Microcaptive Insurance Planning: “Nonsense”

The United States Tax Court issued a recent February 1, 2024 memorandum decision dealing with a medical urgent care clinic business’s captive insurance planning, in which the Tax Court in its conclusion stated:

“Although the Swift captives displayed some attributes of insurance companies, they failed to operate as insurance companies and their premiums were nonsense. We therefore conclude that the Swift captives did not provide insurance in the commonly accepted sense.”

Swift v. Comm’r, T.C. Memo 2024-13 at *44 (emphasis added). Click here for a copy of this Tax Court decision.

Two brief points:

One. This microcaptive insurance tax planning failed. Judicial opinions pointedly catch my eye when a court includes strong wording that is not typical in most opinions; in this case “nonsense”. In my view, these intentionally, heavy-hitting opinion references reflect an added kick from the court. A coup de grâce.

Two. This Tax Court opinion references multiple excerpts from the taxpayer’s captive planning attorney, such as the attorney’s statement during the planning stages that the captive premiums would be untaxed and could be used “to purchase [additional] clinics, or just land, leased to [Clinic].” Id. at *7. In what I believe in law practice today is a continuing overwrought emphasis on overplayed sales of tax planning techniques, the idea that these sales-flavored attorney communications may likely surface to become material evidence in tax controversy cases should give pause to every attorney in these situations.

Here is a pdf copy of my: “The inter-vivos QTIP Trust: Is it Saturday’s Child”

You can get a pdf copy of my outline by clicking here.

I gave the above comprehensive inter-vivos QTIP planning presentation a couple weeks ago with the California based “The Tax and Estate Planning Forum” live virtual 43rd annual seminar. The five-day seminar included some very good presentations, including, but not limited to, attorney Naomita Yadav, with Withers Bergman in San Francisco, on state income tax and trust planning; and Sam Donaldson, Georgia State University Law School, with his always entertaining (and always substantive) federal tax update. I continue to be a great fan of inter-vivos QTIP planning.

Burning Man 2023; Really?

My wife and I attended our first “burn” at the recent 2023 Burning Man (in Black Rock City, Nevada). We were with our phenomenal Camp 3SP. This experience was great, and so powerful that in my view it warrants this blog post. This is not a legal post. It goes to what I believe is of paramount importance in helping each of us achieve a more enjoyable response to life. It is on the notion of maintaining the plasticity of our minds; more specifically our brain’s malleability or ability to change through the neuroplasticity of change or adjustments to our nerve cells. 

NOTE: This non-legal blog post includes only my personal views. It includes no legal content on behalf of my law firm KaneTreadwell Law LLC, nor of its other members or personnel.

Plasticity requires that we — throughout our entire lives — make a conscious effort to remain open to taking into account the views and perspectives of others, especially when our initial (often habitual) response, frequently in closeminded fashion, is quickly to reject those other views and perspectives. This plasticity does not mandate us to accept or adopt these other perspectives, but rather that we at least in an internally tolerant manner maintain a more relaxed, open-minded response to differences.

Burning Man is a good example for this blog post, as I believe a great number of people have an immediate knee-jerk reaction to Burning Man, in most cases without ever having attended the event. Burning Man too often gets a preconceived one-sided rap for being nothing more than a hedonistic Woodstock. To the contrary, I could write dozens of pages about the compelling positive response we had to Burning Man. But below are merely a few key points in line with this plasticity idea.

One, The cooperative civility and generosity of spirit among everyone at Burning Man (all age groups) with whom we crossed paths fit perfectly with Burning Man’s wonderfully effective 7 square mile temporary metropolis layout. Every person we met displayed a noticeable spirit of friendly, open-armed kindness; both in spirit and from the thousands of other attendees (burners) who in droves gave out free drinks, hot chocolate, hors d’oeuvres, clothing (especially free funky costume clothing), cool-water-misting for bicycling passers-by, etc. (virtually everyone had bicycles). All with absolutely no feeling whatsoever of quid-pro-quo [and no commercial or corporate sponsors, etc.].

