Why is this Topic Important to Wealth Managers? This blogticle presents discussion on international estate planning considerations for non-resident aliens generally. We have provided this information for wealth managers with international clients who may have estate tax issues to contend with.

A now deceased individual who at the time of death was neither a resident nor citizen of the United States may nonetheless be subject to U.S. estate tax if at the time of death he or she owned property in the United States. In such a case, although the U.S. estate tax is applicable, only property located in the United States is includable in the gross estate and subject to tax.

An important distinction is made between who is subject to income tax and estate tax. For estate tax purposes, a nonresident alien is a person who is neither a domiciliary nor a citizen of the United States. Thus, an alien who dwells in the United States, but whose domicile remains elsewhere, is classed as a nonresident alien.[1]

Domicile here is used in the traditional sense. In other words, domicile generally requires presence and an intention to remain permanently.

For example, consider a decedent who lived in the United States six years before he died. However, he always intended to return to his native Netherlands, the location of his family and close friends, at the earliest opportunity. This man’s domicile was the Netherlands and therefore he had died a nonresident alien and was not subject to the traditional citizen or resident alien estate tax regime.[2]

The gross estate of a nonresident alien includes that part of his property which is situated in the United States at the time of his death.[3] For purposes of determining what property is situated in the United States, any property which the decedent has transferred, by trust or otherwise, which would be taxable within the provisions of Code §§2035 through 2038 (relating to termination of certain property interests within three years of death, transfers with retained life estate or to take effect at death, and revocable transfers), is deemed situated in the United States if it was so situated either at the time of the transfer or at the time of death.[4]

For a decedent who at the time of death was a nonresident alien, property is considered located in the United States if it falls into any of the categories listed below:

• Real property located in the United States.
• Tangible personal property located in the United States. This includes clothing, jewelry, automobiles, furniture or currency. Works of art imported into the United States solely for public exhibition purposes are not included.
• A debt obligation of a citizen or resident of the United States, a domestic partnership or corporation or other entity, any domestic estate or trust, the United States, a state or a political subdivision of a state or the District of Columbia.
• Shares of stock issued by domestic corporations, regardless of the physical location of stock certificates.[5]

When considering inbound international estate planning issues one question that should be addressed is if the decedent is a citizen or resident of one of the several countries with which the United States has an estate tax convention (treaty). This is because provisions of the applicable treaty may override the normally applicable Internal Revenue Code provisions. The United States is a party to estate or gift tax treaties with the following countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Republic of South Africa, Switzerland, and the United Kingdom.

One final but very important point to note is that proceeds of insurance on a nonresident alien’s life are not includible in his gross estate.[6]This is true even though the proceeds are paid to a resident beneficiary.

For additional information on this subject see AMAFX: U.S. Estate and Gift Tax Consequences for Non-U.S. Citizens.

Tomorrow’s blogticle will discuss the qualified domestic trust.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Treas. Regs. §20.0-1(b).

[2] See Est. of Jan Willem Nienhuys, 17 T.C. 1149 (1952).

[3] IRC §2103.

[4] IRC §2104(b).

[5] Treas. Regs. §20.2104.

[6] IRC §2105(a).

Congress on both sides of the aisle is playing a game of political chicken with the debt ceiling; but what would impact mean for the markets and the economy in general?

Although the U.S. hit its $14.3 trillion debt ceiling on Monday, May 16, economic Armageddon hasn’t yet rained down on the U.S. economy. Thanks to some slick Treasury Department maneuvering, the date when the U.S. really reaches the limit has been pushed to around August 2.

But instead of breathing a sigh of relief and resolving to engage in a bipartisan effort to resolve the debt ceiling issue in advance of the August drop-dead date, both sides are likely to wait until the last moment to avoid impact—threatening our fragile economic recovery in the process.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of U.S. debt in Advisor’s Journal, see Storm Clouds over U.S. Debt (CC 11-85).

It’s a given that most of us want to extend our lives as long as possible. But our ever increasing life spans can create problems for pension funds and others that depend on us dying to keep their books balanced.

Pension funds face severe longevity risk. If pensioners live longer than expected, payouts from the funds could exceed the estimated cost of keeping the funds solvent. Worldwide, $17 trillion of pension funds – $23 trillion in assets – is exposed to longevity risk.

But the big banks—including Goldman Sachs, JPMorgan Chase, and Deustsche Bank—are coming to the rescue by packaging that longevity risk and selling it to investors; and they’re counting on investors being interested in gambling on your death.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance contracts in Advisor’s Journal, see IRS Guidance Provides Safe Harbor for Policies Maturing After Age 100 (CC 10-51).

For in-depth analysis of pension plans and other qualified employee plans, see Advisor’s Main Library: O – ERISA – FAQs.

