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: 

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    • 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.