Wills, Trusts & Estates Prof Blog

Avoiding Taxes on COD Income

Robert S. Bloink (Adjunct Professor of Law, Thomas Jefferson School of Law) recently published his article entitled Premium Financed Surprises: Cancellation of Indebtedness Income and Financed Life Insurance, 63 Tax L. 283 (2010). The abstract available on SSRN is below:

The last decade saw a tremendous expansion in the use of premium financed life insurance for high net worth individuals. Billions of dollars in premium finance loans were sold as low risk options for purchasing high-value life insurance. But the collapse of the secondary market for life insurance policies eliminated the primary exit strategy for insureds who purchased policies utilizing premium finance loans. When the option of selling the policies on the secondary market evaporated, most viewed the best course of action as surrendering the policies in satisfaction of the loan or allowing the policy to lapse.

But while handing back an underwater policy will eliminate all, or at least most, of the debt on the policy, this cancellation of debt (COD) has potentially dire income tax consequences that must be examined by insureds and their advisers. A taxpayer will usually realize income from COD when a premium finance loan is forgiven. But a number of factors may reduce or eliminate the insured's exposure: the identity of the taxpayer, the structure of the trust holding the policy, the structure of the loan, and the applicability of exceptions to the inclusion of COD income in gross income. Each of these factors must be analyzed to determine whether the insured should be prepared for a doomsday tax scenario or whether the insured will walk away from the deal relatively unscathed.

CLE on Israeli Probate Law

Gideon Koren & Co. is sponsoring a 60-minute webseminar entitled An Overview of the Israeli Probate Law and Procedure, and Common Issues in Multinational Proceedings on October 5, 2010. The program description is below:

This Lecture will provide non-Israeli estate and probate practisioners with an overview of Israeli Probate law and procedure. Specifically, the lecture will discuss Israeli law pertaining to jurisdiction, choice of law and domicile and other key issues that arise in multinational proceedings.

The lecture will be practical in its focus and is intended for practisioners who have clients whose estates may involve potential proceedings in Israel.

Political Issues Surrounding the Estate Tax

Dalton Conley (University Professor and Dean for the Social Sciences, New York University) recently published his commentary entitled Tax Revolts, Pregnancy Envy, Race, and the “Death Tax,” 63 Tax L. Rev. 261 (2009). The conclusion is below:

Thus, to think through the political issues surrounding the restoration of a significant estate tax or the reformulation of this revenue source as an inheritance tax (or other proposals such as adjusting basis upon death), we must think through the other realms of life upon which this tax touches. As discussed here, that list includes everything from paternity uncertainty to the definition of the family as distinct from the marketplace to race and the legacy of slavery. I am sure that other scholars could add to this list. The bottom line is that these issues are not “peripheral” to the debate and must be tackled head on if tax policy changes promoting opportunity and meritocracy are to be implemented.

Supreme Court Accepts Anna Nicole Smith Estate Case

On Tuesday, the Supreme Court accepted 14 new cases for the 2010-2011 term, including the appeal from the estate of Anna Nicole Smith. Smith’s estate has been battling her late husband’s son, Pierce Marshall, for nearly two decades. Both Smith and Marshall have passed away, but their estates continue to fight.

The Court also announced that it will start releasing the audio from oral arguments each week. These audio recordings can be downloaded at supremecourt.gov. Although the Court previously released audio in high-profile cases on the day of the hearing, “[c]ourt spokeswoman Kathy Arberg said the occasional practice of same-day audio is being discontinued.”

Joan Biskupic, Supreme Court to Hear Anna Nicole Smith Estate Case, USA Today, Sept. 28, 2010.  See also my prior post for a brief recap of the Anna Nicole Smith saga.

Special thanks to Adam J. Hirsch (William and Catherine VanDercreek Professor of Law, Florida State University College of Law) for brining this to my attention.

Working with the Elderly in New York

Joseph A. Rosenberg (Professor of Law, CUNY School of Law) recently published his article entitled Regrettably Unfair: Brooke Astor and the Other Elderly in New York, 30 Pace L. Rev. 1004 (Spring 2010). The abstract available on SSRN is below:

This article juxtaposes the damning and cautionary tale of Brooke Astor’s mistreatment at the hands of her son and lawyers within the broader context of the plight of vulnerable elders whose lives, in stark contrast to Mrs. Astor, are shaped in large part by poverty, powerlessness, and injustice.

