Will Insurable Interest Case Be Sea Change Or Mere Ripple? Estate
planning could be altered in many states
by Jim Connolly
Those watching a case currently before the Court of Appeals in Richmond, Va., seem to be divided on the impact on the estate planning market and professionals who sell products in that market, according to interviews with National Underwriter.
The case, Vera Chawla v. Transamerica Occidental Life Insurance Company, addresses the issue of whether a life insurance trust has an insurable interest in the life of a decedent. An opinion issued by United States District Judge Claude Hilton in the Eastern District of Virginia, argues that under
The American Council of Life Insurers, Washington, says about 30 states have laws similar to
The policy was sold in
The case addressed two issues: misrepresentation on the application and the insurable interest of a life insurance trust.
Harold Geisinger applied for a $1 million life insurance policy on May 4, 2000, in which he named Chawla owner and beneficiary. Transamerica Occidental refused to issue the policy because of a lack of insurable interest. Geisinger then changed the proposed owner and beneficiary to the Harold Geisinger Special Trust, naming both Chawla and himself as trustees, the opinion states.
According to the court opinion issued on Feb. 3, Geisinger did not detail his health in the application, failing to note health concerns including "a diagnosis of chronic alcohol abuse" and surgery in which "doctors inserted a shunt into his head to drain the excess fluid that had accumulated after his brain surgery." The opinion also states that Chawlaís husband, a physician, conducted the physical examination.
In September 2000, Chawla applied to increase the face value of the policy from $1 million to $2.45 million, the opinion states.
Geisinger died on Sept. 23, 2001.
Judge Hiltonís opinion states that the trust must prove an insurable interest in the life of the insured and Chawla failed to demonstrate such an existence as defined by
"We believe that because this particular decision was based on facts unique to this case, it does not call into question the insurable interest in policies owned by trusts," says Bill Tate, senior vice president and chief marketing officer, Transamerica Occidental Life Insurance Company,
"This case involved a situation where an individual applied for a life insurance policy and was found by Transamerica not to have an insurable interest in the proposed insured," Tate continues. "When the application was turned down on this basis, a trust was then utilized in an apparent attempt to provide for an insurable interest.
"Under this trust, this individual was the sole beneficiary of the life insurance benefits. In the context of this case, this individual had no insurable interest and the use of a trust in this way did not provide one.
"Transamerica does not view this ruling as having any application to trusts generally, including those set up for estate planning purposes," Tate says.
Although the facts surrounding the case are "somewhat unique," the opinion could be read broadly, according to Phil Stano, a partner with Jorden Burt, LLP, a
The Fourth Circuit Court of Appeals usually acts quickly and "if they breathe life into the case," then it could impact agents and estate planners, he adds. "It could be a land, air and sea change."
Agents and estate planners want assurances now, Stano says, and for good reasons.
If trusts are not allowed to be used in some states, then "potentially, the estate would be looking for someone to cover the loss if advice had been given," Stano cautions.
Jack Dolan, an ACLI spokesman, says the courtís decision is specific to one case. "The courtís decision on the trust issue is specific to the facts of a particular case when the court decided that it didnít have an insurable interest. It did not signify in general that trusts did not have an insurable interest. It said a specific trust did not have an insurable interest."
ACLI says it does not plan to file an amicus with the appellate court.
Ted Kurlowicz, an attorney and a professor in estate planning and taxation with the
If the decision was applied more broadly, Kurlowicz continues, he believes there would be a number of remedies for insurers and producers. Insurance is regulated by states, and if it is perceived that there is a problem, then amendments could be proposed at the state level to change insurable interest laws, he says.
Other possible solutions include adding a savings clause to a trust that would ensure that true beneficiaries are recognized, according to Kurlowicz. It has to be made clear that the true purpose of the trust is for the beneficiaries even if the trust is considered an entity and a taxpayer.
A trust protector can be added to a trust so that the terms of the trust can be amended to reflect the stateís insurable interest laws, he adds.
Although he reiterated that he is not concerned about the use of life insurance in a trust, particularly, if it is established by a couple to provide for children or grandchildren, he did say it could be a "closer question" if a trust were established by an aunt or uncle for a niece or nephew or if the relation were not a direct descendant.
Kurlowicz says the reasoning applied to the insurable interest argument in the Chawla case could be used in the argument over expanding insurable interest laws for investor-owned life insurance. The ACLI says there is no application to the IOLI argument.
In the Chawla case, the ultimate beneficiary is someone who lacked an insurable interest from the outset, says Tom Korb, director of government affairs with the Association for Advanced Life Underwriting,
In the vast majority of cases, there is an insurable interest, Korb says. In almost all cases, he continues, family members are beneficiaries of a trust.
When asked about the potential effect on producers if the appeals court affirms the lower court decision, Korb declined to comment on what at this point is a hypothetical situation.
Korb says he does not know if AALU intends to file an amicus brief with the appeals court.