Back to School, Lessons for the Coming Year

Let’s reflect back to last year when we (finally) received new trust owned life insurance (TOLI) guidance In Re: Cochran, to earlier this year with a complaint filed for breach of fiduciary duty, this summer’s giant financial regulation bill, and Schneider v Finnman case that relaxes privity to permit third parties to commence professional negligence actions against estate planning attorneys. Are you up to date on your lessons?  

Lesson One: In Re: Cochran. , 901 NE 2d 1128 (Ind. App. 2009) provides clear guidance that ILIT trustees do not need to be concerned about being second-guessed in hindsight provided they have and follow a "prudent process" and particularly when such a process incorporates information from an "outside, independent entity with no policy to sell or any other financial stake in the outcome." The case also raised but did not resolve the duties to "incur only those costs reasonable and appropriate for the purposes of the trust" and have an "overall investment strategy having risk and return objectives reasonably suited to the trust" and a corresponding "expected total return from income and the appreciation of capital." The court here in Cochran "recognize[d] that this process was certainly less than perfect", the prudent trustee will certainly want to follow the clear guidance for a prudent process that incorporates independent research, and may also wish to consider justifying TOLI expenses and setting reasonable expectations as to the rate of return on invested assets underlying TOLI cash values. Click here to read complete e-newsletter issue.

Lesson Two: Another new case filed earlier this year alleges breach of fiduciary duty against the agent/broker who sold the policies.  The complaint includes allegations of fraud, negligent misrepresentation, negligence, breach of fiduciary duty and violation of the [State] Securities and Investor Protection Act.  This complaint was only recently filed and it is, therefore, too early to know whether this is a case of A) fraud, negligent misrepresentation, negligence, breach of fiduciary duty or violation of securities law or B) a dissatisfied client seeking restitution for a bad decision on their part.  However, the “moral of the story” here is that litigation involving the standard of care surrounding life insurance advice and management continues to rise and that it is preferable NOT to be sued in the first place than to have to defend oneself against accusations like the above.  Click here to read complete e-newsletter issue.

Lesson Three: The Court of Appeals of New York case Schneider v Finnman decided on June 17, 2010 that a personal representative of an estate may maintain a legal malpractice claim for the pecuniary losses to the estate resulting from negligent representation in estate tax planning that causes enhanced estate tax liability.  The possible malpractice at issue concerns whether or not counsel provided the client with the proper advice with respect to the ownership of a $1,000,000 life insurance policy for estate tax purposes. “Relaxing privity to permit third-parties to commence professional negligence actions against estate planning attorneys would produce undesirable results -- uncertainty and limitless liability.”[1]

Lesson Four: Dodd-Frank Wall Street Reform and Consumer Protection Act, establishes a “fiduciary duty for brokers and dealers”.  This fiduciary duty “shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice. In accordance with such rules, any material conflicts of interest shall be disclosed and may be consented to by the customer. Such rules shall provide that such standard of conduct shall be no less stringent than the standard applicable to investment advisers under section 206(1) and (2) of this Act.”[2] Fiduciary standards do NOT require that the results actually prove to be in the best interest of a client, and instead only require that advisors have a “prudent process” that they perform certain duties. As discussed above, In Re: Cochran, the Uniform Prudent Investor Act (UPIA) provides an “instruction manual” for such a “prudent process” and provides legally-accepted guidance as it relates to life insurance.

All these lessons show a clear path towards a higher standard of care.  You should insist that product recommendations/proposals include independent research as to the suitability of the recommended product to the client’s situation relative to peer group product alternatives. 

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