Contrary to popular belief, older investors have as much of an appetite for impact investing as their younger counterparts.
Articulating social impact is not only about measuring an investment’s good in the near term but showing (particularly older) investors how their capital can leave its mark long after they’re gone. Fund managers who may be used to younger investors forking over their cash for social impact will have to increasingly gear their pitches toward an aging generation that, already in retirement, has less willingness to take on risk, less time to make investment decisions and more skepticism about social impact.
The emotional stress of dealing with
one’s impending death due to a terminal illness like cancer, AIDS, etc., is
further compounded by the customary increase in medical bills and a likely
reduction in earning capacity.
A person owning life insurance
policies may have several options for reducing some of his or her financial
concerns.
Methods of
Reducing Financial Concerns
Borrow against cash values: Permanent
type policies such as whole life, variable life, universal life, etc., build up
cash values over the years. The owner of the policy is usually able to borrow
money from the cash value, often at favorable interest rates. When death
occurs, the policy loans and any interest will be subtracted from the face amount
of the policy before payment is made to the beneficiary. If there is also a
“waiver of premium” provision the insured may be relieved of the monthly
premium payments, in certain circumstances.
Surrender the policy: Policies
with accumulated cash values can be surrendered to the life insurance company.
However, this would generally not be desirable, since the face amount of the
policy is usually much higher than the surrender value and the time of death is
close. There may also be income tax consequences.
Borrow funds from a third party: Other
friends, family members, and possibly the beneficiary of the policy may be
willing to lend money to the person who is terminally ill and then receive
repayment from the insurance proceeds.
Accelerated death benefits: Some
life policies provide for payment of a portion of the face amount if the
insured becomes terminally ill. This is generally called a “living benefit” or
an “accelerated death benefit.” Even if it is not mentioned in the policy the company
may have extended the right to the policy owner; the availability of such benefits
should be investigated. Some companies require the owner to have a life
expectancy of from six to nine months or less. Terminally ill persons
(diagnosed by a physician as expected to die within 24 months) may receive
accelerated death benefits free of federal income taxes. Chronically ill
individuals may also exclude from income accelerated death benefits which are
used to pay the actual costs of qualified, long-term care. See IRC Sec. 101(g) for
more detail.
Viatical settlements: Another
option is to sell one’s life policy to a third party[1] in
exchange for a percentage of the face amount. This is called a viatical
settlement. It comes from the Latin word “viaticum” which means “supplies for a
difficult journey.” These settlements may also be available with contracts that
have no cash value such as individual or group term life insurance policies.
Factors which will determine the amount of the settlement include:
The insured’s life expectancy is a factor. In
general, the shorter the period, the more a viatical settlement company will
pay. Some companies will accept up to a five year life expectancy, but many
prefer a shorter term of years.
The period in which the company can contest
the existence of a valid contract must have passed, as well as the “suicide
provision” (typically two years after issue). This period may begin again for
policies that have been reinstated after a lapse for nonpayment of premium.
The financial rating of the company that
issued the policy is important. A lower rating can result in a smaller
settlement.
The dollar amount of the premiums is a factor.
The buyer of the policy is likely to be required to continue making the
payments for the remainder of the insured’s lifetime.
The size of the policy is a factor. Most
settlement companies have upper and lower limits; for example, a top limit of
$1,000,000 down to a low-end limit of $10,000.
The current prime interest rate is important,
since the buyer will compare the settlement agreement to other types of
investments.
After
examining the above factors, a settlement company will generally offer the owner
of the policy between 25% and 85% of the policy’s face amount. The settlement
amount may be received free of federal income tax under conditions similar to
those described above under “accelerated death benefits.”
Other
Considerations
If the terminally ill person is presently
receiving benefits that are dependent upon his or her “means” (income or
assets), like Medicaid, food stamps, etc., he or she must weigh the effect of a
viatical settlement on these benefits. Benefits may be terminated or reduced
until the settlement amount is “spent down.”
If the policy also has an accidental death or
dismemberment rider, those rights should be specifically retained by the
insured in the viatical settlement agreement. The time between applying for a
viatical settlement and having the cash is generally three to eight weeks.
However, this will depend on how quickly the medical information and
beneficiary release forms are in the hands of the settlement company.
Most viatical settlement companies stress the
confidential nature of the transaction but they require the named beneficiary
to release any possible claim to the proceeds. If the insured does not want the
beneficiary to know of the illness, he or she may change beneficiaries just
prior to completing the settlement. If the estate were named as beneficiary,
the insured (owner) would be the only one who would need to sign the release
forms.
