Viatical settlement has become a popular strategy for investors seeking immediate liquidity for end-of-life expenses. Distinct from other derivative products, viatical settlement also offers life insurance policy holders immediate cash for reinvestment without the extenuating contract obligations of other financial assets. Settlement transfers the title of a life insurance policy to a new buyer in exchange for a lump sum cash payment. Eligible insured can also avoid the hassle of collateral borrowing against the limit on a life insurance policy with viatical settlement, which affords an investor immediate cash in exchange for the full value of the policy.    

Eligibility Requirements for Settlement

Life insurance policy holders in New York are eligible for life settlement depending on the terms and conditions of an agreement. An eligible policy can provide an investor with additional cash to offset finance medical or other important expenses. The seller and buyer must agree to any modification of a policy’s terms and conditions, such as obligation to premium payments assumed at time of origination. The full value of a life insurance policy must be determined prior to settlement. Distribution to named beneficiaries of a policy, or other condition to the sale of the policy value should be articulated before transfer.      Unlike other key investments such as real estate, a life insurance policy settlement is a fast and efficient process for enhancing retirement liquidity.

New York insurance laws allow for insurance providers to offer insured seniors life-care policy coverage. A specialized form of insurance coverage, a life-care policy indemnifies the holder for end-of-life care and treatment as part of an extended life services agreement. Distinct from a limited life insurance agreement, life-care coverage can be purchased as a separate policy. An option for estate planning clients, life-care can be written into an agreement as part of a comprehensive insurance policy. Combining life insurance with the added health and life expense benefits that may be required by an estate holder while still alive, life-care coverage protects valuable estate and trust assets in the interim. Insurance policies offering value-added, life-care coverage agreements:

1)    Extended Life-care Policies

A comprehensive life-care policy will cover life insurance beneficiaries on death, as well as any life expenses a holder may have such as residential services, housing, treatment, and end-of-life costs. Some extended life-care policies also offer healthcare services agreements with unlimited access to medical providers at little to no difference in fee assignment. Extended life-care policies tend have a higher sign-on fees.

Estate planners working with clients who have hit the jackpot in Atlantic City or Las Vegas, or have won the lottery, can assist in the formation of an irrevocable life insurance trust (ILIT) to enhance liquidity and pay assigned federal and state estate taxes before the event of their death. The federal Internal Revenue Service (“IRS”) restricts the transfer of lottery future payments, and some state laws also prohibit assignment of cash transfers of winnings without proper estate or gift planning in place. Creation of an ILIT allows for a decedent to protect family members from unexpected gift and estate taxation of winnings, and plan for distribution of any future payment streams resulting from one of these special assets.

Tax implications of a “win”

Federal estate tax rules for gaming and lottery assets are relatively straightforward. The IRS applies a 25% tax rate to all gaming, gambling, lottery or sweepstakes winnings above $5,000. Winnings less than that amount are exempt from federal taxation. An estate that holds a lottery or other gaming win as an asset is valued on basis of fair market value, but also the winner’s original interest in the asset at time of death.

Advanced directives to end the pain of terminal illness within a “living will” became a near future possibility for terminally ill individuals at the end of May this year. Euthanasia has been offered to resident of California, Montana, Oregon, Vermont and Washington) for some time, yet physician assisted suicide continues to be an issue set aside by many state governments unwilling to take on the moral controversy of organized religious groups opposed to such legislation. Thirty-seven (37) U.S states still stand firmly against medically assisted suicide, defining euthanasia under criminal statute; or at minimum codified as an illegal, life-terminating act. At present, New York law classifies the act of intentionally causing or aiding the commission of a suicide of another person as second-degree manslaughter (N.Y. criminal statute 125.15).

A History of “Living Will”

Mid-twentieth century integration of the concept of a “Living Will” within U.S. law was originated by the public policy agenda of the Euthanasia Society of America. Intended to influence public opinion in the interest of legalizing physician-assisted suicide, the Society promoted euthanasia as a treatment solution in the event of medical impairment. Today, the term advanced directive associated with living will formation, also refers to a Durable Power of Attorney for Health Care (DPAHC). Advanced directives now provide instructions for medical treatment, including authorization of euthanasia or physician-assisted suicide in states where it is permitted.

Trustees make difficult decisions about estate or trust investments, distributions and requests for disclosure of financial information. If an estate holder’s investment portfolio is comprised of assets held by onshore and offshore institutions, trustee decisions are especially at risk of an inquiry giving rise to significant claims. Where ambiguities exist, the prudential authority of an estate or trust entity must follow the laws of all jurisdictions involved. An estate attorney can provide a trustee with legal representation in a petition for court instructions in an estate or trust litigation matter.  

Trustee Powers and Duties in U.S. Law

In the United States, the common law of estates provides trustees with prudential authority unless there Is reasonable doubt that the discretionary powers or duties are unreasonable (Restatement (Second) of Trusts § 259 (1959)). The Uniform Trust Code (UTC) allows for “judicial proceeding[s]] involving a trust may relate to any matter involving the trust’s administration, including a request for instructions[.]” (UTC § 201(c) (2010)). U.S. courts generally do not interfere prior to the exercise of a trustee’s discretionary authority, and trustees are entitled to request court instructions absent of a legal dispute.

