Wills, Trusts & Estates Prof Blog

Benefits of captives: They can insure against pandemics

Insurance companies represent an overwhelming majority of Fortune 500 companies and many of those companies have created wholly-owned insurance companies, referred to as "captives." A captive insurance company is a "closely-held insurance company that does not write policies for the general public. A typical captive insurance company insures risks of the captive owner’s businesses that are otherwise unavailable in traditional insurance markets or that are extremely expensive to obtain."

There are many pros to captives. Since captive insurance companies are a C corporation, they can issue more than once class of stock and can also pay out “qualifying” dividends at preferential income tax rates. Captives also create a safety net for future risks. Further, captives may offer expanded coverage while significantly reducing insurance costs. 

Further, a captive "can insure against pandemics and other non-damage related business interruption events, such as loss of rental income and lost profits."

"On an annual basis, the premiums paid to the captive in excess of its claims and operating expenses can be made available for investment or distribution to shareholders. An added benefit of captives is that there may also be opportunities for gift and estate tax savings to the shareholders of captives."

Below is a list of candidates for captives:

• Profitable business entities seeking substantial annual tax deductions.
• Business owners with multiple entities or businesses that can create multiple operating subsidiaries or affiliates.
• Businesses with $1,000,000 or more in annual profits.
• Businesses with uninsured or underinsured risk.
• Business owners interested in personal wealth accumulation and/or estate planning.

See, Eric Allon. Allen Hankins and Jonathan L. Korb, Benefits of captives: They can insure against pandemics, Boston Business Journal, July 28, 2020.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Article on Testamentary Transfers and the Intent versus Formalities Debate: The Case for a ‘Charitable’ Common Ground

Peter T. Wendel recently published an article entitled, Testamentary Transfers and the Intent versus Formalities Debate: The Case for a ‘Charitable’ Common Ground, Wills, Trusts, & Estates Law ejournal (2020). Provided below is the abstract to the Article.

The dominant issue in the law of wills for much of last half century has been how much formality the law should require before giving effect to a party’s testamentary intent. The traditionalists favor: (1) the maintaining the prevailing approach to the Wills Act formalities; (2) strict enforcement of those formalities; and (3) courts having the power to construe but not reform a will. The intent-oriented advocates favor: (1) reducing the Wills Act formalities to a minimum; (2) granting courts the power to dispense with those formalities under the harmless error doctrine; and (3) granting courts the power to reform a will, even if there is no ambiguity in the will. The problem is the underlying variables inherent in the debate are so indeterminate (what is the value of testamentary intent; how much increased costs of administration and potential for fraud is there in the harmless error and/or power-to-reform doctrines), it is tough to imagine much movement in the debate. Recent developments, however, shed a new light on the debate. The debate has overlooked a variable – charitable gifts – that offers a common ground where the two sides should agree. The public benefits associated with saving failed charitable testamentary gifts more than offset the increased administrative costs and potential for fraud associated with the harmless error and power-to-reform doctrines. That conclusion, however, also reframes the issue with respect to the remaining universe of failed testamentary gifts. Do the benefits derived from saving failed noncharitable testamentary gifts exceed the increased administrative costs and potential for fraud associated with the harmless error and power-to-reform doctrines?

12 Different Times When You Should Update Your Will

While some people know they need to update their will but never get around to updating their wills before they pass on, many others believe that their documents are all squared away and do not need to be altered or updated. The latter group's families usually have to deal with the mess that is left behind due to omissions and other mistakes. 

If you are in either one of these groups, here are a list of 12 different times when you should update your will:

• You are having your first child
• You are thinking about divorce
• You have gotten divorced
• Your child gets married
• Your beneficiary develops creditor or substance abuse problems
• Your named executors or beneficiaries die
• Your young family member becomes a responsible adult 
• New legislation is passed
• You come into a windfall of money 
• You can't find your original will
• You buy property in another country or move to another country
• Your family and friends become enemies

If anything on this list applies to you, it is likely that your will ought to be looked at or changed. Failure to do so will likely leave behind a disaster for your loved ones to clean up after you pass on. 

See Daniel A. Timins, 12 Different Times When You Should Update Your Will, Timins Law (Kiplinger), May 26, 2020.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Need Help With Your Estate Plan? Go With the Flow, Advisers Say

"As older adults face mortality during the pandemic, lawyers and wealth advisers are using color-coded documents and flowcharts to help them understand estate planning."

Andrew D. Hendry, a lawyer who worked as general counsel for Colgate-Palmolive, was used to complicated legal documents. However, Mr. Hendry was not interested in digging through legal documents concerning his estate plan. Due to the intricacies of estate planning and the legal documents that come along with it, many people put the process off or do not address it at all. 

However, when the coronavirus crisis became a real and viable threat, Mr. Hendry, 72, decided that it was probably time to revisit his plan. He reached out to his wealth advisor who created a series of color-coded documents. Hendry was pretty excited about this arrangement. The flowchart laid out who got what, when, and why. Mr. Hendry stated, "the flowchart is the guiding document."