Why is this Topic Important to Wealth Managers? Life insurance is an important tool in many areas of modern and advanced financial planning.  In many planning scenarios, the rationale of the transaction rests on gift and estate tax consequences. This means for wealth managers that it is crucial for planning purposes to understand how a life policy is valued at the time of transfer.

Generally the gift tax is an excise tax on the transfer, and is not a tax on the subject of the gift itself. [1]

The gift tax applies to a transfer by way of gift whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. [2]

For example, a taxable transfer may be effected by the creation of a trust, the assignment of the benefits of an insurance policy, or the transfer of other asset classes generally. [3]

The Code provides that if a gift is made in property, its value at the date of the gift shall be considered the amount of the gift. The value of the property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. [4]

Valuation of certain life insurance and annuity contracts

Generally, the value of a life insurance contract or of a contract for the payment of an annuity issued by a company regularly engaged in the selling of contracts of that character is established through the sale of the particular contract by the company, or through the sale by the company of comparable contracts. [5]

Examples

(1) A donor purchases from a life insurance company for the benefit of another a life insurance contract or a contract for the payment of an annuity. The value of the gift is the cost of the contract.

(2) An annuitant purchased from a life insurance company a single payment annuity contract by the terms of which he was entitled to receive payments of $ 1,200 annually for the duration of his life. Five years subsequent to such purchase, and when of the age of 50 years, he gratuitously assigns the contract. The value of the gift is the amount which the company would charge for an annuity contract providing for the payment of $ 1,200 annually for the life of a person 50 years of age.

(3) A donor owning a life insurance policy on which no further payments are to be made to the company (e.g., a single premium policy or paid-up policy) makes a gift of the contract. The value of the gift is the amount which the company would charge for a single premium contract of the same specified amount on the life of a person of the age of the insured.

(4) A donor purchases from a life insurance company for $ 15,198, a joint and survivor annuity contract which provides for the payment of $ 60 a month to the donor during his lifetime, and then to his sister for such time as she may survive him. The premium which would have been charged by the company for an annuity of $ 60 monthly payable during the life of the donor alone is $ 10,690. The value of the gift is $ 4,508 ($ 15,198 less $ 10,690). [6]

Tomorrow’s blogticle will continue our discussion on topics related to planning with life insurance.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Treas. Regs. § 25.2511-1.

[2] Id.

[3] Statutory provisions exempt bonds, notes, bills and certificates of indebtedness of the Federal Government or its agencies and the interest thereon from taxation are not applicable to the gift tax. Treas. Regs. § 25.2511-1.

[4] IRC section 2512; Treas. Regs. § 25.2512-1.

[5] Treas. Regs. § 25.2512-6.

[6] Id.

The Financial Industry Regulatory Authority (“FINRA”) has issued a regulatory notice addressing price volatility concerns associated with low-priced equity securities in customer margin and firm proprietary accounts. The notice advises that close attention be paid to low-priced equity securities; price volatility is usually associated with low-priced equities because they are inherently volatile. But what does FINRA consider a “low-price equity,” and what does it mean for you and your clients?

FINRA advises firms to weigh the risks that come with low-priced equity securities before extending credit in strategy-based or portfolio margin accounts. FINRA cautions firms to consider “volatility and concentrated positions in a single customer account and across all customer accounts, as well as the daily volume and market capitalization of each security when imposing ‘house’ maintenance margin requirements.”

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA-issued guidance in Advisor’s Journal, see Getting Your Feet Wet in the Social Media Market (CC 11-79) & SEC Says “Not So Fast” to Advisor Social Media Marketing (CC 11-40).

Why is this Topic Important to Wealth Managers? This blogticle provides an overview of a recently rule promulgation as part of the Affordable Care Act. Wealth managers providing health insurance should generally be aware of the current regulations as they apply to client planning.

Yesterday, the Department of Health and Human Services (HHS), working in partnership with the States, issued a final regulation which is designed to scrutinize large health insurance premium increases, and to provide consumers with access to clear information about those increases.

Under the final regulation:

• Starting September 1, 2011, insurers seeking rate increases of 10 percent or more for non-grandfathered plans in the individual and small group markets are required to publicly disclose the proposed increases and the justification for them. Such increases will be reviewed by either State or Federal experts to determine whether they are unreasonable.

• An easy-to-access, consumer-friendly disclosure form explaining the proposed increases will also be made publicly available through HHS, State and/or insurer websites.

• Starting September 1, 2012, the 10-percent threshold will be replaced with a State-specific threshold, using data that reflect insurance and health care cost trends particular to that State. The final rule clarifies that HHS will work with States in developing these thresholds.

• States with effective rate review systems will conduct the reviews, but if a State lacks the resources or authority to conduct actuarial reviews, HHS would conduct them. HHS expects that the vast majority of States will conduct these reviews, and will make this determination by July 1. HHS will continue to make resources available to States to strengthen their rate review processes.

