March 7, 2013 – Safeguarding Life Insurance Proceeds and Florida Consumer Protection Laws




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By: Alan S. Gassman, Esq. & Kenneth J. Crotty, Esq.

We sometimes cringe when we see physicians and other professionals that have huge liability exposure as the owners and beneficiaries of life insurance policies on their fellow shareholders when these policies are used to fund a buy sell agreement.

Even worse is when we see the applicable medical practice or other high risk entity as the owner and beneficiary of such policies.

While it may be safer to have a trustee appointed to act on behalf of the shareholders or the company to help assure that life insurance proceeds are used for the proper purposes, a trusteed life insurance arrangement may still run awry if creditors of the beneficial owner of the policy choose to seize the policy proceeds.

And don’t underestimate the propensity of banks to call “insecure lender clauses” when an important shareholder of a practice dies and there are loans owed on real estate, accounts receivable, or other assets.

In addition, while cross purchase agreements are typically preferable so that the surviving owners have an increased basis in the stock purchased, if one shareholder dies and the other shareholders reshuffle ownership of policies, the transfer for value rules can apply to cause the life insurance payable upon a subsequent death to be subject to income tax, which may be a “fate worse than death” for those who survive!

Test your PSA! Enter the Partnership Sales Agreement (“PSA”). Why not have the practice or business owners establish an LLC or LLP taxed as a partnership that can own the life insurance policies under an agreement whereby policy proceeds would be used on behalf of the surviving partners to purchase the ownership interest in the practice entity by the deceased partners, as explained in Private Letter Ruling 200747002.

Oftentimes professional practices have real estate or equipment leasing arrangements that are well suited to share an LLC or LLP taxed as a partnership with life insurance policies, assuming that there is plenty of casualty and liability insurance covering the entity’s activities.

If the tax advisor is not sure whether the activities of an LLC or LLP would be considered a partnership for income tax purposes, as might be the case if the entity only owns the life insurance policies, the advisor could consider having each of the shareholders buy into a publicly or otherwise widely traded partnership entity so that they are partners in a partnership under the transfer for value rules.

For example, if there are three partners in an LLC and these partners only own real estate and one dies, the other two partners are considered to be the owners of one another’s life insurance, which may be considered to be a “transfer for value” of the two surviving shareholder’s policies from the deceased shareholder. But if the two surviving shareholders have each invested $50 in a “valueless” publicly traded partnership that is active, then the transfer for value rule should not apply.

We are looking for sample forms regarding Partnership Sales Agreements. Please let us know if you would be willing to provide us with a sample form that we can then include in a future Thursday Report. In exchange, we will send you a bucket of Kentucky Fried Chicken with a side order of mashed potatoes and gravy or a different side of your choice by UPS.


Florida Consumer Protection Laws found in chapter 559 of the Florida Statutes are especially harsh. These laws impose statutory damages, including attorney’s fees and costs, on creditors or debt collectors who accidently contact a debtor whose debt has been discharged in bankruptcy or directly contact a debtor who is represented by counsel.

Pursuant to Florida Statute Section 559.55, the definition of “creditors” is broad and includes any person to whom a debt is owed, and a “debt collector” is any person who collects or attempts to collect debt within the state. Thus, any person who tries to collect money that is due to them is governed by these consumer protection laws. Because there is no excuse for accidental violations, small businesses, doctor’s offices, and contractors, who all typically send invoices, need to be aware of the implications of these laws because they are classified as debt collectors.

The prohibited practices of “debt collectors” is found in Florida Statute Section 559.72. These protections are intended to help consumers by preventing debt collectors from harassing individuals in an attempt to collect debt. While this statute prohibits harassing debt collection activities, such as calling late at night, threatening violence, and ensuring debts are not made public, there is no wiggle room for accidental violations.
Most notably, this consumer protection law prevents attempted collection from debts that have been discharged. When an individual’s debt is discharged after filing bankruptcy, notices go to all creditors. If a creditor receives notice, but still attempts to collect the debt, this is a violation of consumer protection law.

If any creditor attempts to collect discharged debt, the creditor will be subject to $1,000 of statutory damages plus attorney’s fees and court fees. Even if there is no intent to collect a debt after discharged, but rather the result of a mistake, the statutory damages are still applied.

