IRS Auditing Many 412(i) Plans - Lance Wallach

IRS Auditing Many 412(i) Plans - Lance Wallach


In 2006, Jack Teren purchased life insurance policies from Lincoln Life and indicated that he had a personal net worth of $46.4 million. Investors paid annual premium payments of $909,000 in anticipation of $20 million in life insurance benefits. Asserting that the policies were void because the beneficiaries lacked insurable interests in Teren‘s life, and because they were issued pursuant fraudulent representations regarding the insured‘s net worth, Lincoln Life filed suit in 2008 for declaratory relief in California state court. The lower court ruled in favor of Lincoln Life and held that the trust, the policy beneficiary, was not entitled to either the $20 million policy proceeds or a refund of premiums paid on the policy.

The trust appealed, arguing that the insured participated in the transaction and was free to choose the beneficiary of the policy. The trust asserted that because the insured was the settlor of the trust, which acquired and owned the policies, there was in fact an insurable interest in the insured‘s life. Although it affirmed the lower court‘s ruling that Lincoln Life‘s fraud claims were time barred, the California appeals court agreed with the trust‘s arguments and reversed the lower court‘s decision regarding the validity of the life insurance policies. In addition, the appellate court awarded the trust its costs on appeal. The appeals panel noted that California had since made similar transactions illegal, but that the law was not retroactive. The dissent claimed that the entirety of the transaction, since its inception, was a sham and a fraud, maintaining the position that there is no California authority which prohibits a trial court from looking behind the signatures on the document to determine the true substance of the transaction and that public policy and case law support such an inquiry when questioning whether a policy was supported by a legitimate insurable interest. Lincoln Life filed a petition for rehearing and on June 13, 2011, the court issued an order denying the petition.

2. Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, C.A. No. 08-488-MPT, --- F.Supp.2d ---, 2011 WL 1195878 (D.Del. 2011)

This action was originally filed by Principal in 2008, alleging that a multi-layer trust arrangement was used to circumvent insurable interest requirements for an insurance policy issued by the insurer. In its second amended complaint, filed in April 2009, Principal asserted that the policy should be declared void ab initio for lack of an insurable interest and because the application contained material misrepresentations upon which Principal relied. Although the court determined that there were genuine issues of material fact regarding the representations made on the application, Principal was granted its motion for summary judgment on the claim that the policy was void because of a lack of insurable interest. Thus, the issue was ―whether, in light of this court‘s summary judgment ruling that the policy issued by Principal is void, Principal is now required to return t