Welcome to the penultimate exercise for this course! We'll start with life insurance. Jim comes to you and tells you that he's being offered a life insurance policy that costs $35/month for a $500,000 death benefit and the premiums are locked in for 10 years. This is probably a... [[term policy]] [[whole life policy]] [[blended policy]]Correct! Why would Jim want to consider this over a whole life policy? [[The proceeds of a term policy get more favorable income tax treatment]] [[The term policies generally have lower premiums]] [[The term policies do not lose their value over the long term]]Sorry, that's incorrect. [[try again|start]]Sorry, that's incorrect. [[try again|start]]Nope. They both get the same income tax for the proceeds. [[try again|term policy]]Correct! [[continue|LI]]Actually, this would be an advantage for the whole life policy. [[try again|start]]Jim purchases a life insurance policy and Lisa is the beneficiary. When Jim dies, Lisa is to ger a $500,000 death benefit. This money... [[is subject to income tax]] [[is not subject to income tax]] [[is not subject to income tax if Lisa has an insurable interest in Jim's life]] [[need not be paid out at all if Lisa does not have an insurable interest in Jim's life]]There's a better answer. [[try again|LI]]There's a better answer. [[try again|LI]]Correct! Insurable interest is required to get the income tax exemption. [[continue|LI2]]Yes, it does. Unless the insurance contract specifically limited it that way, there's nothing inherent in an insurance contract that requires an insurable interest to be valid. [[try again|LI]]What if Jim (who purchased the policy for Lisa's benefit) wants to transfer it to a life insurance trust? [[He cannot do so without Lisa's consent]] [[He can do so, but he loses the income tax benefits of a life insurance policy]] [[He can do so, but Lisa must be the sole beneficiary of the trust]] [[He can do so if he chooses, no matter what the trust is about]] That is incorrect. The owner of a policy does not need the beneficiary's permission to transfer it. [[try again|LI2]]Transferring the policy to a trust does not lose the income tax benefits. [[try again|LI2]]Not necessarily. [[try again|LI2]]Correct! The owner may tranfer the policy at any time and for any reason. [[continue|LI3]] Jim transfers the policy to a life insurance trust. Will the death benefit now be in Jim's taxable estate? [[Yes since the policy is on his life]] [[No, since Jim is not the beneficiary]] [[Yes, if Jim retains control over the disposition of the policy]] [[Yes, if Jim does NOT retain control over the disposition of the policy]]Sorry, that is incorrect. [[try again|LI3]]Sorry, that is incorrect. [[try again|LI3]]Sorry, that is incorrect. [[try again|LI3]]Correct! [[continue|LI4]]Okay, what about when Jim transfers the policy to the trust and then keeps paying the premiums? Is that a taxable gift? [[No, because the gift is to a trust, not an individual]] [[Yes, unless the beneficiaries get withdrawal powers]] [[Yes, even if the beneficiaries get withdrawal powers]]There's still a gift tax on gifts to trusts. [[try again|LI4]]Correct! "Crummey" withdrawal powers can allow the benefit of the annual exclusion to gifts made to a trust. [[continue|LI5]]Incorrect. [[try again|LI4]]Okay, we're ready to do a life insurance trust. Why would this potentially NOT be a good idea? [[it decreases flexibility in terms of how to handle the policy]] [[it eliminates the creditor protection benefits of a life insurance policy]] [[it makes it more likely that the death benefit would be in the deceased's taxable estate]]Correct! It's not as easy to change terms when the policy is in a trust as it would be if the client owned the policy. [[continue|LI6]]No, it doesn't do any such thing. [[try again|LI5]]It would have the opposite effect, actually. [[try again|LI5]]Is this ILIT going to be a grantor trust? [[probably]] [[definitely]] [[probably not]] [[definitely not]] Correct! Hopefully, you realized that, under Section 677, a trust is a grantor trust if the trust may pay premiums of life insurance policies on the life of the grantor. So, why "probably" and not [[definitely]] a grantor trust? [[We can make it a non-grantor trust by making a disinterested person a trustee]] [[We can make it a non-grantor trust by making the beneficiaries disinterested parties]] [[We can make it a non-grantor trust by requiring the consent of a trust beneficiary before the premiums are paid.]]Sorry, that is not correct. It's [[probably]] a grantor trust, but not definitely.Sorry, that is incorrect. [[try again|LI6]]Sorry, that is incorrect. [[try again|LI6]]Sorry, that is incorrect. A trustee being a disinterested party will not overcome the rule in Section 677. [[try again|probably]]Sorry, that is incorrect. The beneficiaries being unrelated parties will not overcome the rule in Section 677 (and is probably not what the client wants anyway). [[try again|probably]]Correct! Under Rule 677, it's only a grantor trust by virtue of being able to pay the premiums if it can do so without the consent of an adverse party! [[continue|LI7]]Are you allowed to work with a life insurance agent to service a client's need for both insurance and an insurance trust? [[sure]] [[no; that's a conflict of interest]]Yes, there's nothing wrong with working with an insurance agent. On the contrary, serving the clients in multiple dimensions is a good thing. Still, there are some things we need to watch out for. [[confidentiality]] [[referral fees]] [[reciprocal advice arrangements]][[not necessarily|sure]]Yes! What information about your client are you allowed to share with the life insurance agent? [[nothing]] [[whatever the client allows]] [[everything, because the insurance agent is also a fiduciary]]Are you allowed to give a referral fee to a life insurance agent who steers a client your way? [[Sure; we need the business, after all]] [[no way!]]This means making an arrangement whereby the insurance agent will recommend that the client come to you for a life insurance trust and you recommend that the client purchase life insurance. What's the problem with this arrangement? [[it's like a refferal fee]] [[it may not be in the best interest of your client]]Not necessarily [[try again|confidentiality]]Correct! Now, you can go to: [[referral fees]] [[reciprocal advice arrangements]] Or, if you've done both, [[continue|LI8]]Sorry, that is incorrect. [[try again|confidentiality]]Congratulations! You have finished this exercise. We'll see you in the last exercise on chapters 11 and 12. For the weekly interaction, the code word for this exercise is: supersonic[[no way!]]Correct! Refferal fees, especially to non-lawyers, are a no-no under the Rules of Professional Conduct. Now, you can go to: [[confidentiality]] [[reciprocal advice arrangements]] Or, if you've done both, [[continue|LI8]]Not really. The problem with a refferal fee is that the client is paying someone for legal work that didn't do any legal work. That doesn't happen in a reciprocal advice arrangement. Correct! [[try again|reciprocal advice arrangements]] Correct! Your first responsibility is to the client. The danger here is that the attorney will be bound to recommend life insurance even if the attorney doesn't, in good faith, believe it is in the client's best interest. That doesn't square with the attorney's fiduciary responsibility to the client. [[confidentiality]] [[referral fees]] Or, if you've done both, [[continue|LI8]]