Estate Planning: What is a Life Tenancy? July 19, 1999 Question: What is a life tenancy? Someone told my client that he should establish a life tenancy on an inheritance that has been directed to him after the death of the first beneficiary. Answer: When it comes to estate planning, understanding what the various legal concepts and devices mean, and what each does is the easy part; but figuring out how to work them together into an asset-preserving, tax-saving strategy is much more demanding and, potentially, complex. Now, with that being said, I referred your inquiry about a "life tenancy" to attorney David V. Schultz, who offers this definition and advice: A life tenancy is a form of ownership whereby X may use and enjoy the property during his lifetime, but upon his death, the full ownership of that property rests in Y. It normally only refers to an interest in real estate, an asset that does not get consumed (like cash, for instance); because the life tenant has a legal duty to not "waste" the asset--meaning, not to do anything that will diminish the value of what is due to pass, eventually, to "the remainderman" (Y). As to whether the establishment of a life tenancy in your particular situation is advisable, a host of other background facts would have to be known; and even then, I strongly recommend consulting with an estate-planning attorney. Transactions of this type always have tax ramifications--both gift and estate taxes--which can only be factored in when the entire fact situation is known. Potential Pitfalls of Deferred Comp. Plans January 7, 2000 Question: I've heard that one downside of nonqualified deferred compensation is that its more risky that a 401(k)? Answer: Deferring compensation can be beneficial to highly paid executives but precautions should be taken according to a recent article in Blomberg's Personal Finance. One downside is that the nonqualified deferred funds have greater risk than in a 4-1(k). The funds are, in effect, a loan to the employer. If the employer goes bankrupt, the employee is in the position of a creditor. Also in a merger or other organizational change, repudiation may occur through an adverse interpretation of ambiguous provisions. Or an employer may decide to take advantage of an option to make a lump sum distribution. Some ways to protect your client against these pitfalls: 1) Companies often tinker with discount rates and mortality tables to short change employees so if your clients are offered to be paid in a lump sum always have an actuary review the offer to assure the calculation is fair; 2) Ascertain a return that is appropriate for the added risk assumed. Generally the smaller the company, the larger your client's rate of return should be. Your client should not be "getting the yield on triple A credit when your client's company is triple B"; 3) Consider whether the plan is funded by a device such as a "rabbi trust." Your client will have a better chance of getting their money at payout if the funds are actually put into a trust as the company won't have access to that money for operating expenses. A bankruptcy court can, however, access a "rabbi trust" to pay the company's creditors; 4) Purchasing insurance covering loss of deferred salary, as well as additional coverage for legal expenses, is the most conservative protection devise. This type of policy is offered by both AIG, through its American International Specialty company and Zurich Financial Services through its Fidelity and Deposit Company of Maryland subsidiary. < Back
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