The actions of Mrs. Astor’s son consolidated his power over his mother’s property and living circumstances, isolated her from her loyal staff and friends, and created a risk of harm that led to the filing of a guardianship petition, and ultimately his conviction (along with one of her lawyers) of multiple crimes involving financial theft and exploitation.

This article examines the tale of the Astor family and analyzes the legal and professional responsibility issues that arose within the context of recent developments in New York law.

What to do When Your Relative Dies with Debt

When a relative dies with debt, keep these things in mind: 

•  
  •  
    • Unless you are the spouse, you probably have no legal obligation to pay your relative’s debts. Your relative’s estate is responsible for debts, and the debts will typically go unpaid if the estate runs short.
    • Depending upon which state you live in, some of your relative’s assets are exempt from debt collectors.
    • If a debt collector contacts you, give the collector the contact information of your relative’s personal representative. If you send a debt collector a certified letter saying that you do not want to be contacted further and the collector still contacts you, report problems to the state attorney general’s office.
    • If a debt collector contacts you, do not give out personal information. Scammers often check obituaries and contact relatives.
    • If you are unsure whether or not you are legally obligated to pay your relative’s debt, contact a probate attorney.

See Paying the Debts of a Deceased Relative: What You Should Know, Star Tribune, Sept. 22, 2010.

Special thanks to Sheila Kelly (attorney, Vadnais Heights, MN) for bringing this to my attention.

Self-Settled Domestic Asset Protection Trusts

Phyllis Smith (Associate Professor of Law, Florida A&M University College of Law) recently published her article entitled The Estate and Gift Tax Implications of Self-Settled Domestic Asset Protection Trusts: Can You Really Have Your Cake and Eat it Too?, 44 New England L. Rev. 25 (2009). The abstract available on SSRN is below:

Self-settled asset protection trusts are wealth preservation trusts coupled with the spendthrift provisions. This type of trust permits the settler to have the benefit of treating the trust as a separate entity thereby protecting his assets from creditors while maintaining a pecuniary interest, as well as some level of control over what ultimately happens to the trust property. By providing asset protection from potential creditors while still having the ability to maintain a beneficial interest in the trust, the settler can essentially “have his cake and eat it too.” The typical domestic self-settled asset protection trust may not be treated as an asset of the settler for creditor claims. Whether these assets should be treated as owned by the settler for the purpose of inclusion in the gross estate of the decedent for estate tax purposes is the focus of this Article. The author asserts that it is appropriate to include certain property settled in a domestic asset protection trust (“DAPT”) in the settler gross estate for estate tax purposes because of the control the settler retains over the trust assets up until his death.

Johnstown Woman Writes Will on Wood

When Marilyn Rhodeback’s husband died in 1996 without a will, she knew she needed to get her own affairs in order. She grabbed the closest thing to her, which was a 14”x14” piece of wood, and drafted her will. Over the next few years, she amended it, dated it, and had her sisters sign it.

Marilyn died on April 7 in Johnstown, Ohio, and the will was probated at the Licking County Courthouse. Although unusual, the will is a fully-handwritten original, and the court deems it a legal document. All wills must be kept on file in the courthouse, but the wooden document won’t fit in the drawers. Instead, the courthouse made a copy of the will for the file and is keeping the original in the vault.

See L.B. Whyde, Johnstown Woman’s Will Recorded on Wood, Newark Advocate, Sept. 28, 2010.

Special thanks to Matthew Hochstetler (attorney, Wooster, OH) for bringing this to my attention.

Summary of In Terrorem Clauses in Texas

Gerry W. Beyer (Governor Preston E. Smith Regents Professor of Law, Texas Tech University School of Law) and Benjamin Major (J.D. 2010, Texas Tech University School of Law) recently published their article entitled Are In Terrorem Clauses Still Frightening?, Estate Planning Developments for Texas Professionals, July 2009. The abstract available on SSRN is below:

This article offers a brief history of how beneficiaries were frightened by the dead into not challenging testamentary instruments. A summary of Texas jurisprudence regarding enforcement of in terrorem clauses and exceptions to their enforcement follows along with a discussion of the intent behind HB 1969’s passage and the ways, if any, that HB 1969 changes Texas law regarding the enforcement of in terrorem clauses and exceptions to that enforcement. The article also discusses potential techniques that testators and settlors in Texas may use in their attempt to circumvent HB 1969’s limits on in terrorem clause enforcement.