As many could probably guess, flowcharts are much easier to comprehend than a slew of documents filled with legal jargon. Flowcharts can be on a single page and can contain options for when either spouse dies, where money will flow and whether it will go to children, charities, friends, family, etc. Further, a detailed spreadsheet will allow people to tweak how much is going to who and what assets are transferred and when they will be transferred. 

For people who are not trained lawyers, the charts can help them understand the plan and can serve as verification that their desires will be fulfilled. 

See, Paul Sullivan, Need Help With Your Estate Plan? Go With the Flow, Advisers Say, N.Y. Times, July 24, 2020.

Special thanks to Matthew Bogin, (Esq., Bogin Law) for bringing this article to my attention. 

Idaho Supreme Court: Mom Owed Son Fiduciary Duties Under Trust Agreement

In Ferguson v. Ferguson, the Idaho Supreme Court addressed "the fiduciary duties of a trustee who has discretion to spend the trust's principal, the scope of records available to a trust beneficiary, and the enforceability of a trust instrument's no contest provision."

Roger and Sybil Ferguson created the Ferguson Family Revocable Trust in 1994. Their son Michael, was not included as a beneficiary in the original trust.

Roger died in 2012. The remaining assets were split between three sub-trusts. Sybil exercised her right to serve s trustee of the sub-trusts. In 2013, Sybil executed a Will and exercised power of appointment granted to her by the trust. This time, Sybil named Michael as a beneficiary, as well as various grandchildren. 

As a result of the new will, Michael became entitled to a share of the principal and undistributed net income remaining in the Survivor's Trust at the time of Sybil's death. As trustee of the Survivor's Trust, had the right to distribute as much of the principle as the trustee "may determine is necessary or advisable for any purpose" and as much of the principal as the surviving Grantor may request "for any reason."

Sybil died in 2015. Following Sybil's death, Michael requested financial information regarding the Original Trust and the sub-trusts dating back to Roger's death in 2012. A dispute arose over the scope of trust information available to Michael. 

The Idaho Supreme Court held that where a trustee maintains discretion to spend the trust's assets, the trustee is still subject to basic fiduciary duties under Idaho law. Also, fiduciary duties are not limited to those duties stated in a trust agreement. 

See Idaho Supreme Court: Mom Owed Son Fiduciary Duties Under Trust Agreement, Probate Stars, July 22, 2020. 

 

Article on Overview of the Forced Heirship Rules Under the Code Civil Mauricien

Cedric Tuyau, LL.M recently published an article entitled, Overview of the Forced Heirship Rules Under the Code Civil Mauricien, Wills, Trusts, & Estates Law ejournal (2020). Provided below is the abstract to the Article.

The Republic of Mauritius follows the forced heirship rules as derived from the French Napoleonic Code. This review article will demystify the forced heirship rules and the succession principles under the Code Civil Mauricien. The heirship rules for the surviving spouses will also be established with the view of demonstrating how the latter can also be part of a succession in the absence of any testamentary provisions. Discussions regarding the peculiarities related to the distribution of the succession such as the division-in-kind and licitation will also be established. Finally, the review article will conclude with the renunciation of heirship and its consequences.

Jurisdiction: Republic of Mauritius

'I bequeath all my beauty to my sister... since she has none': That acid quip, aged 9, helped trigger the lifelong feud between Olivia De Havilland - who has died aged 104 - and her sibling Joan Fontaine... a saga greater than Gone With The Wind

Until her death, Olivia de Havilland was convinced that she was the greatest star Hollywood ever produced. You may remember De Havilland from her spectacular performance in "the most glorious movie ever made," Gone with The Wind. 

Olivia was known for challenging the "stranglehold that studios had on their stars," which brought on the end of the 'Hollywood System'.

Olivia was very driven. When she was nominated for an Oscar but lost to Hattie McDaniel, she claimed that she "was convinced that there was no God." However, she had great self-confidence and kept on moving forward. She went on to win two Oscars for Best Actress in 1946 and 1949. 

In 1942, Olivia was nominated for the award, but lost to her sister Joan Fontaine, which only fueled the rivalry which had started when the girls were young. In fact, Joan once told a reporter, "I remember not one act of kindness from Olivia all through my childhood. She so hated the idea of having a sibling she wouldn't go near my crib."

One frequently reported story was that at age nine, Olivia was told to compose an imaginary last will and testament as an assignment and wrote, "I bequeath all my beauty to my younger sister, Joan, since she has none." 

When their mother died in 1975, Olivia tried to exclude her sibling from the memorial service. 

Olivia had a life-long competition with her sister, but of course, to her it was no competition. 