Two. Burning Man includes ten principles that attendees are asked to accept prior to attending the event, as follows: (i) radical inclusion; (ii) gifting; (iii) decommodification; (iv) radical self-reliance; (v) radical self-expression; (vi) communal effort; (vii) civic responsibility; (viii) leaving no trace; (ix) participation; and (x) immediacy. These principles were powerfully palpable among everyone we met at Burning Man. Click here for the Burning Man ten principles.

Three. Now back in my “real” lawyering world, and though I have absolutely no objection to the requirements that we lawyers dress, for example, professionally to meet with clients, or appear in court, the unbounded latitude at Burning Man as to how one chooses to dress was a noticeably enjoyable part of the experience. My sense is that everyone at Burning Man experienced a powerful degree of tremendous, pent-up freedom and joy in being able to dress entirely at whatever whim or desire they chose.

Four. Yes, no doubt, certain “recreational” elements were available at Burning Man. My view, in and out of Burning Man, is that these are realistic elements in any society, the suppression of which throughout history has created (and continues to create) greater long-running problems and detrimental consequences. Burning Man’s cooperative civility, kindness, and extremely effective layout design, coupled with these more realistic recreational elements, provided a societal template that one could argue is potentially more effective than our “real” world outside of Burning Man.

Five. This last point goes directly to this notion of plasticity. Keep in mind I am not trying to compel anyone to arrive at a particular conclusion or reaction to Burning Man. But if you find the idea of Burning Man entirely off-putting, I recommend you listen to the following podcast I heard a couple days ago that centers on a phenomenal philosophical observation of our current “real” world society. This podcast is an excellent bookend in contrast to Burning Man. A comparison of these two perspectives might help trigger a moment of expansive plasticity, regardless of your ultimate view one way or the other about this Burning Man post. Click here for this recent “Philosophize This!” Episode no. 188, titled “Achievement Society and the rise of narcissism, depression and anxiety — Byung-Chul Han”.

“The Inter-Vivos QTIP Trust: Is it a Saturday Child?”

Two points for this brief blog post.

One. I will be speaking October 18, 2023 at the California based “The Tax and Estate Planning Forum” live virtual 43rd annual seminar. This five-day seminar includes 21 credit hours of legal specialization in Estate Planning, Trust and Probate Law; and in Taxation Law. My presentation is “The Inter-Vivos QTIP Trust: Is it a Saturday Child?”. The inter-vivos (created during life) QTIP trust is a workhorse and among my favorite planning options for married couples, especially those in the “bottom” 98% who often do not need more complex planning heavily marketed for the super wealthy. Click here for a link to this forum that begins Monday, October 16, 2023.

Two. I am available, generally within the metropolitan Atlanta area, for lunch presentations on this inter-vivos QTIP trust planning. Please contact me if interested. james@ktlawllc.com

IRS Rev. Rul. 2023-2. Sales to Defective Grantor Trusts; Dead in the Water?

For readers who may not yet have read IRS Revenue Ruling 2023-2, here is a link. Click here. In short, the IRS ruled that property in a completed-gift irrevocable trust will not get a stepped-up cost basis for income tax purposes at the time of the trust grantor’s death. My impression is that some business news services have been reporting this IRS ruling too broadly to convey a notion simply that there can be no stepped-up cost basis for property in an irrevocable trust. Therefore, the following points might be helpful for anyone digesting Rev. Rul. 2023-2:

One. I believe a death FMV stepped-up basis still applies for property in an incomplete-gift irrevocable trust, unchanged by this IRS ruling. To that end, I read Rev. Rul. 2023-2 as applying only in a narrower situation where the trust property at issue (owned within the trust) was a completed gift transfer to the trust, coupled with the trust agreement having certain income tax provisions that make the trust “defective” for income tax purposes. In everyday terms, this intentionally “defective” trust itself is not subject to its own income tax, but rather the person (the trust “grantor”) who transfers the property into the trust continues to be taxable on the trust income, gains, etc. All reported on the grantor’s own personal income tax return Form 1040;

Two. The primary impact of Rev. Rul. 2023-2 targets “sales to defective grantor trusts” with an irrevocable trust / completed-gift design. In other words, this “sale” to the trust is reported on a gift tax return Form 709 as a completed transaction, typically as part of a partial gift or “non-sale” gift transaction. Essentially, and for example, the grantor sells to this “defective grantor trust” the grantor’s property with a current FMV of $500,000, with the grantor taking back a note from the trust for $500,000. This “sale” transaction is reported on the gift tax return Form 709. The trust pays the debt service to the grantor on the $500,000 note.

