First, a few quotes:
“To me old age is always fifteen years older than I am”
----Bernard M. Baruch
“What youth deemed crystal, age finds out as dew.”
--- Robert Browning
“A man is not old until his regrets take the place of dreams”
--- John Barrymore, “Goodnight Sweet Prince” 1943
“We do not count a man’s years until he has nothing else to count.”
--- Ralph Waldo Emerson
“The secret of staying young is to live honestly, eat slowly, and lie about your age”
--- Lucille Ball
“If I were younger, I’d know more.”
--- James Barrie
“Old age is no place for sissies”
--- Bette Davis
This is the first newsletter in what we hope will be a long-enduring series of newsletters for the ISBA Senior Lawyers Section. First, some sobering statistics; or, one might say, some statistics that will provide elation for all of us as we get older. 36.3 million—that is the number of people 65 and over in the United States on July 1, 2004. This age group accounts for 12 percent of the total United States population. Between 2003 and 2004, 351,000 people moved into this age group. 86.7 million—that is the projected number of people 65 and over in the year 2050. People in this age group would comprise 21 percent of America’s total population at that time. 147 percent—that is the projected percentage increase in the 65-and-over population between 2000 and 2050. By comparison, the population as a whole would have increased by only 49 percent over the same period. Because of these statistics, Past President Irene Bahr correctly saw a need to establish the Senior Lawyers Section.
The Senior Lawyers Section should not be confused with the ISBA Elder Law Section. The mission of the ISBA Elder Law Section Council is as follows: 1) to inform and advise the members of the bar whose practice involves representing older persons in such areas as Estate Planning, Public Benefits, Nursing Home Residence Rights, Elder Abuse, Age Discrimination, Real Estate issues and Senior Housing and Guardianship; 2) To review and make recommendations regarding proposed legislation that may affect older persons; 3) To promote the legal rights of older persons to enjoy their communities, families and lives to the fullest extent possible and inform older persons of these rights; 4) to provide a forum for the exchange of views and information in furtherance of these goals. On the other hand, the Senior Lawyers Section is at its core established to give information to this ever-expanding, aging population of lawyers as to what is in store for them in the next stage of their lives and what they can do to plan for the next stage of their own personal lives. To synthesize it down to its essence, Elder Law has to do with lawyers representing elderly clients, whereas the Senior Lawyers Section was established to assist the members of our bar association who are entering that hallowed group of what we affectionately call “Baby Boomers” who are aging. That said, the ISBA CLE will present the Senior Lawyers Section program for Spring 2008. The proposed dates and locations are Friday June 6, 2008 at the Illinois Education Association in Springfield, Friday June 13 at the ISBA Chicago Regional Office in Chicago and Friday, June 20, 2008 at Southern Illinois University in Carbondale. We will have wonderful speakers who have delivered this program in 2007 where it was enthusiastically received and extremely well attended. Apparently, when it comes to dealing with our own mortality, we, that is President Irene Bahr, was prescient when she said we are going to have this section council because it fills a need. Depending which program you attend this spring, the speakers will include one or both of the following: John Mayville from Belvidere, Illinois; and John Phipps from Champaign, Illinois who will be speaking on the rule of Professional Conduct 1.17, which is the sale of law practice and transitioning your practice. I can tell you that their presentation was riveting and affected the attendees in a profound and positive way. You will also hear from a representative of the Illinois Attorney Registration Disciplinary Commission, discussing receiverships under Supreme Court Rule 776. You will also hear about registration status with the ARDC. You will then hear a representative from the ISBA Mutual Insurance Company speak to you about malpractice insurance consideration and the need for continued coverage during retirement. There will also be discussion about file retention and issues regarding LAP as it pertains to aging lawyers. Finally, you will have the privilege of hearing from speakers about what is in store for your life, what can be and how to have your life as a retired or transitioning attorney remain fruitful and exciting. You will hear attorneys talk about pro bono opportunities and how ennobling and inspiring those opportunities are for the transitioning attorney.
So Friends, we are glad to have you read this particular newsletter, our inaugural newsletter, and we hope that you will find it in your best interest to join the Senior Lawyers Section. To quote Betty Friedan, “Aging is not lost youth but a new stage of opportunity and strength.” Life and all that the future holds is precious. Please join and participate in the ISBA Senior Lawyers Section. It will be inspirational.
