid to the agent of record it was not forwarded to the carrier and was unaccounted for. The coverage lapsed, and the beneficiaries sued, charging the trustee with breaching his “fiduciary duties as trustee” causing the policy lapses and “loss of the initial premiums,” and the monies paid directly to “a corporation owned by the agent.”

The attorney/trustee pointed to the referenced the exculpatory language as his defense, but the court disagreed, citing “common law rules…pertaining to trusts and trustees” and found the trustee’s defense “untenable,” since it challenged the “most basic understanding of a trustee’s duty,” the most fundamental being the protection of the trust property.


Key Takeaway from The Rafert Case

  • While in the Wachovia case the trust language waived some trustee responsibilities, the fundamental duties of a trustee cannot be superseded by exculpatory trust language.
  • This case points out some basic administrative guidelines:
    • Review the life insurance application on all policies you accept to verify the information.
    • Never pay a premium with a check not made out to the carrier and send all checks directly to the carrier.

Nacchio v. David Weinstein and the AYCO Company
While the Nacchio case is not a TOLI case, it is important that every TOLI trustee reviews it as the defendants in the case were deemed to be fiduciaries and the settlement awarded to the plaintiffs was large.  The case revolved around a life insurance transaction and the assumptions made around the policies projected performance.

Joseph Nacchio was an executive, David Weinstein was his longtime advisor at AYCO, a subsidiary of Goldman Sachs, who had developed an executive compensation utilizing life insurance.  Mr. Nacchio purchased two survivorship variable life policies totaling approximately $95 million of benefit with one payment of $4.5 million in 2000.  It was assumed that with investment returns of 10.68% and 10.8% on the policies, they would run until age 100.

Ten years after purchase the policies were evaluated, found to be underperforming and Mr. Nacchio surrendered the policies at a cost of over $2 million in termination and legal fees and taxes.  He moved ahead and purchased approximately $85 million in life insurance coverage on his wife as he was now uninsurable and sued his adviser claiming he had breached his duty of care to Mr. Nacchio.

At the trial, the Nacchios had a life insurance expert testify that Mr. Weinstein was a fiduciary under the
Investment Advisers Act of 1940, the policies had less than 25% chance of persisting until the insured’s age 93 and that Mr. Weinstein was negligent and deviated from the level of care that should be expected.

The defense rebutted that testimony with an expert of their own who said the advisor and the insurance program clearly identified the risks of the plan and alerted the Nacchios and their estate planning attorney to the investment risk.

After a short deliberation, the jury awarded the Nacchios $14.2 million – the amount
that would have been needed to purchase the coverage they thought they were getting in 2000.


Key Takeaways from the Nacchio Case

  • While not a TOLI case, all agree that Mr. Weinstein was a fiduciary.
  • The life insurance program was designed with an expected 10.6% plus return over the life of the policies and even though court testimony showed that the defendants met with the plaintiffs at least quarterly, the jury felt the plaintiffs deserved a very large payout.
  • This case highlights the need to disclose and document the expectations around the policy
    when bringing a policy into a TOLI trust and the need to make sure expectations are
    reasonable, performance is monitored by an annual review and written documentation to all pertinent parties is made part of the TOLI file.

The cases we have reviewed over these two posts provide a guide for the TOLI trustee who wishes to limit liability.  Further information on these cases, as well as additional vital guidance about managing life insurance, can be found in the TOLI Handbook, a free download available at