Heirs lose fight over trustee’s $500,000 commission (WI)

It may have been a self-dealing conflict of interest for a trustee bank to sell life insurance policies and buy new ones from its own affiliate – and make a $512,000 commission – but it was expressly allowed by a trust set up for a Sheboygan multimillionaire, a federal appeals court ruled Wednesday.

The opinion, by Judge Diane Sykes, offers a a fascinating glimpse into the financial life of the very well-to-do, where even the best lawyers and consultants can’t always make everyone happy.

Jim French became that multimillionaire when he sold J.L. French Co., a manufacturer of engine parts, for $200 million in 1996. He and his wife cleared over $100 million; his four children, the other stockholders in the closely held company, each made $17 mllion, according to the opinion.

In planning his estate to benefit his children upon his death, he set up two interlocking irrevocable trusts. Over the years, he  wound up changing trustees a couple times.

When Wachovia Bank took over, it opted to dump some whole life insurance  and get much cheaper polices with the same death benefit, while saving $620,000 in premium costs. The bank used a Wachovia broker, and made the commission.

French’s four children felt Wachovia breached its duty of loyalty by reinvesting trust assets through its insurance affiliate and getting the big commission.

But as the 7th U.S. Circuit Court of Appeals held, ” Under the terms of the trust instrument, Wachovia had broad discretion to invest trust property without regard to conflicts of interest, risk, lack of diversification, or unproductivity. This language overrides the common-law prohibition against self-dealing and displaces the prudent-investor rule.”

Sykes further explains that the insurance swap really did make more sense for the trust anyway, since, because Jim French and his children were already wealthy, no one anticipated ever cashing out the old, more expensive polices for accumulated cash value, an option not available with the new, cheaper policies, which still paid the same $5 million each on Jim French’s death.

Wachovia not only got a $512,000 commission on surrendering the old policies, it was entitled to 2% of the premiums on the new policies for the first 10 years.

“No one disputes that this commission, though sizable, is consistent with industry standards,” Sykes wrote. But it irked the French family enough to sue Wachovia.

Now though, they not only lost the case (a second time, as the 7th Circuit was affirming the finding of the district court), they’re on the hook for Wachovia’s attorney fees and costs, which – you guessed it – far exceed the $512,000 commission earned by Wachovia.

The fees were set at $675,174.58 in 2011. Other costs could push the final figure over $700,000.

Attribution:

Heirs lose fight over trustee’s $500,000 commission
Bruce Vielmetti
July 19, 2013
Milwaukee Journal Sentinel
http://www.jsonline.com/blogs/news/216066691.html

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