Abundance of Work Keeps Elder Law Attorneys Busy

Of the 65 elder law attorneys who responded to ElderLawAnswers’ survey, 29% work 41-50 hours per week, 35% work 51-60 hours per week, and 20% work more than 61 hours per week. In addition, the majority responded that they have to work at least some weekends. Others have vowed to never work weekends even if it means extra work during the week or arriving at the office early on Mondays to catch up.

See Survey Reveals Most Elder Law Attorneys Work More Than 40 Hours a Week, ElderLawAnswers, Sept. 9, 2010.

Comprehensive Inheritance Tax

Ann Mumford (Professor of Law, Queen Mary University of London School of Law) recently published her article entitled From Dahomey to London to DC: “Marketing” Wealth with the Proposal for a Comprehensive Inheritance Tax, 63 Tax L. Rev. 221 (2009). The abstract available on SSRN is below:

This paper was presented at the September 19, 2008 NYU Tax Law Review Symposium addressing Prof. Lily Batchelder's proposal to implement a comprehensive inheritance tax. This draft essay seeks to demonstrate that the comprehensive inheritance tax proposal involves a just tax. The idea of justice in taxation frequently involves linking benefits to taxation, and is explored in different ways in tax legal scholarship. On the question of inheritance taxation, however, justice is frequently determined within a socio-political mire of competing objectives. Given the political capital involved, it can be difficult to construct arguments effectively, especially if one is arguing for the adaptation of a different form of taxation of inherited wealth.

This paper acknowledges that the comprehensive inheritance tax will face the problem of politics, as the issue of inheritance taxation is intensely political, and its unpopularity has been the subject of valuable academic analysis. Its spectre of repeal in the US has had an enormous impact in the UK, and elsewhere. Thus this draft response to the proposal for a comprehensive inheritance tax has started from a point of acknowledgment of comparative impact.

CLE on Medicaid Planning

The National Business Institute is sponsoring a 90-Minute National Teleconference on October 25 entitled Current Topics in Medicaid Planning. The program description is below:

Explore the latest trends and toughest challenges of Medicaid practice and get a legal analysis of their implications for your ongoing cases from seasoned attorney faculty. Register today!

• Understand what happens to Medicaid benefits when a client moves to another state.
• Clarify how LTC partnership plans work.
• Learn how reverse mortgages affect Medicaid estate recovery.
• Handle spousal refusal issues effectively.

Re-Examining the Possibility of an Inheritance Tax

David Joulfaian (U.S. Department of the Treasury) recently published his article entitled Replacing the Estate Tax with an Inheritance Tax: A Re-Examination, 63 Tax L. Rev. 209 (2009).  This article addresses Lily Batchelder's article as well as James Hines' article.  The conclusion is below:

The structure of the current estate tax reflects a number of historical developments and political compromises. A fluid narrow tax base and high tax rates, as well as a complex code, are its salient features. The proposed change would introduce a number of complexities in defining the tax base as well as the ability to identify, locate, and expand the number of taxpayers. Hines discusses many of these. More importantly, the proposed inheritance tax would not replace the estate tax. Its starting point is the division of bequests reported on the estate tax return. It merely shifts the statutory incidence of the tax to the heirs while leaving in place all the existing complexities of deriving the size of the estate to be divided among the heirs. Unless the shortcomings of the current estate tax are addressed, the proposed inheritance tax falls far short from a meaningful contribution to reforming the tax system.

Reasons to Keep the Estate Tax?

Arguments are being made that we should keep the estate tax for many reasons, including:

• It only affects a few people who inherit large sums of money—and who can afford to share some of the windfall with their government.
• The wealthy have paid lower taxes during life, so it is only fair that they pay more at death. For example, Social Security taxes stop at a little over $100,000, and capital gains taxes are lower than regular income taxes.
• The government needs money now more than ever as the deficit soars.
• Although the estate tax contributes less than 1% of federal revenue, it still helps fund government projects.
• The estate tax does not stifle economic growth.
• People who inherit large amounts of money are four times more likely to quit working than those who inherit smaller amounts.
• The tax burdens those who inherit the money, not those who earned it.
• Imposing the tax does not conflict with entrepreneurship, hard work, and thrift.

