CURRENT ISSUES IN THE AREAS OF ESTATE, TAX AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Indiana Repeals Prohibition Of “No-Contest” Clauses. Effective July 1, 2018, Indiana’s prohibition on no-contest clauses, also called in terrorem or forfeiture clauses, has been repealed for both wills and trusts. In the past, if a testator or trustor established a will or trust and included a provision that would result in a person filing a contest forfeiting any benefits, such a provision was unenforceable. Those rules no longer apply.
Indiana was one of only two states that precluded such provisions (Florida was the other state). The change in Indiana, however, was not actually a complete acceptance of such clauses. Rather, a no-contest provision will now be enforceable except under enumerated circumstances. One exception is if a fact-finder determines that the contest was brought for good cause. There are other exceptions as well, such as a beneficiary objecting to discretionary actions taken by a fiduciary, including the beneficiary objecting to a trustee’s excess fees or self-dealing. A beneficiary may also now first seek a declaratory judgment to determine whether a proposed filing would trigger the no-contest provision.
Consequently, a no-contest clause may be appropriate, but it would be effective only under particular circumstances. It would be very important to discuss with clients who want to utilize a no-contest provision some of the planning considerations applicable to such a provision. For example, if a beneficiary is receiving a small inheritance, there is very little reason for the beneficiary not to pursue a contest, particularly if he or she may receive a larger inheritance if successful. If the no-contest provision is enforced, and the beneficiary is disinherited, then the will or trust should make very clear where that beneficiary’s inheritance will go, i.e., to his or her descendants, or to other beneficiaries. The repeal of Indiana’s no-contest prohibition now allows the use of a new tool to deter litigation, but it should be noted that such provisions will not absolutely preclude or prevent a contest from taking place.
Insurance Mistakes – Continued. Suppose that an irrevocable trust is established, and that the trust will also hold a life insurance policy. A typical irrevocable life insurance trust (“ILIT”) will generally be a “grantor trust,” which means that it will be disregarded as a taxable entity and all income and deductions will be reflected on the individual return of the ILIT creator. In most instances with an ILIT that is a desirable result, since the trust creator would typically want to avoid the so-called “transfer for value rule” which would result in the life insurance proceeds being included in the gross estate of the trust creator for federal estate tax purposes if the trust creator died within three years of the establishment of the trust. Also, typically the goal would be that the trust would not pay income taxes which would result in a depletion of the trust assets. The federal tax rules provide that an ILIT will always be a grantor trust to the extent that income is applied, or may be applied, to the payment of premiums on policies of life insurance on the life of the grantor or the grantor’s spouse (unless the policy is irrevocably payable to a charity or the application of the income does not depend on the approval of an adverse party). Merely paying premiums with trust income, even if the trust does not specifically provide for it, would result in the trust being treated as a grantor trust. If the goal is to assure that the ILIT is not a grantor trust, then the trust should be drafted so that either income is automatically distributed to the beneficiaries upon receipt, or that income is segregated in a separate accrued income account which cannot be used to pay premiums. Another way to insure that the insured will not be treated as a grantor is to require that any discretionary use of trust income to pay premiums must be consented to be an “adverse party” such as another beneficiary other than the grantor of the trust.
Long Term Care Admission Issues. Long term care contracts are contracts of adhesion, i.e., essentially non-negotiable. To be admitted, the admission documents must be signed. Considering the frailty of people being admitted to a nursing facility, and the pressure their families are under, in most instances the documents are signed without much thought, and with no negotiation. As a part of the general planning process, when powers of attorney are prepared, it may be a good idea to include a provision in the power of attorney that divests the attorney-in-fact of authority to enter into a binding arbitration agreement, since many long term care contracts include binding arbitration. Such a provision in the power of attorney might render the binding arbitration provision unenforceable, which can be beneficial to the nursing home resident. This may be significant because arbitration can actually become more expensive and less likely to result in a favorable outcome than the possibility of litigation, and merely being able to assert the possibility of litigation may avoid a number of legal entanglements. When considering admission to a long term care facility, family members should always tour the facility and become very familiar with its layout, practices, and staffing. Many of these same issues will apply to an assisted living facility as well. Family members should in particular become familiar with the facility’s visitation policy and its theft and loss policies. In the assisted living environment, the applicant or the applicant’s attorney-in-fact should look closely to determine whether it requires a third-party guarantor of financial obligations. A guaranty is impermissible in the case of nursing facilities under the Nursing Home Reform Act, but in the case of assisted living facilities, an admission agreement might require a third party to guarantee financial performance. If such a provision will be agreed to, the signor should be very aware of its existence and the implications of such a provision. Provisions which waive rights should also be carefully reviewed.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.