Tuesday, September 5, 2017

Court confirms creditor protection for life insurance

The Michigan Court of Appeals has issued a decision confirming that all elements of a life insurance policy, including the cash value of a whole life or universal life policy, are exempt from levy by a judgment creditor.

The plaintiff sued the defendant - for what is not disclosed - and recovered a judgment in the amount of $2.5 million. Plaintiff sought a writ of garnishment seeking to have the Prudential Insurance Company turn over the cash value of a policy that had been sold to the defendant. Defendant objected to the request.

MCL 500.2207 protects life insurance policies from claims of this nature by creditors. But the plaintiff argued that this section was intended to protect only the death benefit that is payable to the beneficiaries named by the insured, money that the insured himself does not own and can not reach while he is still alive. The cash value, the plaintiff argued, is fully available to the insured and can be taken out by him at any time, although this would reduce the total amount payable under the policy to the beneficiary after the insured is gone.

The Court of Appeals rejected that argument, ruling that the intent of the Legislature was to protect the entirety of the policy. One important point that it noted was that the cash value, if untouched during the insured's lifetime, will add to the recovery by the beneficiary. Conversely, allowing a creditor to attach the cash value would diminish the amount ultimately received by the beneficiary.

Sunday, September 3, 2017

CFPB resources for clients

The Consumer Financial Protection Bureau is a Federal agency that was established under the Dodd-Frank Act in 2010. Its Ask CFPB page provides information on a number of financial topics and answers to questions that people have asked the agency over the years. If you have a question or issue, this page is often a good source of information that can prepare you before you consult with us about the issue.

Similarly, CFPB's Resources for Older Adults and their Families page provides useful information, including “Protecting against fraud and financial exploitation” and “Tools for financial security as you age.”

Tuesday, May 16, 2017

Asset protection trusts in Michigan

Michigan has passed a new Qualified Dispositions in Trust Act, joining a small number of states that allow an individual to create a self-settled asset protection trust.

Previously, an asset protection trust could not be self-settled in Michigan. Another person, such as a parent or grandparent, could place property into an irrevocable trust, grant the trustee the power to make discretionary decisions only, and thereby prevent the beneficiary's creditors from having any access to the trust property. Suppose that Ben's grandmother creates such a trust with assets of $500,000. If Ben cannot require the trustee to make a distribution from the trust, neither can his creditors. But Ben could not accomplish the same thing with $500,000 of his own money. If he tried to do so, even though the trust would be valid under Michigan law, it would not be effective to keep the trust property away from Ben's creditors.

His option would be to create the trust under the laws of another state or another nation that permit the creation of self-settled asset protection trusts. That is why wealthy people would often set up "offshore" accounts and trusts in places like Bermuda or the Cayman Islands.

The new Act changes that. Now, an individual can create his own asset protection trust, and he can do it right here in Michigan. So long as the requirements of the Act are followed, it will be valid and it will be effective to prevent creditors from gaining access to the funds.

The requirements include:
  • When transferring property to the trust, the person transferring it must sign an affidavit that certifies:
  • (a) The transferor has full right, title, and authority to transfer the property to the trust.
  • (b) The transfer of the property to the trust will not render the transferor insolvent.
  • (c) The transferor does not intend to defraud a creditor by transferring the property to the trust.
  • (d) The transferor does not know of or have reason to know of any pending or threatened court actions against the transferor, except for those court actions identified by the transferor on an attachment to the affidavit.
  • (e) The transferor is not involved in any administrative proceedings, except for those administrative proceedings identified on an attachment to the affidavit.
  • (f) The transferor is not currently in arrears on a child support obligation by more than 30 days.
  • (g) The transferor does not contemplate filing for relief under the bankruptcy code, 11 USC 101 to 1532.
  • (h) The property being transferred to the trust was not derived from unlawful activities. 

    Creditors of the settlor may "avoid" (reverse) that transfer within two years after it is made, but only under certain conditions:
  • If the claim arises after the transfer is made, the creditor must show that the transferor had an actual intent to defraud the creditor, and the claim must be brought within the first two years after the transfer was made.
  • If the claim arose before the transfer is made, the creditor also has one year after he does or reasonably can discover the fact of the transfer to assert the claim.
  • Any such claim must be made under the Fraudulent Transfers Act, with the new amendments made to that Act.
  • All such claims must be brought before the probate court.
  • The creditor must establish the fraudulent intent by clear and convincing evidence.
There are some uncertainties. The first deals with the effect of a false statement in the affidavit. Would that false statement invalidate the trust or simply result in a decision that the property for which the false affidavit was given would not enjoy the protections under the Act?  