Here is the kicker for this point Two. When the grantor thereafter dies, some (a minority in my view) tax practitioners believe there is a supportable argument that the trust property at the time of the grantor’s death should get a (date of death) FMV stepped-up cost basis under the estate tax rules, but also without that FMV property being included in the value of the grantor’s estate for estate tax purposes. This FMV stepped-up cost basis result does apply, generally without issue, to property owned by an individual at his or her death when included in the value of that individual’s estate for estate tax purposes. But, here this “defective trust” owns the property at the grantor’s death.

Assume, in the above example, the trust property increases (within the trust) from its $500,000 purchase value to $2.0 million FMV at the grantor’s later death. The above practitioners believe the trust property gets a death FMV stepped-up basis to this $2.0 million FMV, with no inclusion of this $2.0 million value in the grantor’s estate for purposes of computing estate tax. Keep in mind the basis of the property in the hands of the trust is $500,000 in this example at the time of the grantor’s death. The above IRS ruling takes the position there is no death FMV stepped-up basis; therefore, the trust property continues after the death of the grantor with its unchanged $500,000 cost basis;

Three. I purposely am not including in this blog post my own deeper view as to Rev. Rul. 2023-2. But keep in mind the trust owns the property at the grantor’s death, not the grantor. This trust ownership point, in my general view. creates the steepest slope in this debate. The arguments on both sides of this question also are densely complex, well beyond my simple blog post here; and

Four. My broader, general reaction to Rev. Rul. 2023-2 is that there possibly may be remedial options available in some instances to address a response to this ruling. I do not believe lawyers typically read any pronouncement or rulings without sensing an immediate faint glint of potentially remedial possibilities.

Father’s Day 2023; 2,200 Billable-Hours

A couple days prior to this 2023 Father’s Day, a young law student with whom I have been providing occasional mentoring, recently agreed to a starting associate lawyer position with a large law firm, subject to a minimum annual mandate of 2,200 billable hours. This 2,200 quota is not, in itself, unusual or atypical. Assuming a lawyer works 50 weeks a year, leaving the remaining two weeks for leisure, all holidays, family matters, medical-dental appointments, CLE (continuing legal education), this law student will have to achieve 44 billable hours per week — for each of the 50 weeks — to satisfy this minimum 2,200 hour requirement. Welcome to law practice.

But, this post is not about billable hours. That element helped operate as a catalyst for this blog post. The key point I include in this post, and ponder each Father’s Day, is that my late father Edward Kane, himself a lawyer, without ever preaching to us, allowed (and fostered) my brothers and me to develop strong independence with no notion of living our lives at the dictate, demands, or preferences of anyone. My father emphasized working hard, doing a good job, trying as best as possible to be a cooperative team player, but that one’s aim in life ideally is ultimately to find ways of experiencing fundamentally a more enjoyable response to life; however that pathway plays out.

This post, coincidentally, also is prompted by my finally within the past few weeks having read the entire 600+ page handwritten journal my late father maintained from 1939 up until 1953 or so when my father married and started our family. [Due to the journal’s handwritten density, I recently had a professional transcriber convert the journal to text for ease of reading.]

This journal is abundant with the ebb and flow of my father’s attempts to reconcile, on one hand, a goal of obtaining a more enjoyable response to life, and on the other hand, the moneyed demands of law practice, with its pressure for lawyers to placate and ingratiate themselves persistently among clients, ideally wealthy, in order to be among the most “successful”, public-eye, top-billing lawyers.

I start with the ending here. My father in his journal essentially concluded that one can (and practically must) remain within the competitive arena of life, but simultaneously can keep moving in the direction of an enhanced enjoyable response to life by tuning into (and constantly re-tuning), to the extent possible, an element of religious (pantheistic from his view) and esthetic experience. The rational, practical, work-family-everydayness of life alone — absent these additional factors — will have otherwise an insidious dulling effect on life. He wrote:

11.30.50 [journal entry]

“A passionately held belief in the possibility of a better life, a belief amounting to a hypothesis on which one is prepared to act, but at the same time, a belief & hypothesis which we are prepared to re-examine critically & with our full powers of observation & intelligence at all times. That is what we need and I think we can have it: I think that Plato & Spinoza and others will help us to have such a belief & that we are wiser to take our own passion & inspiration from them while refusing to accept their metaphysics to the extent that application of scientific inquiry & testing shows such metaphysics to be without demonstrable foundation.”

