Stevenson v. Severs III, et. al. (Recently reported in Keeping Current)

In this case, Mrs. Stevenson retained a lawyer and an insurance agent to set up an Irrevocable Life Insurance Trust (ILIT) and fund it with life insurance on her life.

Nine years later, her new attorney discovered that the policy was never transferred to the new ILIT. It was, in fact, still owned by her. She sued the lawyer and the agent for malpractice and for the gift taxes due on the "late" transfer of the policy. By then there were substantial cash values that would not have been taxable gifts had they been made "timely" due to the Crummey exclusion. Had she died within the 3 year rule, this lawsuit would have been for MUCH more due to the death benefit being exposed to a 50% tax!

I see cases just like this frequently where insurance professionals have not followed through on policy service.

Following is a partial list of things you should consider when you get requests for change of ownership of policies:

REQUESTS FOR CHANGE OF OWNERSHIP:

1. Who is the present owner? Is the request from the right person?

2. If a change to an individual ILIT (not a joint policy), is the present

spouse the owner or the insured? In California, you generally

need the INSURED to be the owner prior to the transfer, NOT

the spouse, corporation or other entity. In this case, transfer

back to the insured before a transfer to an ILIT.

3. Would the change be a "transfer for value?" Is it a change to

a person OTHER than the insured or a "Grantor Trust" established

by the insured? (with some exceptions).

4. Is the policy owned by a corporation? If so, the transfer may

trigger realization of gain if transferred out to the insured or

other person or entity.

5. Do you clearly understand the reason for the change? Get it

in writing from the client’s attorney or from the client.

If you are not sure or do not agree with the change, say so in

writing and tell the client (s) why after asking for all pertinent

information.

Remember, it is not your job to be the attorney, but when the requests do not make sense, you owe a duty to your clients to at least address the issue. Just do so politely in writing. At that point, you could not be criticized for making an "error" if you were just doing what the law firm said to do.

In the Stevenson v. Severs III, et. al. case, the simple problem was that the agent dropped the ball. When you get a clear communication to make a transfer, you need a follow up system to remind you to follow up the month after the transfer to make sure it got done.

"To err is human."

That is why we all have double check systems! How is yours working?