Anyone have experience arguing that postpetition life insurance proceeds ...
Posted: Mon Feb 08, 2010 11:15 pm
Holly:
You have multiple issues here to address with your client. This has
several layers of complexity. First off the appropriate nomenclature
is estate tax not inheritance tax. The difference is that the
decedent's estate pays tax prior to distribution to beneficiary of the
estate. If the decedent died in 2010 there is no estate tax. If died
in 2009, estate tax only kicks in after the first $3.5 million. If you
meant income tax and the decedent died in 2009, most assets other than
IRA's and other tax deferred retirements and assets like savings bonds
receive a step-up in basis (or step down if the decedent originally
paid more) to the value at the date of the decedents death or 6 months
later if that figure is lower for all the decedent's estate's assets.
The basis for determining whether there was a gain or loss on sale
would then be that figure for income tax purposes. If the decedent
died in 2010 there is no step-up in basis, you are stuck trying to
figure out the decedents cost basis for the items. There are exemption
amounts, but I probably have already delved too far into tax minutia.
If there is income tax owed it is paid by the bankruptcy estate if the
asset is administered by the Chapter 7 trustee. If exempted, your
client pays the income tax, if any, when the asset is sold. It may be
best for your client to consult with her tax accountant to analyze
these issues. The client may also need to consult with an estate
planning/probate attorney.
You, the client and whoever else is being consulted need to look at
the overall situation and evaluate just what this debtor is entitled
to inherit. If it is more than the debts owed to creditors when the
Chapter 7 case was filed and the assets are not exempt, your client
may just wish to file a motion to dismiss the Chapter 7 based upon the
change of financial circumstances allowing the client to address the
debts outside of the bankruptcy. I once had a client file a Chapter 7
case then see her mother die suddenly a week later and her grandmother
unexpectedly the week after that, leaving her the sole beneficiary of
reasonably significant assets. I promptly filed a motion to dismiss.
The Chapter 7 trustee had not done any work administering the estate
so there was no opposition to motion to dismiss. The debtor could even
pursue and Debt management plan and perhaps have some of the debt
lowered. Converting to Chapter 13 might have benefits as well
depending on the circumstances if the debtor creditors would not allow
her to orderly address their debts outside of bankruptcy. Remember if
funds are on hand, it is almost always more cost effective for the
debtor to pay the debts to creditors and avoid the trustee's cut and
other costs of administration.
Regarding the exemptions, a house owned outright probably has
significant value unless it is in really poor shape or in one of the
particularly distressed areas. Unless this house is where the debtor
resided when the bk was filed and somehow CCP 704.730's homestead
exemption applies, that asset alone may be enough to address the
debtor's debts. IRA's are not rolled over like you would rollover a
401-k, they simply go to the beneficiary who then owns the IRA with
distribution rules that are not necessarily the same as for their own
IRA. Your client should consult with her tax accountant and/or
financial advisor relating to her options if they are in fact exempt
in the bk under 11 U.S.C. Section 523(b)(3)(c). My gut instinct is
that IRA funds in that circumstance would be exempt, but I have not
researched the topic.
There might even be a reason to analyze the extent of your client's
right to disclaim the inheritance, wherein she is presumed as a legal
fiction to predecease the decedent for some or all of the assets left
to her. Again probably best to consult with an estate planning
attorney about the procedures and ramifications. Also wise to research
the debtor's right to disclaim postpetition with relation to the IRC
and the bankruptcy code. There was a string on this topic about a year
and a half/ two years ago as I recall between David Tilem and Pat
Green.
Have fun!
Mark T. Jessee
Law Offices of Mark T. Jessee
"A Debt Relief Agency"
50 W. Hillcrest Drive, Suite 200
Thousand Oaks, CA 91360
(805) 497-5868
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On Mon 8/02/10 9:14 PM , "Holly Roark" roarklaw@yahoo.com sent:
Thanks, Mark. Sorry to be vague. I am just trying to get info while
keeping some privacy since I don't know who all may be reading this.
Debtor was the beneficiary of a life insurance policy. The policy
holder died during the debtor's bk. Debtor is ill. Although the wild
card can exempt some of the proceeds, it won't cover them all. Debtor
was not a dependent of the policy holder, and I just read that under
703, really all debtor can use is the wild card if debtor is not a
dependent.
Debtor also inherited a house and an IRA. I am hoping we can at
least roll the IRA over into debtor's IRA and exempt it. The house
does not have any liens on it.
Debtor will get hit with taxes for this inheritance. Some of this
property will not be exempt. If the house goes to the estate, does the
estate pay the debtor's inheritance taxes?
Jeez this simple case just got complicated.
Holly
holly@roarklawoffices.com [1]
--- In cdcbaa@yahoogroups.com [2], Mark T.Jessee wrote:
>
> Holly, you post does not contain enough details. Do you mean the
> debtor is the benefiary of a policy of someone who dies
postpetition?
> Do you mean the debtor owns the policy prepetition and wants to
cash
> it in postpetition? If it is an inheritance then it is an asset of
> the estate if the individual whose life the policy was based dies
> within 6 months after the petition was filed. If so, whatever is
left
> of the wildcard can be used. If the debtor was the owner of the
> policy prepetition and it is unmatured see CCP 703.140b(7) & (8)
plus
> wildcard or see CCP 704.100 if the debtor needs to use the 704's
> instead of the 703's. The debtor's needs are irrelevant in the
> analysis. The only time the debtor's needs matter in the exemption
> analysis is under 704.100(c) for matured life insuarnce policies.
> Mark T. Jessee
> Law Offices of Mark T. Jessee
> "A Debt Relief Agency"
> 50 W. Hillcrest Drive, Suite 200
> Thousand Oaks, CA 91360
> (805) 497-5868
> On Mon 8/02/10 7:31 PM , "Holly Roark" roarklaw@... sent:
> should be exempt because the debtor is ill and needs them for
> support? CCP 703 exemptions.
> Anyone have this issue come up?
> Thanks,
> Holly Roark
> holly@... [1]
>
>
> Links:
> ------
> [1] mailto:holly@...
> [2] mailto:roarklaw@...?subjectAnyone have experience arguing
> that postpetition life insurance proceeds ...
> [3] mailto:cdcbaa@yahoogroups.com [3]?subjectAnyone have
experience
> arguing that postpetition life insurance proceeds ...
> [4]
>
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