For readers who prefer only this short introductory read, the following journal entry is my father’s then-retrospective articulation of what had led him to began his quest leading up to his above conclusory ideas:

09.28.53 [journal entry]

“For approximately ten years after I got out of law school, I put almost my entire time and energy into an effort to become outstanding and excel at my work practising law; and my work was praised, more than was good for me, by a good many clients as well as by my associates. During this ten years, no religious experience, practically no esthetic experience, no understanding of people or of the human heart, nothing but a tensely strained and over-driven calculating machine operating entirely in the realm of cold, grey, abstract, logical, quasi-mathematical legal phrases, principles and reasoning. In short, a conical, pitiful, vain, empty and shallow intellectual haven. Thank God for the instinct that began to tell me that this was no way to live, an instinct that was greatly strengthened by four years of the outdoor life in the Army, much of it spent in the outdoors.”

Now, for readers who might find interest in more of the particulars. My father started his legal career as an aggressive, successful, hard-charging lawyer, graduating during the height of the Great Depression from Vanderbilt Law School, first in his class, and the only classmate who landed a law job immediately upon graduation. He began his career in Atlanta with the law firm Sutherland, Tuttle & Brennan.

While at the Sutherland firm my father in 1942 was drafted into the Army (WWII), having prior to enlistment applied for an officer’s Commission that would have enabled him to remain stateside as an officer-lawyer. But the Commission had not yet come through at the time my father received his draft notice. A few months into Army basic training at Ft. Bragg (N.C.), his Commission came through and was available ASAP.

However, my father turned down his Commission, having concluded while still in basic training that it was not equitable that he simply remain stateside as a commissioned officer-lawyer, especially when so many others had no such option or opportunity. Primarily as an artillery forward observer with the infantry, my father eventually rose, while in Europe, to the rank of Captain in the Army 307th Field Artillery Battalion of the 78th Infantry Division, receiving both a Bronze Start and Purple Heart. I previously wrote about this Commission situation. Click here for my previous post.

In 1945 my father returned from the Army back to the Sutherland firm. He, thereafter, resigned in 1950. His journal is replete with entries surrounding his return from WWII and his resignation. In short, and this was well known within the Sutherland firm, my father and Bill Sutherland simply could not mutually co-exist.

Within a year or so of his resignation, my father returned to law practice with a group of lawyers who ultimately became part of Alston & Bird, from which my father retired many years later at the end of his 45-year lawyering career.

The broader dissatisfaction my father expressed in his journal leading up to his 1950 resignation was the atmosphere in law practice of the money-making, grasping desire always to attract and maintain wealthy clients that my father concluded had become simply too dull and shallow for the way in which he wished to experience life. Upon his resignation my father also resigned from the East Lake Country Club (Atlanta) and the Piedmont Driving Club (Atlanta), purposely stepping away from these other elements of his pre-WWII life.

Now, is the above discussion relevant directly to anyone reading this blog post? I hope so. My purpose with this post is not to suggest any particular action, pathway, or ultimate balance for anyone, including the young law student I referred to above. But, rather, to suggest strongly that every person, including all lawyers, traversing the pathway of their careers not lose sight of their own quest in moving always in the direction of seeking their own pathway. Never accede or relinquish to anyone else, nor in acquiescence to any particular dogma or norm, the guiding light of your own pathway. If, for example, you thrive on being the largest, billable producer in your law firm, that is fine. Simply make sure it is something emanating from within you that moves you in the direction of your most enjoyable response to life. There is no right or wrong pathway.

Below are a few excerpts from my father’s journal that are particularly relevant to this blog post:

06.22.40 [journal entry prior to WWII]

“How ambitious am I?  I‘m not sure. . . . Really the success I desire is a difficult kind. It is to accumulate, not money, but a real philosophy & culture; a broadened perspective, a real courage & fortitude; an independence of mind, etc. If I can continue to develop along these lines, I will really be somebody in my own eyes, and the money and vainglory can go. Pursuing character and culture, I think I will for the most part be reasonably happy, Pursuing solely money & prestige, I think I would be most unhappy.”