Traditionally, estate planning has primarily been focused on transfer of assets to a tax-exempt shelter for distribution to named heirs or beneficiaries at time of an individual’s death. In addition to a written will, these five (5) directives specifying “end of life” actions to be taken by a Trustee or Personal Representative (“Executor”) may be part of an estate.  

  1. Advance Directives

If a decedent is expected to die soon, or has court ordered physician-assisted-suicide in response to a terminal illness, “end of life” directives can be created in a “Letter of Final Instruction” or “Disposition Authorization” with instructions for contact of family members, attorney representation, and funeral and burial arrangements, and organ donation if a “Living Will” is not already present. A “Designated Agent” may be identified to administer those arrangements. A Durable Power of Attorney for Health Care might already be present to manage the transfer of the decedent from a hospice to a hospital.

Homestead exemption protect property assets from probate. Properties recognized under laws of homestead are off-limits to creditors seeking attachment. New York homestead law protects property owner rights to the value of an asset transferred to an estate or trust. Homestead declarations are automatic for title holders of residential property in the state. Jointly owned property owned by a married couple is held as a single married entity, “tenancy by the entirety” – not as individuals. Trustees of revocable trusts seeking homestead protections for property assets from lien, can consult with a licensed attorney specializing in estate probate law.  

NY Homestead Law

Federal and state property taxes are an exception to estate or trust homestead exemption from lien or attachment. No exempt homestead is exempt from taxation or from liquidation for purposes of payment of an outstanding assessment or tax lien. The NY C.P.L.R. §5206 Real property exempt from application to the satisfaction of money judgments outlines criteria for (a) homestead exemption; and (b) distribution of a property asset after the original owner has died. Homestead properties are “exempt from application to the satisfaction of a money judgment, unless the judgment was recovered wholly for the purchase price thereof: 1) lot of land with a dwelling thereon, 2) shares of stock in a cooperative apartment corporation, 3) units of a condominium apartment, or 4) a mobile home.”

Publication of the Financial Industry Regulatory Authority’s (“FINRA”) rule reform by the federal Securities and Exchange Commission (“SEC”) clarifies the enhanced practice rules recently enacted to protect investors from financial exploitation. As of February 2018, FINRA Rule 4512 Financial Exploitation of Specified Adults  requires FINRA members to place a temporary hold on the disbursements of a client’s funds or securities where “there is a reasonable belief of financial exploitation” of a customer falling under the criteria of a “specified adult.” Financial professionals must make a reasonable effort in obtaining the name and contact of a “trusted contact person” (“TCP”) before making changes to a client’s account.

An Added Layer of Protection

Amendment of Rule 4512 fulfills contract provisions for “incapacity” of parties. Rule 4512 allows for a hold on a specified person’s account if a TCP has made a decision that is questionable. The new legislation furthers prudential protections for clients that might otherwise be compromised by account mismanagement. FINRA members have fiduciary duty to a professional standard of care. Similarly, estate laws require fiduciary duty of a legal guardian, holder of power of attorney, executor, or trustee responsible for the administration of an elderly client’s account(s). The new TCP rule is intended as an added layer of protection; alerting an administrator of any exploitation by a third party.

New York laws governing the disposition of a firearm part of an estate or trust when a gun owner dies may be affected by the Secure Ammunition and Firearms Enforcement (SAFE) Act of 2013. The legislation amending legislative regulation of gun ownership, includes rules and timeline for safeguarding firearms after the registered owner is deceased. In response to the Act, §2509 of the New York Surrogate’s Court Procedure Act (SCPA) was reformed with new estate settlement rules requiring fiduciaries to file an estate’s firearms inventory with the court. State law also require that firearms inventory of a decedent’s estate be filed with the division of criminal justice services. Heirs to an estate holding firearms assets should be aware that failure to file the required inventories is a violation of New York Penal Code.

Will transfer of firearms to beneficiaries.

A written last will and testament naming a specified beneficiary designates the person who will receive an asset after death. In the case of firearm assets, distribution cannot be performed by passing the gun directly without criminal liability. Prior to distribution, the Administrator or Executor of the estate must “(i) know the decedent legally owned the gun; ii) know that the specific beneficiary has a license to legally own a firearm; and (iii) adhere to proper transfer procedures,” N.Y. Penal Law §400.00; N.Y. Penal Law §400.05(6), 2017. Legal transfer of firearms from an estate should be performed with the assistance of a licensed attorney in coordination with law enforcement 15-days after the death of a decedent.

Professional assessors have a duty to a standard of care under federal and state law. New York Department of Taxation and Finance (“DTF”) licensed assessors must take adequate precautions to not commit 1) errors of omission; or 2) commission that would significantly affect a valuation appraisal. All valuation of real property and special property assets of an estate or otherwise, must involve numerous checks during the process to ensure prevention of errors that could affect the value conclusion of an assessment report. Sufficient attention to site inspection should be followed by county recorder record to exhibit due diligence has been practiced so to avoid errors or omissions to the extent no further inspection is required. Evidence that accurate data from reliable sources shows that a value has been ascertained accurately. Only in a circumstance where real property consists of a substantial inventory of assets with value changing characteristics, should repeat onsite inspections be required.

ASB Appraisal Guidelines

The Appraisal Standards Board (“ASB”) of the Appraisal Foundation responsible for the definition and publication of  Uniform Standards of

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