On April 1, 2010, the Michigan Trust Code ("MTC") will go into effect. The MTC is a set of default rules that apply to the administration and drafting of trusts. The enactment of the MTC will result in several changes to the laws governing trusts in Michigan. Practitioners who are involved with the drafting and administration of trusts, as well as professionals who assist and represent trustees, should have an understanding of these changes. For the next several months, we will publish E-Updates which will highlight sections of the MTC that may impact those in the financial and accounting industries who provide service to trustees.

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

On February 12, 2010, President Obama signed a $1.9 trillion increase in Federal borrowing. The legislation also includes statutory "pay-go" rules which would require that Congress cover any new spending with corresponding spending reductions (offsets). The bill includes a number of exemptions from the "pay-go" rules, including a two-year extension of the 2009 estate tax exemptions and rates.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

A non-spouse beneficiary of an inherited IRA has prevailed in bankruptcy court in Minnesota. In In re: Nessa, decided January 11, 2010, the Minnesota bankruptcy court, rejecting the winning arguments used in all previous inherited IRA bankruptcy cases except one (see complete summary here), held that the IRA that Nancy Nessa inherited from her father was exempt from Ms. Nessa's bankruptcy estate, and thus, beyond the reach of her creditors. This case is important not only because it is another non-spouse beneficiary win, but because it is the first case to analyze the federal exemption for IRAs in an inherited IRA context.

Somewhat remarkably, we now have two very recent decisions, the Robertson decision out of Florida in August 2009 (see our September 2009 E-Update) and the Nessa decision, where the interpretation of nearly identical statutes produced completely opposite results. Section 522(d)(12) of the bankruptcy code exempts "...retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section...408...of the Internal Revenue Code of 1986", while Section 222.21(2)(a) of Florida statutes exempts "...any interest in a fund or account [that] is...exempt from taxation under section...408...of the Internal Revenue Code of 1986". (Michigan law provides similarly, except that it denies exemption if the claim is that of an ex-spouse, one for child support, or for nondeductible contributions and the earnings thereon. MCL 600.6023(1)(k), MCL 600.5451(1)(l).)

The solution? Make retirement plans payable at death to a retirement plan trust (RPT). The Nessa decision may be the start of a new bankruptcy court trend or it may just be an anomaly. To avoid the need to guess which, use an RPT, since, in virtue of its spendthrift provision, an RPT is excluded from the bankruptcy estate. In addition, to hedge against the risk that a beneficiary might not qualify for bankruptcy relief, use an RPT to defeat potential non-bankruptcy creditors. For example, had Ms. Nessa been unable to qualify for bankruptcy relief, she would have lost the portion of the inherited IRA that was in excess of $30,000 plus whatever extra, if anything, the court may have determined to be reasonably needed for her support. Minnesota law protects only that much. Add a properly drafted RPT to that hypothetical picture, and Ms. Nessa loses nothing.

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

Recently, the Obama Administration released its fiscal year 2011 budget, along with the Treasury Department's general explanations of the budget (commonly known as the "Greenbook"). As part of its budget, the Administration has proposed reporting requirements for sales of existing life insurance contracts.

The Administration's proposal would require a person or entity who purchases an interest in an existing life insurance contract with a death benefit equal to or exceeding $500,000 to report (1) the purchase price; (2) the buyer's taxpayer identification number; (3) the seller's taxpayer identification number; and (4) the issuing company and policy number to the Internal Revenue Service, insurance company that issued the policy, and to the policy seller. The apparent reasoning behind this proposal is to ensure compliance with reporting of gain or loss from life settlement transactions, since such reporting may be hindered due to the lack of information reported.

The reporting requirements would apply to sales or assignments of interests in life insurance policies and payments of death benefits for taxable years beginning after December 31, 2010.

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