01.2.49 [journal entry after WWII]

“Maybe I am now where I was in the Army just before I asked to be sent up with the infantry. Common-sense & conservation said stay in service battery – but the urge to live more fully & to taste more of the real excitement of life drove me to leave – and I think it was perhaps the best decision I ever made.”

05.21.50 [journal entry]

“In the war, when I went up with the infantry I felt for the first time that I was  really doing something that accounted to something worthwhile, up to then I felt so ‘no account’.”

06.10.50 [journal entry]

“Now it seems to me that here is much food for thought. Is life so bare of something really interesting and worthwhile that the remaining thirty or more years must be one long anti-climax to the intensity of life in those few months of 1944-1945? Well, it may be so, but I’m not prepared as yet to admit it. . . .

And I know, with a equal degree of assurance, that one of the chief causes of my dissatisfaction & unhappiness since 1945 was getting back into contact with so many people who were so engrossed with the idea of making more money than the other people around them that they lost all genuine warmth of friendliness.”

04.6.52 [journal entry]

“Most of our competition today is for sordid goals and is carried on by sordid means, with position and influence taking the place of strength and courage of mind & body; but this is no reason for concluding that all competition is bad and that one should become a non-competitor. Much as we worship money, would not many of us choose to be a frontiersman in Kentucky of several centuries ago, living in poverty and in danger but with adventure and zest for daily activities, rather than to be at that time the spoiled son of a rich merchant in London, doing no work and passing his time with cards and whisky and the like? The choice would not be on any word grounds at all but would go at the type of life offering more zest. The thing neglected today is feeling. There’s no feeling, in the passionate and intense sense I’m thinking of, in making or spending money, getting your picture in the paper, drinking whisky etc. These things aren’t so much bad as they are dull.”

A Holy Grail Inter-Vivos QTIP Client-Memo

Click here for my recent Leimberg Information Services newsletter about the inter-vivos QTIP trust (qualified terminable interest property). One of the best estate and trust planning tools available for a broad range of clients, with also the benefit of powerful asset protection. It is among my favorite trust planning options. The newsletter link also includes information about my upcoming May 24 Leimberg webinar on inter-vivos QTIP trusts.

Irrevocable Trusts are No Longer Carved in Stone

For my continuing legal education (CLE), I attended recently the 2023 University of Miami Heckerling Institute on Estate Planning. It is always a great week of very informative presentations. [I am the ultimate nerd who attends every presentation and who writes notes throughout every presentation. Although I generally do not refer again to the notes, the note-taking process helps burn numerous points into mind.]

One of the key presentation points at Heckerling that continues to resound more loudly each year is the notion of how — in some cases essentially easily — one now can change or rewrite an otherwise existing irrevocable trust by decanting, or distributions in further trust, non-judicial settlement agreements, etc. In my view, the idea of an irrevocable trust substantively no longer has powerful relevance. By contrast, in my first year of law practice many years ago, following my first meeting then in which our client signed an “irrevocable” trust document, I felt as though that document had at that moment become carved in stone.

Bottom line. And consistent with a recommendation from one of the Heckerling speakers, you should consider including a provision in your trust document that helps protect against eliminating beneficiaries as a result of a decanting, non-judicial settlement agreement, etc., such as my own sample language below:

Except as to an exercise of the powers of appointment under Article XX of this trust agreement, no statutory powers in any jurisdiction, including but not limited to decanting or by non-judicial settlement agreement, nor by operation of any other provisions included hereinafter, may be exercised in any manner with the result of removing or eliminating any individual’s beneficial interest under this trust agreement, whether or not such interest is at such time vested or contingent.

You can email me at james@ktlawllc.com or text me at our law firm central phone number (470) 401-0100.