If death occurs before the viatical settlement
is completed, with the insured’s estate as the beneficiary, the life insurance
proceeds would be paid to the estate and may be subject to probate
administration.
Viatical settlement of group insurance
policies will usually require that one’s employer be notified.
Confidentiality may also be lost if the policy
is sold by the settlement company in the “secondary market” to individual
investors, since a new investor would want to know the health status of the
insured.
An escrow account is generally used to make certain
that the payment of the agreed upon amount is made to the insured shortly after
the insurance company notifies the escrow company that the ownership of the
policy has been transferred to the viatical settlement company.
Several viatical settlement companies should
be investigated in order to negotiate the best offer.
Typical Uses
for the Cash Received Include
Cover out of pocket medical expenses.
Finance alternative treatments not covered by
existing medical insurance.
Purchase of a new car or finance a dream
vacation.
To be able to personally distribute cash to
loved ones.
Ease financial stress to perhaps further
extend life expectancy.
Maintain one’s dignity by not dying destitute.
Pay off loans.
The
sale of one’s life insurance policies can have far reaching effects and should
be done only after consulting with one’s attorney, certified public accountant
or other advisors.
[1] Effective January 1, 2018, the Tax Cuts and Jobs Act of 2017 established a new requirement to report certain information when a life insurance policy is acquired in a “reportable policy sale.” A reportable policy sale refers to the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured, apart from the acquirer’s interest in the life insurance contract.
So, your parents have a trust, and you’ve just found out that you are the trustee. Do you thank them or did they reward you with the booby prize? A trustee is held to a high standard of accountability and must act in accordance with an established standard of care as outlined below. To fail in one or more of these – called a breach of fiduciary duty – is to invite litigation and sometimes results in broken family relationships where a family member is also the trustee. Professional trustees, like banks with trust departments, or corporate trustees will be given very little leeway if they fail in any of these duties, but untrained family members or individuals who find themselves in this unenviable position are often not excused for lack of knowledge either.
Duty of loyalty. A trustee has a fundamental duty to administer a trust solely in the interests of the beneficiaries. A trustee must not engage in acts of self‐dealing.
Duty of administration. The trustee must administer the trust in accordance with its terms, purposes, and the interests of the beneficiaries. A trustee must act prudently in the administration of a trust and exercise reasonable care, skill, and caution, as well as properly account for receipts and disbursements between principal and income.
Duty to control and protect trust property. The trustee must take reasonable steps to take control of and protect the trust property.
Duty to keep property separate and maintain adequate records. A trustee must keep trust property separate from the trustee’s property and keep and render clear and accurate records with respect to the administration of the trust.
Duty of impartiality. If a trust has two or more beneficiaries, the trustee must act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests.
Duty to enforce and defend claims. A trustee must take reasonable steps to enforce claims of the trust and to defend claims against the trust.
Duly to inform and report. A trustee must keep qualified trust beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.
Duty of prudent investment. A trustee who invests and manages trust property has a duty to “invest and manage trust property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.
Much like the position of Executor, the role of Trustee is not to be accepted lightly and can often be a lifetime of responsibility. If you are not comfortable serving in this capacity, discuss this with your parents now so that alternate plans can be made.
Trusts are excellent vehicles for protecting an estate from creditors, transfer taxes, or misbehaving heirs. Their operation may be simple or complex, but it is incumbent upon you to talk to your parents about their trusts, and especially who the parties are if you are in the role of financial caregiver.
It is a well established principle of trust law that trustees are fiduciaries who owe specific duties to the beneficiaries of a trust. These duties can be grouped into duties of loyalty and duties of care.
But what if a trust has beneficiaries with adverse interests to one another? It is not uncommon for a trust to have two kinds of beneficiaries – a current beneficiary as well as a remainder beneficiary. That is, the current beneficiary may have rights to the income from the trust, and perhaps even discretionary rights to the trust’s assets (also known as the trust principal or corpus); whereas the remainder beneficiary may have rights or equitable interest in what is left in the trust (the remainder) after a period of years or upon the death of the current beneficiary. These adverse interests can test the mettle of most individual or family trustees as both beneficiaries are owed duties of loyalty and care.
The Brady Bunch
Suppose Mike Brady created a trust to take effect at his death. His trust includes the following (summarized) instructions:
At my death, my trustee shall pay to my surviving spouse the net income from my trust for as long as my spouse shall live.
In addition to the net income, my trustee may also pay to my surviving spouse from the trust’s principal, as much as my trustee shall deem necessary to maintain my spouse in [her] accustomed standard of living.
