A lawsuit causes scrutiny of insurance, trust and disclosure practices.
Estate planning professionals are closely watching a lawsuit against a renowned attorney to see just how far it might go in setting a legal precedent regarding an estate planning attorney's duties when putting together a plan for a client.
A group of wealthy families, angry over what appears to be an advanced estate planning technique gone sour, are suing estate planning attorney Jonathon Blattmachr for fraud and conflict of interest relating to the insurance, trust and disclosure practices involved in the plan.
Blattmachr, a New York City-based attorney with Milbank, Tweed, Hadley & McCloy LLP, rose to estate planning prominence and spent much of the past seven years by putting together family reverse split-dollar plans for wealthy clients. The arrangements, which allow policyholders to sidestep much of the gift tax they would otherwise pay on insurance premiums paid into a policy for beneficiaries, were tentatively greenlighted by the Internal Revenue Service in a 1996 ruling obtained by Blattmachr and insurance broker Michael Brown.
Ironically the suit, which names Blattmachr, Brown and others, does not cite the reverse split-dollar arrangements, but rather a host of insurance, trust and conflict-of-interest issues. While the plaintiffs' attorneys at Anderson Kill & Olick in Philadelphia told Financial Advisor magazine that they reserve the right to include the arrangement in the suit in the future, the plan itself has not been audited by the IRS, making it difficult to show related damages.
The lawsuit raises a number of issues critical to estate planning professionals. For instance, is it an estate attorney's responsibility to ensure that insurance policies, especially multi-million dollar policies, are competitive in terms and price? Is it his responsibility to see that lower insurance premiums are negotiated or that private placement quotes are obtained? What should happen if the attorney represents the insurance brokers who are shopping for the policy, but then decides to excuse himself from all responsibility for the recommended policy, its costs and its suitability?
These and other issues could be decided in a suit being brought by New York real estate magnate Charles B. Benenson and his wife, Jane. At one time, Benenson made the Forbes 400 for his lucrative real estate investments. Blattmachr was the Benensons' attorney for several years before offering them the arrangement in early 2000 as a way to reduce gift and estate taxes.
After a scathing July 29, 2002, report in The New York Times describing how Blattmachr and his mega-wealthy clients were using the arrangements to shelter assets from taxes, the IRS waited just 18 days to issue Notice 2002-59 on August 16. The notice says that under reverse split-dollar arrangements, "one party holding a right to current life insurance protection uses inappropriately high current term insurance rates, prepayment of premiums or other techniques to confer policy benefits other than current life insurance protection on another party. The use of such techniques by any party to understate the value of these other policy benefits distorts the income, employment or gift tax consequences of the arrangement and does not conform to, and is not permitted by, any published guidance."
In effect, the notice closed the loophole that estate-planning attorneys such as Blattmachr had been using to encourage America's wealthiest families to buy super-sized insurance policies for the benefit of heirs. The basic reverse split-dollar technique allowed clients to use government tables or insurers' own published premium tables to reduce to minimum levels the premiums they had to report for purposes of paying gift taxes. In some cases, however, the actual premiums the families were "gifting" were tenfold or more than what they were reporting.
Alarmed by the report and alleging that Blattmachr and the other parties in the deal weren't returning phone calls, the Benensons retained counsel. The suit against Blattmachr and related parties was filed in Los Angeles Superior Court on June 5, 2003.
Also named in the suit, which alleges breach of contract, fraud and conflict of interest, are: Blattmachr's law firm, Milbank, Tweed; the insurance companies that sold the policy, Massachusetts Mutual Financial Group and its subsidiary, CM Life Insurance; insurance brokerage firms Spectrum Financial Network Insurance and Investments LLC and Executive Compensation Group; and insurance agents Louis and Amie Kreisberg of Executive and Michael Brown of Spectrum. Except for Blattmachr and the firm of Millbank, Tweed, none returned calls seeking comment.