Join me for my somewhat contrarian Leimberg SLAT webinar

Most marketable, mnemonic sales-oriented trust and estate planning efforts (e.g., SLATs [spousal limited access trusts)] are greatly oversold, in my opinion. I am not opposed to the use of SLATs, but believe strongly they are being marketed with over-weighted accolades that fail to reflect crucial tax and non-tax checklist items and other important considerations. As a practitioner, I try my best to review trust and estate sales efforts from the perspective of an informed customer, rather than simply from a seller’s view. My upcoming Leimberg webinar will cover an array of these different SLAT factors and issues that can help you better serve each particular client; and touch on the potential alternative or complimentary use of inter-vivos QTIP trusts. Click here for details about my upcoming webinar.

Most SLATs are Oversold

The popularity of SLATs (spousal limited access trust) is, in my view, a great marketing spin. But, in most cases, SLATs are being oversold.

Oversold for the following three key reasons:

(1) A Secondary Interest for the Settlor Spouse? How can (or will) the settlor spouse who creates and funds the SLAT obtain any interest in the SLAT in the event of the early death of the beneficiary spouse? Other than possibly inclusion of an unpredictable limited power of appointment under the terms of the SLAT, I simply cannot find an effective way to protect the settlor spouse. Also, in my view it is only by using an inter-vivos QTIP trust can the settlor spouse retain a secondary interest in the QTIP trust in the event the beneficiary spouse predeceases the settlor spouse without that retention triggering later estate inclusion for the settlor spouse for estate tax purposes. See Treas. Reg. Section 25.2523(f)-1(d)(1); see, for example, IRS Private Letter Rulings 200406004 and 200413011.

In addition, even if one can find tax-law support to avoid estate tax inclusion for the settlor spouse’s secondary interest in, e.g., a SLAT or inter-vivos QTIP trust, that tax planning becomes painfully illusory and ineffective if local state law treats the settlor spouse’s secondary interest as a self-settled trust for creditor claim purposes; thus likely triggering estate inclusion for estate tax purposes. See, for example, Rev. Proc. 76-103.

As to these protective state statutes, the North Carolina statute under N.C. Gen. Stat. Section 36C-5-505(c)(1) is an excellent, well-drafted statute for protecting a settlor spouse’s secondary interest. A copy of this NC statute in included in my recent SLAT speech outline I refer to at the end of this blog post. But, again simply having a protective state statute, even this NC statute, is of no value if the settlor’s secondary interest is a retained interest for federal estate tax purposes.

Not all is lost, however.

These excellent, protective state statutes do lay the foundation for some highly effective incomplete-gift SLAT and inter-vivos QTIP trust planning in situations where the settlor spouse’s funding of the trust is purposely designed as an incomplete gift for gift tax purposes. One might ask: so why bother with a SLAT or inter-vivos QTIP as an incomplete gift? My response is because the tremendous benefit of this incomplete-gift irrevocable trust set-up can provide outstanding asset protection and greater assurance the trust property will remain only within the settlor and beneficiary spouse’s family, and ultimately for their children. Reduces, as examples, the risk to the family assets of old-age, widow or widower predatory marriages, mismanagement of assets, Madoff schemes, etc.

(2) Divorce of the Spouses? This opens up numerous potential problems with SLAT planning well beyond the scope of this blog post. I address this topic much more fully in my SLAT outline referenced below. However, various planners who assert the SLAT can simply include a “movable” definition of “spouse”, or can effectively apply by its terms to a new subsequent spouse, are in my view simply wrong. In addition, most of the above protective state statutes I find dealing with a secondary interest for the settlor spouse mandate that the same beneficiary spouse to whom the settlor spouse is married at the time the trust is created must also continue as a beneficiary of the trust until that beneficiary spouse’s death. These statutes typically do not allow creative efforts in support of these shifting definitions of the beneficiary spouse.

(3) Long-Arm Jurisdictional Litigation Statutes. Any effort to create a trust in another state jurisdiction in order to avail the settlor spouse of more favorable laws in that state can quickly sink if the settlor’s home state’s long-arm jurisdiction statute can (easily in many cases) pull the out-of-state trust into the home state’s litigation arena.

This jurisdiction subject is too broad for this blog post. However, I cover this long-arm statute point and the above two preceding points in a comprehensive recent speech I gave on SLATs at the recent 67th Seattle Estate Planning Seminar. Click here for a pdf copy of my SLAT speech outline [this is a box.com link].

Also contact me if you have any questions or wish to discuss any of these points. james@ktlawllc.com