Additionally, if a debt collector or creditor receives notice of the debtor being represented by an attorney, the debt collector or creditor can only contact the attorney with regard to collection attempts. Again, statutory damages of $1,000 plus attorney’s fees and court fees would apply if the debt collector or creditor contacts the debtor directly instead of contacting the attorney.

These claims can be litigated, but it is often more expensive to pay for litigation than to just settle the suit. This is especially true considering that all the debtor needs to show is that notice was received by the debt collector or creditor, and an attempt to contact the debtor occurred. With such a low burden of proof, these cases are seen as easy money by plaintiff’s lawyers and have resulted in “consumer protection” attorney’s popping up all over the state.

The best way to prevent violations is to make sure that a system is in place to note on a client’s file to hold bills and notices after notification of discharge or representation. Any preventative technique that stops an accidental notice can save you money in litigation fees and settlements in the long run!


Today at 12:30 p.m., we participated in a Bloomberg BNA Webinar entitled Don’t Discount Discounts. We came up with 17 points that we thought were important, which we discussed with Jerry Hesch and John Porter in the Webinar.

You can contact Jerry Hesch of the Berger Singerman law firm in Miami at or (305) 982-4088.

You can contact John Porter of the Baker Botts law firm in Houston, Texas, at or (713) 229-1597.

These were as follows:

1. Without discounting, countless estates would pay taxes when they don’t need to or much more in taxes than they have to.

2. Discounting using annual gifting is much more effective than straight gifts of non discounted assets. The time value of money has a great leverage factor with respect to this.

3. This is even more important as gifts are made of the $130,000 and subsequent exemption increase amounts for clients who have used their exemptions to take into account the time value of money.

If you took discounts in 2011 and 2012 gifting and filed gift tax returns, set your calendar for 3 years after filing to make more gifts of the exemption that remains available.

4. Under Wandry and other cases, you can reduce the risk of an IRS discount reduction or tax resulting from that by using Valuation Clauses in transfer documents and safety clauses in Trust Agreements.

5. You can lock in discounts by entering into installment sales, making GRAT contributions, CLAT contributions, and using QPRTs, GRITs to non family members, and other present interest/remainder interest allowed arrangements.

Husband and wife funded QPRTs can allow for further discounts given that 50% of a property is worth less than 50% of the value of the entire property.

6. You can lower exposure to IRS review by making a seed capital gift to a defective grantor trust and have the defective grantor trust buy a discounted FLP, LLC, or other interest.

So should you file a gift tax return disclosing an installment sale so that the IRS cannot later reclassify the values used?

When the older family member does not want to “hassle with the IRS” it may be better to not report the sale and let the next generation who benefits have the issue.

If the transaction puts the family below estate tax filing thresholds there would seem to be less reason to disclose.

7. You should realize that the defective grantor trust effect is much more pronounced than discounting on wealth transfers but may not be around “forever” because it is on the Administration’s hit list.

Understand the risks of using defective grantor trusts, and assure that there is a “switch off” plan in case they are too effective.

8. You can use tiered discounts where they are natural and real.

9. You must have a solid well written appraisal from an appraiser who is qualified to testify. The appraisal must segregate discounts by asset class within the entity. You want to rely upon the appraiser and not have the appraiser write a “Made As Instructed” appraisal report.

10. Do you need a real estate appraisal for each parcel of real estate involved in the family arrangement?

11. You may want less of a discount than you used to think on death because the 20% capital gains tax (or 39.6%) plus 3.8% recapture tax can be more than the 40% estate tax where you have highly appreciated assets.

12. You have to fund an FLP or LLC well before the gift or sale of a discounted interest to avoid a special application of the Step Transaction Doctrine that has evolved from the Senda and other cases.

13. You must have a business or investment purpose other than just estate and gift tax avoidance in most cases. Creditor protection is often a very real and much needed business purpose. Use of creditor protection trusts to receive discounted entity interests can help prove this to be the case.

14. You may want to eliminate discounts in many situations. If the family is below the $5,250,000 level, they want full stepped-up basis, but do so in a way that preserves charging order creditor protection.

15. Consider amending irrevocable trusts by giving the Grantor a special power of appointment to facilitate better stewardship of the assets and a stepped-up basis for income tax purposes.

16. Compare Life Insurance Planning with discount planning or use both by placing the life insurance under the discounted entity or funding by use of split dollar or low interest loans or under preexisting trusts.

17. 529 plans can be owned by entities that were discounted.

