Wilsey Estate Planning Blawg

Estate Planning for Physicians

Here's an article I wrote that describes the unique needs of physicians and dentists when it comes to estate planning. High debt, retirement concerns, life insurance, and lawsuits all filter into the equation, and this article tries to sum up the issues.

Download EstatePlanningforPhysicians.pdf

New Case Bolsters Legitimacy of Premium Owned Life Insurance...Somewhat

I'm really interested in the legal aspects of premium financed life insurance, partly because I'm a geeky estate planning lawyer, and partly because I think that in certain circumstances, these insurance policies can have positive estate planning implications for wealthy clients who do not have the cash flow  (or are simply not willing) to pay life insurance premiums. Obviously, life insurance in an irrevocable life insurance trust ("ILIT") is exempt from the client's taxable estate, and can be used to pay estate taxes or as part of a zero-tax estate plan, with the client's taxable estate going to charity.

One argument against premium finance arrangements has always been that the implied arrangement to sell some of these policies after the statutory 2 year non-contestability period makes all premium financed arrangements void from their inception. This is because all states require an insurable interest when a policy is issued. This means that the policy must be purchased by someone who has an incentive to see the insured continue living. The argument is that while the insured or an ILIT is purchasing the policy, they are really doing so as a straw-person for a third party, who plans on purchasing the policy from the insured in after the 2 year incontestability period is complete.

However, a new case out of Minnesota (where most premium financed policies are issued) seems to state that unless there is a purchaser identifiable when the policy is purchased, there is no implied arrangement to sell the policy after 2 years. Here's a link to the case:

http://www.insurereinsure.com/files/upload/Order_Granting_Motion_to_Dismiss-Paulson_2.pdf

Unfortunately, the court does not explore the issue of what if the economic terms of the loan arrangement make it economically unfeasible to continue the policy after the 2 year period. I guess this issue is for another case, but for the time being, this seems to be a win for the premium finance industry.

Using an ILIT in Estate Planning

Here's a presentation I recently gave via webinar entitled "Using an ILIT in Estate Planning". The presentation goes over the procedure for moving the proceeds of Life Insurance policies out of one's taxable estate. This is important for wealthy clients in order to ensure that roughly half their life insurance death benefit doesn't go to the IRS.

I have a copy of the presentation with my narration as well. If you would like a copy, please email me at wardwilsey@wilseylaw.com.

| View | Upload your own

Presentation on Using Life Insurance in Zero Estate Tax Plans

I've seen a lot of "zero-tax" estate plans that use a TCLAT, or Testamentary Charitable Lead Annuity Trust, to eliminate estate taxes upon a persons death. This is all well and fine, but you must realize that if you use a TCLAT, for the most part, you will receive less than had your heirs just paid the estate taxes. As such, Life Insurance is an essential element of these plans. Here's a presentation that does in-depth in the mathematics of zeroed-out estate plans. I also have a version with audio, please email me at wardwilsey@wilseylaw.com if you'd like a copy.

| View | Upload your own

Dynasty Trust for Estate Planning

Warren Buffet has famously stated," I want to leave my children enough so they can do anything, but not enough so that they can do nothing".

This famous tenet encapsulates what most of my clients are concerned about with their estate plans. They want their wealth to benefit their family, but are afraid that if left unfettered, it can have negative implications on their children's well being and work ethic. This is a legitimate gripe, it seems to me a common occurence that wealth, left untethered, inherited by beneficiaries outright generally has negative effects.

The use of the Dynasty Trust is one way to combat this problem. Here is a great New York Times Article that explains the benefits of such a trust for one's family. Basically a trust that does not end for the duration of a beneficiaries life, and possibly the lives of subsequent beneficiaries, a Dynasty Trust is an awesome way to ensure that one's family is protected from the dangers of inherited wealth.

Charitable Ideas for the New Year

The longer I practice the more clients I encounter who have a charitable intent as their legacy, even if they may not know it when they first come into my office.

The obvious great thing about charitable giving is the benefit one gives to their community at large. Often there is no greater feeling than this. I'm sure all of us have felt the rush of good feelings we get by doing the right thing and helping someone out. M. Scott Peck, a favorite author of mine, has referred to this state as a feeling of "grace".

However you define it, charitable gifting can be a great emotional high. It can also be a great benefit to your pocket book, as this article from the Fort Worth Business Press describes.

One area I can see a lot of future benefit for wealthy clients is in the area of the Charitable Remainder Trust. Since capital gains rates may rise in the future, depending on the next presidential election, more and more folks are looking to get highly appreciated assets sold without incurring a substantial capital gains hit. A great way of doing this is the Charitable Remainder Trust.

With a Charitable Remainder Trust, you transfer an appreciated asset into the trust. Generally, you are allowed to act as trustee of your own trust, giving you full control over the asset upon its transfer. The trust is required to pay you an annuity for either a term of years or for your life. Most of my clients elect for a lifetime payment to maximize their payout.

A great use for this trust is to diversify an asset, and reinvest in a tax free environment. For instance, if a large part of your wealth is owned in the stock of a single company, you could put that company in a Charitable Remainder Trust, and once in the trust sell it as many times as you like. Only the annuity payments each year that are made to you are taxable.

