On January 11, 2010, the Bankruptcy Code's protection for inherited IRAs was tested for the first time since the Code was revised in 2005 (In Re Nessa - see our February, 2010 E-Update). It held. Then on March 5, 2010, it was tested again (In Re Chilton - see our March, 2010 E-Update). It failed. Likely encouraged by the Chilton loss, the Nessa bankruptcy trustee appealed his loss. He failed. The Chilton case was of no avail. In its April 9, 2010 opinion affirming the loss, the Eighth Circuit Appellate Court stated that it believed Chilton to be erroneous. As a result, it is pretty safe to say that the Bankruptcy Code's protection for inherited IRAs is good (for now) in these Eighth Circuit states: North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Missouri, and Arkansas.

Will Ms. Chilton now be emboldened to appeal her loss to the Fifth Circuit Appellate Court? Will there be an eventual appeal to the Supreme Court? Will Congress change the law after that? Who knows? But we do know that one thing has been certain all along: the use of trusts to avoid the issue completely. Retirement plan trusts not only keep inherited IRAs in the family and prevent cash-outs, they also avoid bankruptcy completely and protect against judgment creditors, too.

Stay tuned for the next installment in this ongoing inherited IRA saga!

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

On April 1, 2010, the Michigan Trust Code ("MTC") became effective and applies to the administration of all Trusts which become irrevocable after April 1, 2010. The MTC provides substantially more guidance for Trustees in administering Trusts when compared to statutes that existed prior to April 1, 2010. In providing such guidance, the MTC imposes certain duties and responsibilities on Trustees, by default. Consideration should be given to modifying your clients' Living Trusts to override certain default provisions imposed upon Trustees by the MTC. For example, unless overridden by the Trust instrument, remote Trust beneficiaries (e.g., those who are one or more generation removed from the settlor) would be entitled to receive annual Trust accountings. Additionally, unless a Living Trust properly establishes the desired level of creditor protection for a client's beneficiaries, the MTC may enable a beneficiary's creditors to access his/her Trust share to satisfy the beneficiary's debts.

Clients with revocable Living Trusts should consider discussing with their Trust lawyer the impact of the MTC on their estate planning.

For more information regarding this topic, please e-mail your requests to Julie L. Cavanaugh, or call Julie at (248) 457-7228.

The new health care reform legislation includes a new long-term care insurance program, called the Community Living Assistance Services and Supports (CLASS) program, which sets up the first national government-run, long-term care insurance program.

The program is offered primarily through employers, and starting next year, workers can voluntarily set aside money from his or her paycheck to pay for the cost of long-term care (i.e., activities of daily living, such as bathing, dressing, toileting, transferring, etc.) at home or in a community-based setting. The program is meant primarily to provide a supplemental, but not an alternative, payment source for long-term care costs and secondarily to encourage workers to take responsibility for individual long-term care costs, rather than to rely on government assistance to pay for the cost of long-term care. The CLASS program creates a voluntary payroll deduction plan for long-term care costs that works like this: Workers do not have to qualify for coverage, and can simply enroll by paying monthly premiums that are deducted from his or her paycheck.

After a five-year vesting period (during which workers must remain enrolled in the program and must remain employed for at least three of those five years), workers are entitled to a cash benefit of at least $50 per day (or more if the individual's needs are greater). The worker is entitled to this minimum benefit regardless of age or disability and, since the benefit is a cash payment, the individual can choose the assistance that best suits his or her long-term care needs. These benefits continue for the individual's lifetime or for as long as the need for long-term care exists. Medicaid beneficiaries in nursing homes would retain 5% of his or her cash benefit, and Medicaid beneficiaries receiving in-home and community-based services would keep 50% of his or her cash benefit. The new long-term care insurance program is not designed to pay the entire cost of long-term care. Rather, it is intended to help offset the high costs of private pay in-home and community-based care and the high costs of government-funded programs, like Medicare and Medicaid.

Although it's unlikely that the new program will replace the private long-term care insurance industry, if the CLASS program is successful, financial planners should consider incorporating its benefits into their clients' overall retirement plans.

For more information regarding this topic, please e-mail your requests to Brenna D. Mansfield, or call Brenna at (248) 457-7227.

In PHL Variable Insurance Company (i.e., Phoenix Life) v. Lucille E. Morello, the United States District Court in Minnesota ruled on a Motion for partial judgment following an action filed by Phoenix Life to rescind a life insurance policy and receive monetary damages (for fraud) resulting in their issuance of a life insurance policy.

During 2007, a hair dresser and the insured's only child; a disbarred lawyer who was one of the son's customers; an insurance broker; an individual posing as an accountant; multiple insurance agents; and a lender allegedly conspired to commit fraud on various insurance carriers. This scheme resulted in almost $19 million of life insurance being issued on a woman who was well past retirement age. The fraud wasn't discovered by Phoenix Life, one of the carriers involved, until after the death of the insured (who passed away within two years of issuance of the policy). While the insurance application submitted to Phoenix Life represented that the insured had a net worth of almost $34 million, it was discovered after her death that her gross estate was approximately $800,000. Furthermore, the Statement of Client Intent Form submitted with the insurance application represented that there was no intent by the insured to transfer an interest in the policy to a third party. At the time of the insured's death, the plan to sell the Phoenix policy was already in process.

The District Court rescinded the policy from inception so that it was deemed to have never existed. Therefore, the policy's death benefits would not be paid to the Trust, the Trust beneficiaries, the insured's creditors, or any other entity or individual, including the lender of the premiums who had a collateral assignment filed with the carrier with respect to the policy. The collateral assignee (the lender who paid the significant premiums) argued that, if the policy was rescinded, Phoenix should return the premiums paid for the policy. The Court rejected this argument holding that not only is a premium refund inconsistent with Minnesota law, but such an action would serve as an invitation to commit similar fraud in the future. In other words, if the worst that a party could do by committing fraud on an insurance application was to get their money back, more parties would be induced to commit fraud.

This is yet another case in a series of instances where financial speculators (or their representatives) financially induce the elderly to purchase life insurance policies they otherwise would not buy or pay for, with the intent of eventually transferring the death benefits to these same speculators. Not only do some of these cases involve insurance fraud but, in many instances, insureds and their family can be left vulnerable to unknown taxes, legal fees, and expenses, as well as owning a policy they are not able to sell at a price they had been promised. It is important to understand that these types of transactions are worlds apart from legitimate life insurance transactions where a policy was purchased in good faith but is sold by its owner when the policy is no longer needed.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.