After an article in The New York Times last July about this type of shelter, the Treasury Department announced that such shelters would not be allowed.
A number of wealthy Americans, including at least one Rockefeller, bought similar insurance plans devised by the tax lawyer to escape billions of dollars in gift and estate taxes, according to insurance, legal and accounting officials who worked on some of the deals. One form of the device used a trust, combined with a gift involving a spouse, to pass fortunes to heirs nearly tax-free.
Since the government began attacking tax shelters in earnest two years ago, a growing number of individuals and corporations who bought shelters that the I.R.S. has either demolished, or may demolish, have filed lawsuits against promoters and their lawyers.
The lawyer in this case, Jonathan G. Blattmachr, one of the nation's most influential estate tax lawyers, and his firm, Milbank Tweed Hadley & McCloy, are accused in the lawsuit of fraud, professional negligence, breach of contract, negligent misrepresentation and a violation of their duty of loyalty to clients. The suit was filed on June 5 in Los Angeles County Superior Court by the Benenson family, who were partners in real estate deals with Lewis Rudin, who has died.
The Benensons say they paid more than $20 million since August 2000 to a subsidiary of Massachusetts Mutual Financial Group. The policy was far less valuable than the one they negotiated for, they assert, and the $4.4 million in commissions on the policy was about twice what the defendants told them they would pay. They also say the defendants failed to tell them they could have negotiated a deal with commissions of just $600,000 and that without their knowledge the policy was backdated one year.
The suit also accuses Mr. Blattmachr of not at first disclosing what the Benensons say were conflicts of interest and never fully disclosing some crucial facts. It says Mr. Blattmachr approached the Benensons in early 2000 "with promises of an estate planning strategy tailor-made" for their situation and then introduced the insurance brokers, agent and insurance company to them.
The policy, with a face value of $48.5 million after four years, was sold
to Jane Stein Benenson, 84, the wife of Charles Benenson of
Milbank Tweed, in a statement, called the lawsuit "patently absurd" and "totally false." The lawsuit "falsely characterizes Mr. Blattmachr as having played the role of an insurance salesman," the firm said, "and then complains about the insurance product that the Benensons acquired. Neither Milbank nor Mr. Blattmachr had anything to do with the Benensons' choice of insurance product."
A Milbank Tweed representative said Mr. Blattmachr was unavailable.
Other than disallowing this type of shelter, the I.R.S. has taken no action against Milbank Tweed or Mr. Blattmachr. Federal laws governing tax-shelter registration apply only to income taxes, not to gift and estate taxes.
The plan involved paying a high price for insurance, but for gift tax purposes reporting to the Internal Revenue Service the lowest price at which such a policy could be sold. It was not necessary that any policies were actually sold at the low price; the rate just had to be on file in some state regulatory office.
The difference between the low price reported to the I.R.S. and the high price actually paid was intended to be untaxed, Mr. Blattmachr confirmed last year. The insurer invested the excess premium for the benefit of the heirs.
In addition, by involving a spouse, Mr. Blattmachr said, the low value for tax purposes was reduced even more.
"I'm not saying this is the best thing since sliced bread," Mr. Blattmachr said last year, "but it's really good for pushing wealth forward tax-free."
Precise details about the Blattmachr plans are not known because those who bought them, and their financial advisers, had to sign confidentiality agreements. But individuals who had seen the documents described deals last year with first-year premiums as high as $40 million. Several leading estate tax lawyers said they warned their clients the deals would not survive an I.R.S. audit.
Milbank Tweed was paid $970,000 for an opinion letter asserting that the plan would save gift and estate taxes and related legal work, according to court papers.
The suit asserts that Louis P. Kreisberg of
Executive Compensation Group in
Amie Kreisberg is listed as the selling agent, the suit states, yet the lawsuit says the Benensons never met her.
The Kreisbergs declined to comment, and Mr. Brown and Mass Mutual declined comment. The suit seeks the return of all fees paid to the defendants, compensation for actual damages because the policy sold was not the one negotiated for, and punitive damages.
In 1996 Mr. Blattmachr obtained a ruling from the I.R.S. that formed the basis of the plan, which he described in an article in The Times article last July. The lawsuit indicates that on the day the article was published the Benensons began asking Mr. Kreisberg questions about the validity of the plan.
The I.R.S. has taken no action involving the Benensons' plan.
The Treasury Department announced 18 days later that the technique "is not permitted in any published guidance." Pamela F. Olson, the Treasury assistant secretary for tax policy, said then that under the new regulations "any scheme to understate the value of benefits for income or gift-tax purposes won't be respected" in I.R.S. audits.
The lawsuit filed by the Benensons describes an insurance plan with many but not all of the features of the specific plan described in The Times article last year. There is no mention of what is known as a split interest in the suit. The suit says Mr. Blattmachr told the Benensons he had a plan "custom tailored" to their situation.
Mr. Blattmachr also said in interviews last year that while he might have been legally allowed to share in the life insurance commissions from the plan, he decided against such fee-splitting.
The suit makes repeated references to the Alaska Trust Company, where Charles Benenson created a trust to hold the life insurance policy for his heirs. The trust company is not a defendant in the case.
The president of Alaska Trust is Mr. Blattmachr's brother, Douglas. The lawsuit asserts that Jonathan Blattmachr "did not fully disclose his connections with Alaska Trust, including his family's financial interests" in it or any "potential conflicts of interest."
The suit says Jonathan Blattmachr told the Benensons that because of a reduced tax rate on life
insurance premiums in