MARKET TREND:  Divorce rates have been on the rise nationally over the past several years.  Accordingly, it should play a larger role in legacy management.

SYNOPSIS:  Divorce related legacy planning is critical. Spousal inheritance rights continue to exist until the divorce is final. Merely filing a divorce petition may not terminate provisions for a spouse under existing legacy planning documents or sever survivorship interests in marital or joint tenancy assets.  To ensure a client’s assets pass to intended beneficiaries, it is critical that the client amend his legacy plan (or create one) to adapt to the changed circumstances. Although clients have the most leeway to change their plans before proceedings are initiated, there are still actions the client can and should take after proceedings commence.

TAKE AWAYS:  Before a divorce petition is filed, clients can execute new wills, amend, revoke, or create and fund revocable and irrevocable trusts, execute new powers of attorney and beneficiary designations, and make other legacy planning changes in anticipation of the divorce. After divorce proceedings begin, clients can still freely execute new wills and powers of attorney, but may need to notify the spouse, obtain the spouse’s consent, or secure a court order before implementing more extensive changes. State laws differ as to what a client is authorized to change and transfers that can be made during a divorce. Clients and their advisors must work closely with divorce counsel to determine the exact planning actions that can and can’t be taken once a petition for divorce is filed.

SUMMARY:  Co-shareholders in a closely held business purchased insurance on each other’s lives, arguably for the purpose of funding a death-time buyout of shares. However, no binding buy-sell agreement was ever signed. When one of the owners of the business died, the proceeds were paid to the surviving shareholder. The trial court and appeals court both concluded that the surviving owner was not required to use the life insurance proceeds for the purpose of purchasing the decedent’s stock.

CITE: Selzer v. Dunn, 2014 WL 356992, No. 12–12–00150–CV (Ct. App. Tex. Jan. 31, 2014).

Click to download the printable pdf.

MARKET TREND: As planning approaches and products become more complex, care must be taken to avoid the retention or acquisition by the insured of powers over the policies that would cause the proceeds to be included in the insured’s estate at death.  Product sophistication using long term care riders and investment approaches with high cash value products has increased the array of planning options, offering insureds more flexibility but higher risks as well.

SYNOPSIS: Life insurance proceeds will be included in the insured’s estate for federal estate tax purposes if, at death, the insured has any right to the economic benefits, so-called incidents of ownership, in the policy, even if the insured does not actually own the policy.  “Incidents of ownership” include the power, directly or indirectly, to change the beneficiary or the contingent beneficiary, surrender or cancel the policy, assign the policy or to revoke an assignment, pledge the policy as collateral for a loan, and obtain a loan from the carrier against the surrender value of the policy.  In order to avoid inclusion of the proceeds in the insured’s estate, the insured must avoid holding any and all such incidents of ownership, even if attributed indirectly.  For example, if the insured holds a controlling interest in a corporation that owns policies on the insured’s life, the proceeds will be included in the insured’s estate to the extent the proceeds are not payable to or for the benefit of the corporation.  Policies purchased with community property funds also may cause both spouses to have incidents of ownership in the policies.  Second-to-die policies may give both insureds incidents of ownership and generally should not be transferred to an ILIT of which one of the insureds is a beneficiary.

TAKE AWAYS:  Inclusion of life insurance death benefits in the insured’s estate will occur if the insured holds any incidents of ownership in the policy.  “Incidents of ownership” encompass far more rights than actual policy ownership, including the ability to name policy beneficiaries or pledge a policy for a loan.  In addition, incidents of ownership may be attributed to an insured indirectly depending on the acquisition or ownership structure, such as with a corporate-owned policy where the insured is a majority shareholder, or a trust-owned policy where an insured is a trustee of the trust.  Thus, advisors can add value to the services they provide by helping clients identify situations where the insured may have retained or may acquire an incident of ownership and reviewing alternatives to eliminate the possibility for incidents of ownership and the potential estate tax exposure. 

MAJOR REFERENCES: IRC §2042; Private Letter Ruling 201327010; Chief Counsel Advice 201328030. 

Scroll to read the full report or click here to download a printable PDF.  ​