Avoiding Fraud - ILIT Trustee and Trust Beneficiary Situations
Companies have a variety of approaches for handling life insurance applications with an Irrevocable Life Insurance Trust (ILIT) listed as owner and/or beneficiary. Some companies don’t ask for anything other than the trust’s tax identification number; some ask for a trust certification; others just ask for limited pages from the trust; and still others ask for a copy of the entire trust and utilize a committee review approach, often involving associates from advanced marketing/legal, agency, actuarial and underwriting departments.
An ILIT trustee is a key contact in the customer, agent and funding entity agreements. Obviously not all ILIT trustee situations will be adverse, but there are some scenarios that may merit additional scrutiny. Keep an eye out for the following:
- The trust contains a “trust advisor” or “trust consultant” whose trust-related powers exceed those of the trustee(s). This person may be the agent on the life insurance policy, family member or business associate of the agent, and may pose a conflict of interest and facilitate misuse of the policy values and death benefit. This information typically remains unknown to companies that do not review the entire trust document.
- For a portion of the proceeds, the trust has a beneficiary that does not have insurable interest in the life of the insured. This may be a company or charity set up to direct proceeds back to the agent who wrote the life insurance policy. This would not be identified without review of the entire trust document.
- The trustee is not well-known to the applicant and/or lives in a different state than the applicant/insured.
- The trust is established offshore or utilizes offshore banking facilities.
- Multiple insureds from the same writing agent utilize the same trustee.
In the case of third-party financial records, there are also some red flags to watch. Large face amounts of coverage will often require independent third-party data verification of an individual’s financial situation to include a breakdown of assets and liabilities. However, the underwriter is sometimes challenged to determine whether the information being received, and the sources of third-party financial information being supplied, are legitimate. Some red flags that can be a tip-off that things should be investigated further, include:
- No formal letterhead of the firm or CPA.
- No CPA name printed under the signature.
- No professional credentials listed after the CPA’s name.
- No Internet search information found, such as a website.
- No listing on state CPA licensing sites.
- Unaudited accountant-provided financials that are based on information from the proposed insured and that may be largely worthless.
- Credit reports with little information or information that seems inconsistent with the reported income.
- Discrepancies in information from different sources concerning income reported on the application, Confidential Financial Statement/Application Financial Statement and in a tele-interview or commercial inspection report.
- The proposed insured's or owner’s signature on the CFS differs from the signatures on the balance of the application.
What could you do? In some of these instances, a variety of measures should be taken:
- You could contact the CPA firm and verify that the CPA or firm does indeed represent the proposed insured and completed the actual documents.
- Be careful when considering the financials from an estate tax attorney who is affiliated with the writing agent or agency rather than the proposed insured. Check the attorney’s business address; if it's the same as the agent/producer or writing agency it may be a red flag.
- Check the application’s Agent’s Statement or Certification to see if the attorney is included among those listed as receiving part of the commission split. If so, you may want to require a different source to verify financials due to the potential conflict of interest.
- Supplement the third-party-provided information with an electronic inspection report.
- Use Form 4506-T Request for Transcript of Tax Return. If agents/producers push back on requiring this documentation, remind them of the extensive financial documentation required for a mortgage, home equity loan or tuition loan. Lack of help from an agent with this requirement can be a red flag.
For quick tips on ways to avoid fraud in life insurance agent recruiting and application design, read my previous blog.