See Michael J. Graetz, It’s Fair, and We Need the Revenue, W.S.J., Sept. 20, 2010.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.

Tips for Preparing for Your Death

Karen Jones (author, educator, and broadcast journalist) recently published her book entitled Death for Beginners: Your No-Nonsense, Money-Saving Guide to Planning for the Inevitable (Linden Publishing 2010). The summary provided on ElderLawAnswers is below:

This is the one "how-to" book that no one wants to believe they'll need -- but if the past is any guide, it covers a topic that all of us will encounter eventually. Burial or cremation? Funeral or memorial service? Organ donation or body farm? The choices are numerous and without some guidance and advance planning, our loved ones may be consumed with anxiety about what to do, and in the rush to take care of myriad details they may end up spending far more on our demise than necessary.

In Death for Beginners, author Karen Jones takes we the living through all the options involved in exiting this mortal coil, presenting the costs, the pros and cons, and crucial "how to" information. And in doing so Jones accomplishes the seemingly impossible -- she has written a book about death that's actually fun to read. Her breezy, conversational style is peppered with humorous asides (in the section on organ donation she laments that fat cells can't yet be donated), and she gives readers frequent breaks from the morbid subject at hand by presenting strange facts and oddities, such as the brutally honest 2008 obituary for one Dolores Aguilar.

Topics covered include the many different ways to dispose of the body, choosing a funeral home, planning a memorial service, composing an obituary, writing a will and dealing with grief. Along the way Jones provides ample information for holding one's own against the funeral industry and addresses important questions we perhaps never knew we had. Is embalming necessary? Which is more "green": cremation or green burial? Can one take cremated remains on an airplane? Readers learn that Costco sells caskets (now starting at $949.99), that one person can save or enhance up to 60 lives through organ and tissue donation, and that cell phone addicts can order a wooden coffin in the shape of a Nokia phone that was hand-sculpted by the famous Ga coffin carpenters of Accra, Ghana. (No word on choice of ring tone.)

The book's appendices include worksheets that, if completed, will make it easy for loved ones to divine anyone's after-death predilections and provide a clear road map for them to follow. An accompanying Web site, DeathforBeginners.com, gives a trove of links and updates, as well as downloadable versions of the book's worksheets.

Paradoxically, reading Death for Beginners and applying its advice may enhance your remaining years, as you'll be secure in the knowledge that you and your loved ones are well prepared when you finally move from Beginner to Expert.

Special thanks to Ken Coughlin (ElderLawAnswers) for bringing this to my attention. 

The Year to Give to Grandchildren

Although the estate tax lapse has stolen the spotlight this year, there is another lapse that fewer people are aware of. The generation-skipping transfer tax (GSTT) also disappeared in 2010, offering wealthy individuals a tax-free way to pass on money to their grandchildren. The grandparent will still have to pay the gift tax, but the rate for gifts is only 35% this year. Next year, if Congress doesn’t act, the gift tax will rise to 55%, and the GSTT will be applied on top of that.

J.P. Morgan recently analyzed the numbers and found that the benefit of a $1 million gift made in 2010 is $305,565 more than the same gift in 2011. A J.P. Morgan adviser “said that while there is a lot of interest in making gifts to grandchildren this year, many people are waiting until closer to the end of the year to make sure Congress doesn't enact a retroactive estate and generation-skipping tax at the last minute. The chance of this grows slimmer each day. Nonetheless, some people are loathe to write a big gift tax check tax until they are more certain.”

Tax Break Promotes Big Gifts to Grandchildren, Private Wealth, Sept. 23, 2010.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.

CLE on Trust Accounting

The National Business Institute is sponsoring a 90-Minute National Teleconference on October 21 entitled Income Tax Consequences and Trust Accounting. The program description is below:

Do you have the skills needed to manage all the practical aspects of ongoing trust maintenance? Explore effective tax planning methods and review sample annual and final accounting to ensure successful and compliant trust operation. Register today!

• Explore the mechanics of transferring IRA payments into trusts.
• Distinguish between judicial and non-judicial accounting.
• Fully understand the fiduciary's duty to account and review sample annual and final accountings. 
• Prevent fiduciary misconduct - ensure ongoing compliance with the Uniform Principal Income Act.

