Life Insurance Ownership Post ATRA 2012/2013. Fiduciary Responsibility in WI Life Insurance Trusts (General) Select Problems & Rescues

Transcription

1 Life Insurance Ownership Post ATRA 2012/2013 Fiduciary Responsibility in WI Life Insurance Trusts (General) Select Problems & Rescues

2 Fiduciary Responsibility in WI Wisconsin Standards Hammes (1) a duty of care or voluntary assumption of a duty on the part of the defendant; (2) a breach of that duty, i.e., failure to exercise ordinary care in making the representation or in ascertaining the facts; (3) a causal link between the conduct and the injury; and (4) actual loss or damage as a result of the injury.

3 Tale of Two Fiduciary Liability Cases: Hatleberg & French Hatelburg Facts ILIT Missing Crummeys Trust officers knew, but advised to continue Attorney 40% liable Holding Trustee breached fiduciary duty French ILIT Converted WL Policies Reduced premiums, but affiliate received big commissions No breach of fiduciary duty

4 Considerations for Financial Professionals Insurance Only Relationship use of ordinary care in making the representation or ascertaining the facts. Insurance + Investment Advisor See Above negligence consideration. In addition, an affirmative obligation to employ reasonable care to avoid misleading his clients. Know the difference between an affirmative obligation and an ordinary obligation. Tacitly standing by may be construed as misleading WI Courts clearly indicated remaining silent is not an option 4

5 Life Insurance Trusts (General) Often used for estate planning purposes Designed to keep life insurance proceeds outside of the estate, if irrevocable Private, and the proceeds pass to the beneficiary discreetly and outside of probate 5

6 Select Problems and Rescues Existing Trusts Death Benefit Funding an Estate Tax That No Longer Exists Trust owns low basis assets; Grantor owns high basis assets Lapsing Policies Subject to Split Dollar Arrangement Economic Benefit Regime Causing Phantom Income Tax Proposed Ownership/Trusts Buy-sell Funding with disproportionate premiums 2 nd Estate Creation (e.g., 2 nd or 3 rd marriage) Asset Protection Features 6

7 Life Insurance Trusts (Current Issues Existing Trusts) Using a life insurance partnership as a surrogate for administering life insurance policies Partnership reduces weaknesses of buy-sell arrangements For example, in a cross purchase Multiple policies and increased administration are needed. Premium inequities could result due to the differing ages and health of each owner. At retirement, the transfer of insurance policies to the retiring owner could result in taxable income Using a life insurance partnership as a surrogate for administering life insurance policies Operating company bonuses out premiums and owners contribute to Partnership At Death, Partnership distributes to surviving owners to fulfill obligations under buysell Works well for buy-sell funding, but no transfer tax benefit without transferring partnership interests. 7

8 Life Insurance Trusts (Current Issues Existing Trusts) Grantor Trust Status Trust = Grantor Trust for Income Tax if grantor retains certain powers over or interests in the trust. grantor retains power to dispose beneficial enjoyment of corpus or income without an adverse party s approval or consent certain powers are exercisable primarily for the grantor s benefit (Substituation) power to revoke right to income from the trust if trust income must be (or, in the discretion of the grantor or a non-adverse party, can be) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor s spouse (678) Revenue Ruling , C.B. 7, clarified the circumstances in which an income tax reimbursement clause would cause inclusion in the grantor s estate. Toggling. See, Madorin v. Comm r, 84 T.C. 667 (1985); Treas.Reg (c), Ex. (5); Rev.Rul , C.B Rev.Rul , C.B Notice , identifying a toggling grantor trust transaction as a reportable transaction of interest. Notice , C.B IS TOGGLING AN ABUSE? 8

9 Life Insurance Trusts (Current Issues Existing Trusts) 1035 Exchanges Inside or Outside a trust Beware of a 1035 exchange for a policy outside the trust for a new policy inside the trust - will invoke the three year waiting period on the new policy Watch out for Section 72 (U) if ILIT is exchanger Watch out for trust income tax rules if resulting annuity is trust owned Make sure you consider surrender or gift options before doing exchange. 9

10 Life Insurance Trusts (Current Issues Existing Trusts) Split Dollar & Lapse Split Dollar Arrangements Watch for lapsing policies Watch for economic benefit regime on old arrangements increasing the phantom income to the retiree Solution is to re-negotiate the arrangement and move from economic benefit to loan regime to take advantage of lower interest rates Lapse issues also need to be addressed with the policy. 10

11 Life Insurance Trusts (Trust Planning) Buy-sell Funding with disproportionate premiums 2 nd Estate Creation (e.g., 2 nd or 3 rd marriage) Asset Protection Features IDGT Others? 11

12 Questions / Comments? Robert Mathers, Shareholder Davis & Kuelthau, s.c rmathers@dkattorneys.com