If you have any questions on the Charitable Remainder Trust, or Planned Giving in general, please feel free to call me at (858) 764-2672.

The Estate Planner Made Me Do It!!!

Here is an interesting article from Reuters about an SEC inquiry into some stock sales by Countrywide Financial Corp, Chief Executive Angelo Mozilo. According to Board Member Henry Cisneros, these transfers were done for estate planning purposes, and not as some part of a nefarious scheme to defraud investors.

I'm sure this is true. My suspicion is that with the lowered stock values, Mr. Mozilo's attorney thought it was a great time to move some of the assets out of Mr. Mozilo's estate through the use of a GRAT or some other technique. As the beaten down lender regains its stock value, as it probably will, the appreciation will pass outside of Mr. Mozilo's estate.

This article, however, just shows the importance of documenting the purpose for these moves, especially in the case of High Net Worth executives who are subject to SEC regulations.

Making the most out of gifting

Many clients come to me with a very informal gifting plan in place. They are generally aware of the basic rules, such as being able to gift $12,000 per year to as many different people as they choose. However, often clients end up getting themselves in trouble by making gifts that exceed this amount without proper consideration for the issues involved. See this article for more information.

However, one option I ask clients to strongly consider is the idea of making annual gifts to a Family Bank while they are still alive. The concept is for a husband and wife to make gifts to a trust plan from which they can make gifts to their children without concern for the annual exclusion limitations. Done properly, these assets will grow over time, and allow Mom and Dad to make large one time gifts to their children, such as down payments for houses, capital for businesses, etc. The idea, when done properly, can make gifting much more effective.

The Queen of Mean Estate Plan

Well, it seems Leona Helmsly's estate plan has solidified her spot as the "Queen of Mean" amongst most commentators. This is due to her cutting 2 of her grandchildren out of her estate plan (reportedly for failing to name any of their children after her late husband) in favor of her 7 year old Maltese, aptly named Trouble.

However, many seem to overlook the fact that she is leaving the bulk of her estate, estimated at $2.5 billion, to charity. I would think that this would better her reputation somewhat, but perhaps her requirement that her mausoleum be acid washed or steam cleaned at least once a year was too much for the public to handle.

Anyway, for a great analysis of the estate plan, see here. What's interesting about Ms. Helmsley's death is that it has shone the spotlight on pet trusts. I have been remiss in not emphasizing these enough for my client's furry companions, but they are definitely an integral part of the pet lover's post mortem planning. I may even write a full legnth article about the concept in the future, so stay tuned.

The Potential Trap of IRC §101(j) on Business Owned Life Insurance

Newly enacted Internal Revenue Code §101(j) provides that the proceeds of business owned life insurance (BOLI) and corporate owned life insurance (COLI) are tax exempt only to the extent of premiums or other consideration paid for the policy. The remaining proceeds are taxable income unless specific process and/or exemptions are met. This statute applies to life insurance policies issued after 8/17/2006. What this means is that if a corporation purchases life insurance, absent an exception, all proceeds above the premiums actually paid are subject to income tax. Advisors must be especially cognizant of this rule, as the liability can be gigantic. If Company X buys a $1,000,000 life insurance policy on its owner, Mr. W, but only pays $100,000 in premiums prior to death, then the corporation will incur $900,000 of ordinary income tax. This defeats the purpose of the insurance and must be avoided! Do not assume that these new provisions apply only to corporations. It is possible, in fact, likely, that they apply to insurance policies owned by self-employed individuals (partnerships and LLCs). Thus, this provision applies to deferred compensation and key person life insurance policies as well as potentially to policies owned by entities under stock redemption type buy sell agreements. From now on, when buy sell agreements are put in place, it is IMPERATIVE that legal counsel is sought on the non-taxability of the proceeds. Let us see how we can avoid this result. In order to avoid income tax inclusion, the policy owner must meet (1) a notice and consent rule and (2) the insured must be a member of an accepted class. The notice and consent requirements are: (1) Before the policy is issued, the insured must receive a notice that states that the entity intends to apply for a life insurance policy insuring the employee’s life and that the employer will be the beneficiary thereof, (2) the notice must state the maximum amount of insurance to be applied for, (3) the employee must provide the employer with a consent to be insured under the contract as well as consent that the employer may continue the life insurance in force after the employee’s termination of employment. The accepted classes of insured are an employee employed by the employer in the 12 months prior to his or her death, who must be, at the time of the issuance of the contract, (1) a director or highly compensated employee (using the qualified plan rules definitions) or (2) the death benefits are used for the benefit of the insured’s family or heirs (which includes the purchase of his or her interest in the entity under a buy sell agreement, direct beneficiaries, the insured’s estate or a trust for the benefit of the insured’s family or heirs). Therefore, you can see that this will work fine for a buy sell agreement, as long as the notice requirement is met. If the notice requirement is not met, and recorded in the corporate minute book, a potential devastating effect can take place. Take care in advising your client with respect to entity owned life insurance, and please feel free to call me if you have any questions.