Jerry Hesch also had an important observation on basis step-up based upon the following question:

What if a married client has a business asset with a value between $1,000,000 and $2,000,0000, and a net worth significantly less than $10,000,000 so that there will not be any estate tax upon his death?

The client wants to gift the business to his son who works in the business.

Since the cost of an appraisal will be between $8,000 to $12,000, the client does not want to pay that much.

The client asks why not just enter an estimate for the value on the gift tax return, let the IRS audit the gift tax return and just accept whatever value the IRS uses in its audit. In effect, the IRS pays for the appraisal.

How can this objective be accomplished since there is a need to attach the appraisal report to the gift tax return?

If you would like a transcript of Jerry’s discussion of this issue, please let us know.

The PowerPoint presentation also included Bob Burke’s Rule: For every complex situation, there is a simple answer… It is almost always the wrong answer. Complex problems almost always call for complex solutions.

Do not hesitate to quote the Bob Burke Rule in client and advisor interactions. This is about getting the best result, not oversimplifying and taking dangerous shortcuts.

You can contact Bob Burke at


To view a chart of this month, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3 please click here.



The Florida Bar Continuing Education Committee and the Health Law Section present Advanced Health Law Topics and Certification Review 2013. Location: Hyatt Regency, Orlando, Florida. Topics to be discussed include: Federal Anti-Kickback Prohibitions and Self-Referral by Lester Perling; Florida Restrictions on Anti-Kickback, Fee Splitting, Patient Brokering and Self-Referral by Sandra P. Greenblatt; Healthcare Tax Issues by Alan S. Gassman and many others.

Alan S. Gassman, J.D., LL.M. is a practicing lawyer and author based in Clearwater, Florida. Mr. Gassman is the founder of the firm Gassman, Crotty & Denicolo, P.A., which focuses on the representation of physicians, high net worth individuals, and business owners in estate planning, taxation, and business and personal matters. He is the lead author on Bloomberg BNA’s Estate Tax Planning and 2011 and 2012, Creditor Protection for Florida Physicians, Gassman & Markham on Florida and Federal Asset Protection Law, A Practical Guide to Kickback and Self-Referral Laws for Florida Physicians, The Florida Physician Advertising Handbook and The Florida Guide to Prescription, Controlled Substance and Pain Medicine Laws, among others. Mr. Gassman is a frequent speaker for continuing education programs, publishes regularly for Bloomberg BNA Tax & Accounting, Estates and Trusts Magazine, Estate Planning Magazine and Leimberg Estate Planning Network (LISI). He holds a law degree and a Masters of Law degree (LL.M.) in Taxation from the University of Florida, and a business degree from Rollins College. Mr. Gassman is board certified by the Florida Bar Association in Estate Planning and Trust Law, and has the Accredited Estate Planner designation for the National Association of Estate Planners & Councils. Mr. Gassman’s email is

Thomas J. Ellwanger, J.D., is a lawyer practicing at the Clearwater, Florida firm of Gassman, Crotty & Denicolo, P.A. Mr. Ellwanger received his B.A. in 1970 from Northwestern University and his J.D. with honors in 1974 from the University of Florida College of Law. His practice areas include estate planning, trust and estate administration, personal tax planning and charitable tax planning. Mr. Ellwanger is a member of the American College of Trusts and Estates Council (ACTEC). His email address is

Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, and the Florida Bar Journal. He is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law, and his LL.M. (Estate Planning) from the University of Miami. His email address is

Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practical Tax Strategies. Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is

Thank you to our law clerks that assisted us in preparing this report:

Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is

Eric Moody graduated from Stetson University College of Law in December 2012 and is currently seeking admission to the Florida Bar. He is considering pursuing an LL.M. in estate planning. Eric is also an Articles and Symposia Editor for Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is

Carly Ross is a third-year law student at Stetson University College of Law. She is the Notes and Comments Editor for Stetson Law Review, and a member of Stetson’s Jessup Moot Court Team. She graduated from the University of North Carolina at Chapel Hill in 2010 with majors in History and Political Science. Carly’s email is

Jonathan DeSantis is in his final year at Stetson University College of Law. Originally hailing from Philadelphia, Jonathan received a B.A., with honors, in Criminal Justice from Temple University. Jonathan serves as a Senior Associate on the Stetson Law Review and is the immediate past president of the American Constitution Society. His email address is