See, Christopher Stevens, 'I bequeath all my beauty to my sister... since she has none': That acid quip, aged 9, helped trigger the lifelong feud between Olivia De Havilland - who has died aged 104 - and her sibling Joan Fontaine... a saga greater than Gone With The Wind, Daily Mail (U.K.), July 26, 2020. 

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

Article on Waking the Dead: An Empirical Analysis of Revival of Wills

Adam J. Hirsch recently published an article entitled, Waking the Dead: An Empirical Analysis of Revival of Wills, Wills, Trusts, & Estates Law ejournal (2020). Provided below is the abstract to the Article.

The problem of revival arises when a testator executes a first will, subsequently executes a second will that functions to revoke the first one by subsequent executed writing, and then later revokes the second will by act. Does this sequence of events reinstate the first will (“revival”) or leave the testator intestate (“anti-revival”)? Most states, together with the Uniform Probate Code, create either a conclusive or rebuttable presumption of anti-revival. This Article argues that, as a matter of policy, lawmakers should impose whichever presumption most testators would assume to apply, in order to minimize the risk of error. The Article presents evidence from an electronic survey finding that around seventy-five percent of respondents believe that this scenario would result in the revival of their first wills. This evidence indicates that a presumption of revival would correspond with popular assumptions and should replace the prevailing presumption of anti-revival. The Article further argues that the presumption should be rebuttable, in order to maintain consistency with other elements of the law of will revocation. Finally, the Article explores the significance of the lopsidedness of the data and applies Bayesian probability theory to suggest the possibility of imposing a clear-and-convincing evidence standard when a “supermajoritarian” default is discovered to exist — a contribution to default rule theory.

Article on The Uniform Basis Rules and Terminating Interests in Trusts Early

Lad Boyle, Howard M. Zaritsky, and Ryan Wallace recently published an article entitled, The Uniform Basis Rules and Terminating Interests in Trusts Early, Wills, Trusts, & Estates Law ejournal (2020). Provided below is the abstract to the Article.

The resolution of income tax issues that may arise for trust beneficiaries who dispose of temporal interests in trusts remains relatively obscure. Additional issues exist for subsequent interest holders; the methods that the Code and Regulations prescribe for establishing, maintaining, and potentially recovering basis for successor owners of interests in a trust are not well developed.

In some instances, the trust instrument creating a temporal interest will supply a suitable path for early termination and distribution of assets. In those cases, Sub-chapter J of the Code typically governs the transaction and provides that terminating the trust and distributing its assets be treated as nonrecognition events. However, one must look beyond the confines of Sub-chapter J when trust beneficiaries participate in the disposition without a settlor-provided power to do so. The Internal Revenue Service has consistently applied in letter rulings a different tax regime other than the income tax rules provided in Sub-chapter J of the Code; gain may be realized and recognized under section 1001, which often brings into play the uniform basis rules.

The uniform basis rules reflect the concept that property acquired by gift or from a decedent has a single or uniform basis, whether multiple persons receive an interest in the property and whether directly or through a trust, and the individual interests have a basis that it is a proportional part of the uniform basis. The uniform basis rules of section 1001(e)(1) often deny the seller of a life or term interest in a trust any recovery of basis unless all interests in the trust are transferred to a third party for consideration. On the other the hand, the uniform basis rules permit a remainder beneficiary to recover basis in a sale, whether or not the life or term interest is also transferred. Besides these two basic rules, there are many nuances to the tax consequences of uniform basis rules and some interesting issues to evaluate when considering the sale of an interest in a trust, or the commutation or early termination of a trust, and how holders of transferred interests are treated for income tax purposes.

46th Annual Notre Dame Tax & Estate Planning Institute

Here is information I received about the 46th Annual Notre Dame Tax & Estate Planning Institute:

Due to the uncertainty as to how COVID-19 will affect travel this fall, the 46th Annual Notre Dame Tax & Estate Planning Institute will be delivered exclusively online via Zoom on its originally scheduled dates, October 29 and 30, 2020 (with a bonus session the evening of the 28th).  This virtual format (including our popular dual-track approach) will allow you to participate online in real time with the speakers, including opportunities for Q&A, and will be structured to qualify for continuing education credit to the extent allowed by the respective accrediting agencies. As an added bonus, we plan to record videos of all the sessions and your registration fee will include online access to these recordings for later viewing at your convenience (enabling you, for example, to view the dual-track sessions that you don’t attend “live”)

This year's brochure is available here: Download Notre_Dame_46_Brochure.  If you have not yet registered, you can register online now.   

We hope that this virtual format will be of benefit to the many hundreds of you who regularly rely on the Institute and will also enable many additional estate planning professionals, who might not otherwise have had the chance to attend the Institute in person, to engage with and benefit from the Institute this year. We look forward to seeing all of you online in October and, we hope, in person in South Bend in 2021.

            Jerome M. Hesch
            Director
            46th Annual Notre Dame Tax and Estate Planning Institute

Please direct all inquiries, questions, and concerns to:
Notre Dame Conference Center
[email protected]