Tax legislation update: October 2022

• No spousal or charitable deductions for unitrust payable to spouse or charity at trustee’s discretion—In Chief Counsel Memorandum 202233014 (August 19, 2022), a deceased left a portion of his estate to a residual charity (CRUT) which provided annual unitrust payments, a portion of which was payable to the spouse of the deceased for the spouse’s life. The CRUT amount was divided into two parts: 25% had to be paid to the spouse. The remaining 75% could be paid to the spouse or to a charity, at the discretion of the trustee. On the death of the spouse, all remaining assets were to be donated to the charity.

Section 2055 of the Internal Revenue Code governs the deduction of charitable estate tax, and Treasury regulations, along with Section 664 of the IRC, further provide the rules and requirements for deductions. charities for property transferred to trusts in which there are both charitable and non-charitable beneficiaries, known as “shared interest trusts”. The remaining interest directed to the charity on the death of the spouse was eligible for the charitable deduction under Section 664 because the trust qualified as a CRUT.However, no charitable deduction is allowed for other types of split interest unless the portion to be paid to the charity is in the form of a guaranteed annuity or a fixed percentage Because there was no guarantee or clear percentage dictating the amount to be paid to the charity from u CRUT of 75%, no charitable deduction was allowed.

Similarly, the trustee’s discretion interfered with the spousal deduction for the 75% that could be paid to the spouse or charity. The 25% payable to the spouse is eligible for the spousal deduction – it passed from the deceased to the spouse under IRC section 2056(a), and it is not subject to the cancellable interest rule as it does not There was no contingency or event that would cause this 25% to be paid to anyone other than the spouse. However, there was no way to determine the amount that would be payable to the spouse from the 75% and therefore the 75% was not considered to pass from the deceased to the spouse and was not eligible for marital deduction.

• The Seventh Circuit has an insurance policy that was an illegal bet on a stranger’s life—In Sun Life Assurance Co. of Canada v. Wells Fargo Bank, NANos. 20-2339 and 20-2472 (7e Cir. 2022), the United States Court of Appeals for the Seventh Circuit analyzed whether a life insurance policy was legitimately bought and sold by a person with a bona fide insurable interest or constituted an elaborate sequence of transactions intended to hide the fact that there was no appropriate insurable interest.

Robert Corwell, aged 78, participated in a scheme run by Coventry Capital. Under the program, Robert requested the purchase of a $5 million life insurance policy on his own life with an annual premium of nearly $300,000 and received a non-recourse loan from LaSalle Bank. to fund his policy premiums. The loan was guaranteed only by the policy itself; there was no personal responsibility for Robert. At the end of the 30-month loan term, Robert was offered two options: (1) repay the loan himself or (2) assign his interest in the insurance policy to the lender.

Robert made the first premium payment and was repaid from the loan proceeds. After this initial payment, the bank made all premium payments directly to the insurance company. As expected by everyone involved, at the end of the 30-month term, Robert transferred his policy to Banque LaSalle. Robert essentially received free life insurance for about two and a half years in exchange for handing over the policy to the bank that had funded it all along. LaSalle, in turn, quickly sold it to Coventry First LLC, a subsidiary of Coventry Capital, which had been aware of Robert’s original purchase in 2006 and, at that time, planned to buy the font for AIG when available. Conventry First and AIG had entered into an agreement whereby Conventry First purchased policies exclusively for AIG Life Settlements LLC. Coventry First then transferred the policy to AIG Life Settlements LLC, through AIG agent Wells Fargo. Wells Fargo continued to make premium payments for the policy, first on behalf of AIG, later Blackstone, then later again Vida Longevity Fund, LP, the beneficial owner upon Robert’s death.

Upon Robert’s death, Wells Fargo filed a claim with Sun Life to collect the $5 million death benefit under the policy. Sun Life sued, arguing that the policy was void ab initio because it was an illegal betting contract obtained for the benefit of strangers who had no insurable interest.

The court agreed with Sun Life, citing the long-standing ban on foreign life insurance policies (STOLI) and stressing the need under Illinois law to look “beyond of the simple form of transactions”. On the face of it, the police appeared legitimate, as Robert had an insurable interest in his own life and nominal control over the police. The surrounding facts, however, painted a very different picture. For example, while Robert took out a policy on his own life, he only did so under the Coventry plan. In addition, police funding was hidden from Sun Life. Finally, Robert didn’t need and couldn’t afford the font himself, so there was no real possibility that Robert would keep the font for himself. The court ruled that it was an illegal bet by strangers on Robert’s life and upheld the district court’s decision that the $5 million policy was void.

The Seventh Circuit then asserted that Wells Fargo was not entitled to a refund of the vast majority of premium payments from Sun Life, generally, and reversed the district court’s decision to refund approximately $13,000 from Wells Fargo. on behalf of Vida Longevity Fund, LP (Vida). Wells Fargo argued that it was entitled to a refund of all premiums it paid on Robert’s policy because she was innocent in the betting scheme. The Seventh Circuit disagreed, finding that Wells Fargo never had a beneficial interest in politics, but was only a “middleman for (hidden and conniving) beneficial owners”. Furthermore, the court ruled that Vida, a multi-billion dollar company specializing in the purchase of life insurance policies, was not innocently naïve. Not only did Vida conduct a thorough review of Robert’s policy, but she was also well aware of successful lawsuits in courts across the country challenging policies funded using Coventry Capital’s loan scheme.

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