Publication of the final rule under the Act was prompted in part since the rise in health insurance premium over the last decade. Since 1999, the cost of coverage for a family of four has climbed 131 percent. [1] Moreover the rule comes as health insurance companies have reported some of their highest profits in years.[2]

The regulation issued today finalizes proposed rules issued in December 2010. The final rule has several additions to the proposed rule, including a requirement that states provide an opportunity for public input in the evaluation of rate increases subject to review.

The Affordable Care Act brings an unprecedented level of scrutiny to health insurance rate increases. The new rate review regulation works in conjunction with earlier rules requiring insurers to spend at least 80 percent of premium dollars on direct medical care or work to improve the quality of care for patients or provide a rebate to their enrollees. The “medical loss ratio” regulation was released on November 22, 2010. The medical loss ratio regulation is designed to ensure that premiums are being spent on health care and quality-related costs, not excessive administrative costs and executive salaries.

The New York Times reports that since “Federal officials acknowledged that they did not have the authority to block rates that were found to be unjustified” the feds provided other support in the form of $250 million. The Times reports that a few states have turned downed the funding because they are generally opposed to the federal health care law.[3]. HHS has already awarded $44 million in Affordable Care Act in connection with state oversight capability funding.

Next week’s blogticle will present discussion on topics related to planning with life insurance.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] The Kaiser Family Foundation and Health Research Educational Trust. “Employer Health Benefits 2010 Annual Survey”. http://ehbs.kff.org/pdf/2010/8085.pdf. Last Accessed 5/19/2011.

[2] See generally New York Times, “Health Insurers Making Record Profits as Many Postpone Care.” May 13, 2011.http://www.nytimes.com/2011/05/14/business/14health.html.  “The nation’s major health insurers are barreling into a third year of record profits…”

[3] Robert Pear. “Insurers Told to Justify Rate Increases Over 10 Percent.” New York Times. Published: May 19, 2011. http://www.nytimes.com/2011/05/20/us/politics/20health.html. Last Accessed May 19, 2011.

The Obama Administration’s 2012 federal budget proposal has revived two budget proposals that will touch the life insurance business – one affecting Corporate-Owned Life Insurance (“COLI”) and the other affecting carriers’ Dividends-Received Deduction (“DRD”).

In response to alarm that the proposals tamper with the tax preferred status of life insurance, the Treasury recently issued a letter clarifying that these proposals center around tax arbitrage issues, not the tax treatment of death benefits.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of corporate life insurance in Advisor’s Journal, see Obama Budget Would Undercut Utility of Life Insurance in Small Business Planning (CC 11-41).

For in-depth analysis of taxation affecting corporations, see Advisor’s Main Library: A – The Corporate Income Tax.

Why is this Topic Important to Wealth Managers? This blogticle provides a general lesson regarding diligence for wealth managers. That a court shall not grant the same legal weight to plan summaries as plan descriptions and documents themselves means wealth managers should look to original plan documentation. This rule should apply to all investment and insurance products and arrangements. Summaries alone will not provide a legally sufficient basis to create a contract. As such the agreement between the parties should be thoroughly examined as the binding document.

The U.S. Supreme Court recently ruled that summary plan descriptions for pension plans need not represent the full plan details and terms; the interpretation by the plan participant of the summary is legally insufficient as to create a remedy without a showing of fraud or serious harm. Thus, the Court significantly narrowed the grounds by which an employee may bring an action for additional pension benefits based on errors in a plan’s summary plan description (SPD).

The Court held unanimously that an SPD should be accurate, but it need not be as complete as the underlying plan documents, and participants cannot sue to enforce their interpretation of the SPD in the same way that they could sue to enforce the actual terms of the plan. [1]

CIGNA Corp., the pension plan sponsor involved in the case, converted a traditional defined benefit pension plan, which used a funding formula based on the assumption that an employee would spend many years at the company, into a cash balance plan. An employer that sponsors a cash balance plan simply puts in a set amount of cash each year. The amount of benefits accrued each year is the sum of the contribution and interest earnings on the contribution.

J. Amara, the lead plaintiff in the class action argued that the SPD for the new plan – the document that was supposed to describe the plan in terms that participants could understand — was misleading, because it said employees would do at least as well as in the old plan and failed to explain that a drop in interest rates could affect the ultimate benefits. The conversions however under the new plan left some participants worse off given present value calculations and assumed interest rates.

The lower courts ruled that the SPD was incomplete and inaccurate, that the participants were “likely harmed” by the inaccuracies, and that all 27,000 plan participants should share in a recovery.

However, the Supreme Court held that ERISA did not give the district court authority to reform CIGNA’s plan, but that statute does give a participant, beneficiary, or fiduciary an opportunity to seek “’other appropriate equitable relief” to redress violations of ERISA ‘ or the [plan’s] terms.’” [2]

The Court interpreted the law as allowing “equitable relief,” such as a surcharge only if SPD errors were the result of fraud or that the errors had led to serious harm.