A more subtle issue also arises. Banks and credit unions are familiar with revocable trusts and are usually willing to lend money and take a mortgage on land owned under a trust, knowing that the land used to secure the loan can be foreclosed if the trustee does not keep up with the payments. But it is not clear how many financial institutions would be willing to extend a loan to a trustee who has the power but not the obligation to use trust property to make payments on the loan. Further, the right of the lender to enter a judgment against the borrower for any funds still owed after the land and home are sold after foreclosure - the "deficiency judgment" - would be futile when the court will not allow the bank as judgment creditor to have access to the trust property to satisfy that judgment.

In our area, investigation discloses that at least two banks will simply not make residential mortgage loans to the trustees of an irrevocable trust. Although perhaps overbroad, this policy has the merit of being both easy to understand and easy to apply. 

These and other complications will arise as practitioners adapt themselves to this new creature under Michigan law.

Saturday, March 4, 2017

The change

Effective March 15, I am ending my affiliation with the law firm of Garan Lucow Miller, P.C. and will be thereafter associated with the Kitch law firm in its Marquette office. I will continue to be available to clients in Marquette and surrounding communities to assist with personal and family succession planning, probate and estate issues, wills, health care directives, real estate matters, trusts and trust administration, IRA and retirement account planning, Social Security planning, contested probate matters, and similar issues. I appreciate the confidence that Marquette County residents have had in my services, and I look forward to being able to assist with your needs in the future. 

All client files in this area of practice will continue to be maintained by me with my new law firm. 

Contact information after March 15: 

M. Sean Fosmire 
Kitch Drutchas Wagner Valitutti & Sherbrook, P.C.
1440 West Ridge Street, Suite C
Marquette, Michigan 49855
(906) 228-0001

Note that I will be working in the same office (behind Shopko) that I have been in for the last 15 years. 

Monday, January 30, 2017

Planning for digital assets

Joe Kissell, who has written numerous books in this series, has written Take Control of Your Digital Legacy, a guide to planning for digital and online assets. From the introduction:
"This book walks you through the process of digital estate planning. It helps you identify the important information you may want to pass on to future generations, document your wishes in detail, and make practical decisions about preserving your data."
The book is available as an electronic books, in PDF, EPUB, or Mobi format, for $15 from Take Control Books

Saturday, January 7, 2017

Expected changes to inherited IRAs

Included in the Retirement Enhancement and Savings Act introduced last year is a proposal to modify the ability of a non-spouse designated beneficiary of an IRA or other retirement account to take mandatory distributions, after the death of the participant (the worker whose earnings originally funded the account), over a "stretch" period based on the life expectancy of that beneficiary.

This idea has been raised, in one form or another, several times in the past few years, by Federal officials eager to accelerate the release of these funds as distributions of ordinary income that will generate tax revenue. Most of the proposals made by the outgoing Obama administration had called for the outright elimination of the "stretch" distribution for all funds payable to a non-spouse beneficiary.

This more recent proposal offers more of a compromise. It would provide:

  • The current right of the spouse of the participant to treat the account as his or her own after the participant's death to remain unchanged.   
  • The current ability of a non-spouse beneficiary to take distributions from the account based on his or her own life expectancy to remain in effect for the first $450,000 in all accounts owned by him. 
  • For amounts over $450,000, they are to be subject to a much faster distribution schedule. All such funds must be distributed, as ordinary income, within five years after the participant has died. 

On request, we can provide a model payout schedule that will demonstrate, for a given set of retirement accounts, how this proposal would affect distributions.

Knowledgeable observers expect that this proposal or something close to it has a good chance of passing in 2017. At this point, the bill has been approved by the Senate Finance Committee. There are still several steps needed before it is passed and enacted.

How much additional revenue this proposal would generate is uncertain. Commentators familiar with the issue have pointed out that most non-spouse beneficiaries do not leave the funds in place to continue to grow over the "stretch" period. Most, they say, take the money out, pay the tax on it, and spend it.

Tuesday, November 8, 2016

Appeals from final probate court decisions

MCL 600.308 (part of the Revised Judicature Act, governing courts) and MCL 700.1303 (part of the Estates and Protected Individuals Code, governing procedure in the probate court) have been amended by Public Acts 186 and 287. The two are tie-barred but have different effective dates (9-27-16 and 12-26-16, respectively). 

This changes the former fractured practice, under which some decisions of the probate court were appealed to circuit court and others to the Court of Appeals. Final decisions of the probate court are now appealable by right to the Court of Appeals, as is the case with Circuit Court decisions.