• No marital or charitable deduction for unitrust payable to spouse or charity in trustee’s discretion—In Chief Counsel Memorandum 202233014 (Aug. 19, 2022), a decedent left a portion of his estate to a charitable remainder unitrust (CRUT) that provided for annual unitrust payments, part of which was payable to the decedent’s spouse for the spouse’s lifetime. The CRUT amount was divided into two portions—25% was required to be paid to the spouse. The remaining 75% could be paid to the spouse or to a charity, as the trustee determined in his discretion. On the spouse’s death, all the remaining property was to be paid to the charity.
Internal Revenue Code Section 2055 governs the charitable estate tax deduction, and the Treasury regulations, along with IRC Section 664, further provide the rules and requirements for charitable deductions for property transferred to trusts in which there are both charitable and noncharitable beneficiaries, known as “split-interest” trusts. The remainder interest directed to the charity on the spouse’s death qualified for the charitable deduction under Section 664 as the trust qualified as a CRUT. However, no charitable deduction is allowed for other types of split interests unless the portion to be paid to the charity is in a form of a guaranteed annuity or fixed percentage amount. Because there was no clear guarantee or percentage dictating the amount to be paid to the charity from the 75% CRUT, no charitable deduction was allowed.
Similarly, the trustee’s discretion interfered with the marital deduction for the 75% that could be paid to either the spouse or charity. The 25% payable to the spouse qualified for the marital deduction—it passed from the decedent to the spouse under IRC Section 2056(a), and it’s not subject to the terminable interest rule because there was no contingency or event that would cause that 25% to be paid to an individual other than the spouse. However, there was no way to determine the amount that would be payable to the spouse from the 75%, and, as a result, the 75% wasn’t considered to be passing from the decedent to the spouse and wasn’t eligible for the marital deduction.
• Seventh Circuit holds insurance policy was illegal wager on a stranger’s life—In Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A., Nos. 20-2339 and 20-2472 (7th Cir. 2022), the U.S. Court of Appeals for the Seventh Circuit analyzed whether a life insurance policy was legitimately purchased and sold by an individual with a genuine insurable interest or constituted an elaborate sequence of transactions designed to hide the fact that there was no proper insurable interest.
Robert Corwell, at the age of 78, participated in a program run by Coventry Capital. As part of the program, Robert applied to purchase 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 secured only by the policy itself; there was no personal liability for Robert. At the end of the 30-month loan term, Robert was given two options: (1) repay the loan himself, or (2) relinquish his interest in the insurance policy to the lender.
Robert made the first premium payment and was reimbursed from the loan proceeds. After that initial payment, the bank made all premium payments directly to the insurance company. As expected by everyone involved, as the 30-month term ended, Robert relinquished his policy to LaSalle Bank. Robert essentially received free life insurance for about two and a half years in exchange for an assignment of the policy to the bank that had funded it from the beginning. LaSalle, in turn, promptly sold it to Coventry First LLC, an affiliate of Coventry Capital, which had been aware of Robert’s initial purchase in 2006 and, at that time, had planned to purchase the policy for AIG when it became available. Conventry First and AIG had an agreement under which Conventry First was procuring policies exclusively for AIG Life Settlements LLC. Coventry First then transferred the policy to AIG Life Settlements LLC, through AIG’s agent, Wells Fargo. Wells Fargo continued to make premium payments for the policy, first on behalf of AIG, later Blackstone, then later still Vida Longevity Fund, L.P., the beneficial owner at Robert’s death.
On Robert’s death, Wells Fargo submitted a death claim to Sun Life to collect the $5 million death benefit under the policy. Sun Life filed suit, arguing that the policy was void ab initio because it was an illegal wagering contract procured for the benefit of strangers who lacked an insurable interest.
The court agreed with Sun Life, citing the long-held prohibition on stranger-oriented life insurance (STOLI) policies and emphasizing the need under Illinois law to look “beyond the mere form of the transactions.” On its face, the policy appeared legitimate, as Robert had an insurable interest on his own life and held nominal control over the policy. The surrounding facts, however, painted a very different picture. For example, while Robert took out a policy on his own life, he did so only as part of Coventry’s scheme. In addition, the financing of the policy was concealed from Sun Life. Finally, Robert didn’t need and couldn’t afford the policy himself so there was no real possibility that Robert would retain the policy for himself. The court held that it was an unlawful wager by strangers on Robert’s life and affirmed the district court’s holding that the $5 million policy was void.
The Seventh Circuit went on to affirm that Wells Fargo wasn’t entitled to a refund of the vast majority of premium payments by Sun Life, in general, and to reverse the district court decision to refund about $13,000 by Wells Fargo on behalf of Vida Longevity Fund, L.P. (Vida). Wells Fargo argued that it was entitled to a refund of all the premiums it paid on Robert’s policy because it was innocent in the wager scheme. The Seventh Circuit disagreed, finding that Wells Fargo had never had a beneficial interest in the policy but was merely “a conduit for the (hidden and complicit) beneficial owners.” Further, the court held that Vida, a multibillion dollar company in the business of purchasing life insurance policies, wasn’t a naïve innocent. Not only did Vida employ an extensive review of Robert’s policy but also, it was well aware of the successful suits in courts around the country challenging policies funded using the Coventry Capital loan program.