In Cook County, senior citizens can take advantage of two important residential real estate tax exemptions: the Senior Citizen Homestead Exemption and the Senior Citizen Assessment Freeze Homestead Exemption.
The Senior Citizen Homestead Exemption provides real estate tax relief by reducing the equalized assessed value of a qualifying residence by $3,500. Before receiving this exemption, a few eligibility requirements need to be met. Property qualifies for this exemption if the applicant is at least 65 years old during the year for which they are applying. Also, as of January 1 of the year in question, the applicant must be the owner of the property. If the applicant is not the owner of the property, then the applicant must have an existing lease or contract which makes them responsible for the property’s real estate taxes. Finally, as of January 1 of the year in question, the property must be the applicant’s principal residence.
To help demonstrate the benefit of this exemption, suppose a qualified applicant owns a property with an assessment value of 100,000. Taking this assessment value and multiplying it by the state equalization factor (last known to be 2.7076), the applicant will arrive at the property’s equalized assessed value. A qualified applicant for the Senior Citizen Homestead Exemption can then deduct $3,500 from their property’s equalized assessment value before it is multiplied against the current tax rate. In this situation, if the tax rate was 10 percent, the qualified applicant could enjoy approximately $350 in tax relief. This relief would be seen on the applicant’s second installment real estate tax bill.
The Senior Citizen Assessment Freeze Homestead Exemption allows applicants with total household incomes of $50,000 or less to obtain a freeze of the assessed value of their property. More specifically, this exemption freezes a property’s equalized assessed value for the year preceding the year in which the applicant first qualifies and applies for the exemption. For example, for the 2007 tax year, payable in 2008, the applicant must have owned and occupied the residence between January 1, 2006 and January 1, 2007, and have been responsible for paying the 2006 and 2007 taxes.
If eligible for the Senior Citizen Homestead Exemption and the Senior Citizen Assessment Freeze Homestead Exemption, the applicant needs to complete and sign the corresponding application, found either on the Cook County Assessor’s Web site, <www.cookcountyassessor.com>, or in the Cook County Assessor’s Office itself. The Property Index Number and Township can be found on the real estate tax bill. The Cook County Assessor’s Office will send a notification if and when the application is approved.
For every subsequent year following approval, an annual renewal form needs to be signed and returned to the Cook County Assessor’s Office in order to preserve the exemption. If a taxpayer is qualified to receive credit for an exemption but does not receive it, the taxpayer must contact the Cook County Assessor’s Office to possibly correct the situation through a Certificate of Error.
More information on these and other exemptions can be found directly on the Cook County Assessor’s Web site at <www.cookcountyassessor.com>.
From the great minds of seasoned lawyers, the Senior Lawyers Section Council has been brainstorming on pertinent topics for the aging lawyer for the Continued Learning Education department.
After the successful run of the CLE program “From Legal Practice to What’s Next: The Boomer-Lawyer’s Guide to a Smooth Transition,” the Senior Lawyers Section Council has decided to beef up and re-run the half-day afternoon program in three locations in the month of June.
Leading-edge baby boomers are now approaching retirement age, but that doesn’t necessarily mean they’re headed for the rocking chair. Boomer-lawyers may taper their practices, but still keep a hand in while pursuing long-sidelined interests. Or, those interests may become their sole focus. This program highlights that successful change, which requires careful planning.
The program targets “boomer” lawyers aged 55 and older and those who have been practicing for 25 years or more. “From Legal Practice to What’s Next: The Boomer-Lawyer’s Guide to a Smooth Transition” will be held June 6th at the Illinois Education Association in Springfield, June 13th at the ISBA Chicago Regional Office and on June 20th at SIU-Carbondale.
Along with engaging topics, such as Sale of Law Practice, Receiverships, ARDC Registration, Malpractice Insurance, File Retention, Mentoring and Pro Bono Opportunities, the program has added an additional segment featuring guest speakers from the Lawyer’s Assistance Program to speak on the issues facing aging lawyers and colleagues.
The Senior Lawyers Section Council is also working in conjunction with the Elder Law Section Council to bring a new CLE program to the table: From Legal Practice to What’s Next: Elder Law for Senior Attorneys.
