The ruling was issued by the 4th Appellate District in an appeal on the case: The Lincoln Life and Annuity Company of New York vs. Jonathan S. Berck, as Trustee, etc, Case No. D056373(May 17, 2011).
The policy at issue in the case was purchased in 2006 by Californian Jack Teren. On the prompting of his son, Jack sought to purchase life insurance for the purpose of selling it to investors.
Jack was approved for a $20 million policy. On the same day he signed the policy application, he also signed documents forming a life insurance trust to hold the policy. Jack was identified in the trust documents as the trust’s settlor, and his son Elliot was named sole beneficiary of the trust. The trust was identified on the policy application as owner of the policy. Jack funded the trust with $1,000. The initial trustee of the trust was Robert Desch, a vice president of TD Banknorth NA.
There were a number of irregularities in the life insurance application. Jack claimed that his net worth was $46.4 million and that his annual income was $3 million. His actual net worth at the time of application was about $50,000 and his monthly pension and social security income was no more than $1,333.23.
Jack’s misrepresentations on the application were supported by a document that was allegedly prepared by a California accounting firm.
When Lincoln’s underwriters questioned whether the policy was being issued as a STOLI policy, both Jack and the trustee signed a document stating that the policy was being purchased for the benefit of Jack’s personal beneficiaries and that Jack was not being paid to apply for the policy.
Prior to Jack signing the policy, a shareholder of Life Products Clearing, LLC (LPC) sought investor contributions to purchase a beneficial interest in a number of policies, including the policy that was to be issued on Jack Teren’s life. Thereafter, Lincoln Life issued two policies on Jack’s life with a total death benefit of $20 million and an annual premium of $909,000.
As required by California law, both policies included an incontestability clause that restricted the carrier from challenging the validity of the policy after it had been in force for more than two years.
After the policy was issued, Elliot Teren transferred his beneficial interest in policy to LPC in exchange for a $600,000 cash payment. Most of that sum was eventually transferred to Jack.
LPC paid premiums on the policy for two years. By the time of trial, the life insurance trust had paid more than $2
million in premiums to Lincoln (using funds provided by LPC).