The NPS civil trial is scheduled for trial in February 2015, and the SDR’s strategy took a twist when her litigation team filed a motion to dismiss Doug Cassity as a defendant in the lawsuit. The dismissal probably signals the SDR’s intent to use Mr. Cassity’s testimony. Now convinced that Mr. Cassity does not have hidden funds that exceed the restitution required by the criminal conviction, the SDR will seek to use his testimony against the various bank defendants. It may not matter whether he is a cooperative witness. Consequently, Mr. Cassity’s testimony could have ramifications for fiduciaries and insurance companies that do business in Missouri, and the regulators who supervise the state’s preneed trusts.
As seller of trust funded preneed contracts, NPS directed the trustees to follow an investment advisor selected by NPS. That investment advisor then directed the trustees to purchase insurance policies issued by a related company (Lincoln Memorial Life). The trustees may have also followed the directions of NPS and Lincoln Memorial Life regarding the reporting of trust income.
How far did Missouri law allow the trustee to follow the seller’s instructions with regard to investments, administration and taxation of a preneed trust? To what extent did the trustees owe fiduciary duties to funeral home providers and preneed contract purchasers? Will the results of the trial have implications to preneed fiduciaries in other states?
Preneed insurance companies understand the need to offer consumer options, and some have begun to offer hybrid trust programs. Consumer payments are deposited to a trust pursuant to a contract that requires the trustee to purchase insurance at some future date. This affords the consumer flexibility in making payments until the insurance is purchased. The trustee will take a Section 685 election to avoid income reporting to the consumer until the insurance is purchased. When the contract beneficiary dies, the trustee will collect insurance proceeds pursuant to IRC Section 101 and pay the seller upon proof of performance. For so long as the trust owns an insurance policy, the seller can anticipate a constant, albeit low, trust return.
For these programs, the NPS civil trial could either clarify or redefine the duties owed by trustees to consumers and third party funeral home providers regarding insurance investments. Did the NPS trustees have a duty to look behind Mr. Cassity’s polished presentation before purchasing insurance? Was this a one and done determination of prudence, or was the determination required with each purchase of an insurance contract? For contracts sold after SB1, there is also the question of whether the investment of trust funds in an insurance product complies with the prudent investor rule, and its diversification requirement. What was the diversification requirement under the old prudent man standard?
Must the bank also determine the correct taxation of the insurance product when held in trust? When trusts rushed to insurance products to avoid Rev.Rul. 87-127, there was no Section 685. Rev.Rul. 87-127 afforded trusts the legal authority to treat the purchaser as grantor, and thus claim taxation pursuant to IRC Section 101. What happened when NPS rolled over a seller trust that had a Section 685 election in force? Were the insurance proceeds then taxable?
Mr. Cassity’s testimony may well influence whether trustees can deflect these liability issues back to the seller and the sponsoring insurance company.