Taxing on the Basis of Receipt Rather than Gift

James R. Hines, Jr. (L. Hart Wright Collegiate Professor of Law, University of Michigan Law School) recently published his article entitled Taxing Inheritances, Taxing Estates, 63 Tax L. Rev. 189 (2009).  An excerpt from the introduction is below:

This Article considers two aspects of converting the U.S. transfer tax system to one in which burdens are imposed on the basis of receipt rather than gift. The first aspect is the economic impact of distinguishing transfer tax liabilities by numbers of children in a family in addition to the total amount of transferred wealth. The second aspect is the nature of the event that triggers tax liability. Taxing on the basis of receipt raises complicated issues about generation-skipping transfers, transfers to trusts, and transfers that involve foreign as well as domestic parties, all of which are potentially influenced by the logic of taxing on receipt rather than gift.

Part II of the Article reviews the logic of wealth transfer taxation in the broader context of the federal tax system. Part III considers the ultimate incidence of wealth transfer taxes, which is to say, the distribution of their burdens, and Part IV analyzes the efficiency costs of taxing wealth transfers. Part V considers the impact of potential reforms on wealth concentration, and Part VI analyzes international aspects of wealth transfer tax reform. Part VII is the conclusion.

Top SSRN Downloads

Here are the top downloads from July 26, 2010 to September 24, 2010 from the SSRN Journal of Wills, Trusts, & Estates Law for all papers announced in the last 60 days.

Rank	Downloads	Paper Title
1	139	Wills and Trusts Gerry W. Beyer, Texas Tech University School of Law, Date posted to database: September 11, 2010 Last Revised: September 11, 2010
2	126	Are in Terrorem Clauses Still Frightening? Gerry W. Beyer, Benjamin Major, Texas Tech University School of Law, Estate Planning and Community Property Law Journal, Date posted to database: July 12, 2010 Last Revised: July 12, 2010
3	98	Morgens: More QTIP Mischief Wendy C. Gerzog, University of Baltimore - School of Law, Date posted to database: July 24, 2010 Last Revised: July 24, 2010
4	78	Gay and Lesbian Elders: Estate Planning and End-of-Life Decision Making Nancy J. Knauer, Temple University - Beasley School of Law, Date posted to database: August 6, 2010 Last Revised: September 6, 2010
5	71	Outcomes-Based Education One Course at a Time: My Experiment with Estates and Trusts Carolyn Grose, William Mitchell College of Law, Date posted to database: August 23, 2010 Last Revised: September 14, 2010
6	51	Charity for the 'Death Tax': The Impact of Legislation on Charitable Bequests Kristine S. Knaplund, Pepperdine University School of Law, Date posted to database: August 10, 2010 Last Revised: August 10, 2010
7	47	The American Law Institute Proposes a New Approach to Perpetuities: Limiting the Dead Hand to Two Younger Generations Lawrence W. Waggoner, University of Michigan at Ann Arbor - Law School - Faculty, Date posted to database: May 24, 2010 Last Revised: July 13, 2010
8	46	Congress Should Impose a Two-Generation Limit on the GST Exemption: Here's Why Lawrence W. Waggoner, University of Michigan at Ann Arbor - Law School - Faculty, Date posted to database: July 17, 2010 Last Revised: July 21, 2010
9	38	Common Law Same-Sex Marriage Peter Nicolas, University of Washington School of Law, Date posted to database: June 25, 2010 Last Revised: August 11, 2010
10	38	Risk of Death Ariel Porat, Avraham D. Tabbach, Tel Aviv University, Tel Aviv University, Date posted to database: September 1, 2010 Last Revised: September 1, 2010

Taxation of Private Transfers

Louis Kaplow (Finn M. W. Caspersen and Household International Professor of Law and Economics, Harvard Law School) recently published his article entitled On the Taxation of Private Transfers, 63 Tax L. Rev. 159 (2009).  The summary available on The National Bureau of Economic Research is below:

This essay considers the appropriate conceptual framework for assessing the taxation of private transfers to individuals. Although it is conventional to emphasize the role of estate and gift taxation or inheritance taxation in redistributing income from the rich to the poor, the revenue effects of transfer taxation, and its distortionary effect on labor supply and savings, it is suggested in line with some recent work that the dominant focus should be on positive and negative externalities attributable to giving. The fundamental reason is that transfer tax reform can be combined with adjustments to other aspects of the fiscal system, notably the income tax, so as to keep constant most effects other than externalities.