“To make the language of a plan summary legally binding could well lead plan administrators to sacrifice simplicity and comprehensibility in order to describe plan terms in the language of lawyers,” wrote Justice Stephen Breyer in his opinion.

On the other hand, by enforcing the summaries as a binding legal agreement would likely “bring about complexity that would defeat the fundamental purpose of the summaries,” Breyer said. “For these reasons taken together we conclude that the summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan.”

Tomorrow’s blog will discuss topics related to life insurance.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] See CIGNA Corp. v. Amara, No. 09-804.

[2] See generally ERISA Section 502(a)(1)(B).

Segments of this article were adopted from Lifeandhealthinsurancenews.com, Supreme Court Favors CIGNA in Summary Plan Description Case, By Arthur D. Postal. Published 5/16/2011. You can access the full article here.

Life settlements offer diversity because their returns are uncorrelated to the markets. But are they a viable financing vehicle for municipal finance? Rancho Mirage California City Councilman Scott Hines thinks so.

Under Hines’ plan, the city would issue bonds, with most of the issue proceeds being used to finance city projects. The remaining funds would be invested in life settlements with an aggregate face value equal to the face value of the bond issue. Payouts on the life settlements would then be used to pay back bond principal.

Instead of the typical municipal bond financing arrangement, where tax dollars are used to pay back both principal and interest on an issue, Hines’ plan would leave taxpayers with only a bill for interest payments.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life settlements in Advisor’s Journal, see Life Settlement Provider Accused of Falsifying Life Span Reports (CC 11-23).

Why is this Topic Important to Wealth Managers? This topic is presented to keep wealth managers informed and aware of the current federal regulatory environment regarding insurance. Federal oversight concerning insurance has generally expanded since the new regulatory laws were passed last year. Thus we discuss current trends of federal regulation of the insurance industry.

The Treasury Department has determined that it is in the public interest to establish the Federal Advisory Committee on Insurance. A Charter for the Committee has been prepared and is expected to be filed next week.

The stated purpose of the Committee is to present advice and recommendations to the Federal Insurance Office (FIO) to assist the Office in carrying out its duties and authorities.

It is intended that the FIO will benefit from the knowledge and regulatory experience of the State and Tribal insurance regulators, who are the functional regulators of insurance, as well as the experience and perspective of industry experts and others.

The Treasury believes that it is in the public interest to establish, under the provisions of the Federal Advisory Committee Act, the Federal Advisory Committee on Insurance (FACI).

The FACI shall be a continuing advisory committee with an initial two-year term, subject to twoyear re-authorizations. The Committee will provide a critical forum for State and Tribal insurance regulators and/or officials, distinguished members of the property and casualty insurance industry, the life insurance industry, the reinsurance industry, the agent and broker community, academics, and consumers. These views will be offered directly to the Director of the FIO on a regular basis.  The Treasury states that there exists no other source within the Federal government that could serve this function.

The FIO was established in Subpart A of the Federal Insurance Office Act of 2010 [1] Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act. [2] The FIO’s authorities extend to all 3 lines of insurance except health insurance, long-term care insurance (except that which is included with life or annuity insurance components), and crop insurance.

Generally, the duties and the authorities of the FIO are:

• The FIO advises the Secretary of the Treasury on major domestic and prudential international insurance policy issues.
• The FIO Director serves as a non-voting member of the FSOC in an advisory capacity.
• The FIO has the authority to recommend to the FSOC that FSOC designate an insurer (including affiliates) to be an entity subject to regulation as a nonbank financial company supervised by the Board of Governors of the Federal Reserve.
• The FIO monitors all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the U.S. financial system.
• The Director also plays a role in authorizing the resolution of any insurance companies subject to regulation as a nonbank financial company
• The FIO coordinates and develops Federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors (or a successor entity), and assisting the Secretary (with the United States Trade Representative) in negotiating certain written bilateral or multilateral agreements regarding prudential insurance measures with respect to the business of insurance or reinsurance.  The Office assists the Director in determining whether State insurance measures are preempted by such agreement or agreements.
• The FIO monitors the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance, except health insurance.
• The FIO assists the Secretary of the Treasury and other officials in administering the Terrorism Risk Insurance Program.

In carrying out these functions, the Office may receive and collect data and information on and from the insurance industry and insurers; enter into information-sharing agreements; analyze and disseminate data and information; and issue reports regarding all lines of insurance except health insurance.

Tomorrow blogticle will continue to address issues surrounding the insurance industry.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] 31 U.S.C.§ 313, et seq.

[2] P.L. 111-203, 12 U.S.C. 5301 et seq. (July 21, 2010).