Upon my spouse’s death, my trustee shall distribute my trust to my surviving children (Greg Brady, Peter Brady, and Bobby Brady) in equal shares.
Now supposed that when Mike Brady dies, Carol Brady is appointed to serve as trustee of Mike’s trust. Or, perhaps Mike’s oldest son, Greg, is appointed as trustee. This is not only permitted but done frequently, presumably to avoid paying a professional trustee. The conflicts to the Duty of Loyalty are obvious.
For example, if Carol Brady is trustee, it stands to reason that she would want to maximize current income from the trust while minimizing principal growth. Likewise, if Greg is trustee, he would want to maximize his ultimate share of the trust by investing for growth rather than income. In addition, asking either party to objectively define “accustomed standard of living” puts them both in awkward, if not conflicting positions. Should Alice’s services as a live-in housekeeper continue to be paid after everyone has moved on? Carol could certainly argue that the expense met the accustomed standard of living test, but would Greg require Carol to pay for it herself, or would he deny it saying it wasn’t necessary any longer?
Perhaps when Mike and Carol were in the attorney’s office, their response to these hypothetical situations was typical. “Oh our kids would never argue over this.”
It is possible to be loyal to both beneficiaries even if there are adverse interests. However, doing so requires a great deal of objectivity, scrutiny, and immunity to emotional persuasion. A wise trustee will establish clear expectations and open communication early in the relationship to avoid favoring one beneficiary over the other and risk breaching the duty of loyalty.
Once a legal document is completed and signed, it is often carefully laid to rest in a safe deposit box or file drawer and comes out again only when a party dies or a conflict arises.
Prudent persons periodically review and update their legal documents. Just how often depends, of course, on the document and which circumstances have changed. The following list sets forth some events that may require the updating of a legal document.
Life Events
● Marriage. ● Dissolution of a marriage (divorce). ● Death of a spouse. ● Disability of a spouse or child. ● A substantial change in estate size. ● A move to another state. ● Death of executor, trustee or guardian. ● Birth or adoption. ● Serious illness of family member. ● Change in business interest. ● Retirement. ● Change in health. ● Change in insurability for life insurance. ● Acquisition of property in another state. ● Changes in tax, property or probate and trust law. ● A change in beneficiary attitudes. ● Financial responsibility of a child.
If there is any question as to the effect of a change in circumstances on your will, trust, buy-sell agreement, asset titles and beneficiary designations, etc., contact the appropriate member of your team and have it reviewed before a crisis arises.
Wealth and Honor is a website dedicated to helping families navigate the financial challenges of age transitions. The site now has a YouTube Channel to host “edutainment” videos featuring non-legal commentary on actual court cases involving will disputes, elder financial abuse, estate litigation, fiduciary liability, and other issues of aging, death, and wealth.
Court transcripts are condensed into a factual summary with popular sitcom characters providing faces to the actual characters of the case, followed by a non-legal commentary of lessons to learn and missteps to avoid.
https://youtu.be/6gBLpiWQX9c
The Case Files Trailer
The first episode covers the case of Lintz vs Lintz, a 2014 case decided in the California Appeals Court, that includes claims of breach of fiduciary duty, elder financial abuse, undue influence, among other claims. Viewers are encouraged to first watch a presentation of commonly used terms before watching the case episodes.
For a full text of the court transcript, click here.
There are an estimated 25 million safe deposit boxes in America, and they operate in a legal gray zone within the highly regulated banking industry. There are no federal laws governing the boxes; no rules require banks to compensate customers if their property is stolen or destroyed.
Recently the Uniform Law Commissioners approved five new acts, including the The Uniform Electronic Wills Act. According to the ULC:
This Act permits testators to execute an electronic will and allows probate courts to give electronic wills legal effect. Most documents that were traditionally printed on paper can now be created, transferred, signed, and recorded in electronic form. Since 2000 the Uniform Electronic Transactions Act (UETA) and a similar federal law, E-SIGN have provided that a transaction is not invalid solely because the terms of the contract are in an electronic format. But UETA and E-SIGN both contain an express exception for wills, which, because the testator is deceased at the time the document must be interpreted, are subject to special execution requirements to ensure validity and must still be executed on paper in most states. Under the new Electronic Wills Act, the testator’s electronic signature must be witnessed contemporaneously (or notarized contemporaneously in states that allow notarized wills) and the document must be stored in a tamper-evident file. States will have the option to include language that allows remote witnessing. The act will also address recognition of electronic wills executed under the law of another state. For a generation that is used to banking, communicating, and transacting business online, the Uniform Electronic Wills Act will allow online estate planning while maintaining safeguards to help prevent fraud and coercion.