This program focuses on the fundamentals of social security and Medicare, Medicaid eligibility, special needs trusts, guardianship and alternatives to guardianship, special products for elder planning and senior lawyer pro bono opportunities.
Keep an eye on your inbox for more information about the Senior Lawyers Section CLE programs.
Introduction
There are several ways for an owner of a life insurance policy to convert the policy into cash. For example, using the policy as collateral, the owner might be able to obtain a loan from the insurer. Of course, the owner would be obligated to continue paying premiums when they come due and would be charged interest on the loan until it is repaid (if dividends are paid and are sufficient, they may cover all or some portion of the premiums and/or loan interest). Alternatively, a policy with cash value could be surrendered to the insurer for that amount. Unfortunately, the cash surrender value of a life insurance policy usually is far below the policy’s death benefit and may even result in proceeds less than the aggregate of premiums that have been paid. Another possibility may be to obtain an accelerated death benefit if the policy includes that feature and the insured is terminally ill.
This article concerns a relatively new way to convert a life insurance policy into cash while the insured person is alive: sell it on the market. Many persons with life insurance do not know about or understand the business of purchasing and selling life insurance policies—including term life insurance—while the insured is alive. It is a thriving business, and it offers a living insured some advantages over the other methods for cashing out. First, the other methods are only available if the policy permits them which is not true of selling the policy. Second, although the sale price will be below a policy’s death benefit, the price usually will be substantially more than the policy’s cash surrender value. Third, unlike borrowing against the policy (which carries with it a duty to make interest payments) or taking an accelerated death benefit, the insured does not retain an obligation to pay future premiums because when the policy is sold the burden of making premium payments is assumed by the purchaser.
Viatical and Life Settlements
There are two names given to insurance policy purchasers: “viatical settlement providers” and “life settlement providers.” In either instance, the provider becomes the owner of the policy, assumes responsibility to pay premiums when due, and is entitled to the policy benefits.
Insureds who sell to their policies to viatical settlement providers are known as “viators.” They usually are terminally ill and have a short life expectancy. They often are elderly, and they almost always are desperate for immediate cash often in order to pay for medical or nursing care. Consequently, they have little bargaining power. Not surprisingly, if the purchasers and those in cahoots with them are unscrupulous, viators easily can be victimized.
Life settlements, by contrast, are contracts entered into with persons who are not catastrophically ill but who, for whatever reason, desire to convert their life insurance policy into cash. For example, the purpose for which the insurance was purchased may no longer be relevant (the insurance may have been to protect a spouse or child in the event of an early demise of the insured, but the spouse or child may have outgrown that need). Or, the insured may prefer to use some or all of the sale proceeds to make an inter vivos charitable donation, or to make a current gift to one or more individuals, rather than delaying and providing a testamentary bequest after death.
Viatical or life settlement insurance providers pay a lump sum (or, occasionally, structured payments) the amounts of which are determined by consideration of such factors as the policy amount, the insured’s life expectancy and state of health, the premiums yet to be remitted, the time-value of money, and—sad to say—the scruples of the purchasers. The purchase price may or may not be taxable to a seller.
Many Life Insurance Companies Dislike Viatical and Life Settlements
For various reasons, many life insurance companies do not promote viatical and life settlements. One might think that insurers would use the existence of this after-market to promote the value of buying life insurance, but that is not ordinarily the case. Moreover, very few insurance companies are willing to buy back policies they have issued.
Viatical and life settlements are relatively new. Insurers dislike viatical and life settlements partly because one of the assumptions used in calculating the amount charged as life insurance policy premiums, particularly for older policies, is that some percentage of policies will lapse before the death benefit is due or will never be presented for payment. Policies lapse usually because of a failure to pay premiums when due. If a policy is not presented for payment of death benefits, it is usually because the policy is not located after the insured’s death, or because the insured’s survivors simply never notify the insurers that the time for payment has arrived. However, after viatical and life settlement providers purchase policies, they rarely fail to pay premiums when due, they infrequently misplace the policies, and they invariably present the policies for payment of death benefits as soon as they learn of the insureds’ demise.
Viatical and Life Settlement Brokers
In order to maximize the amount received in a viatical or life settlement, the seller needs considerable information about the market. That information is not readily available. Consequently, a new profession has arisen: viatical and life settlement brokers. Their job is to canvass the available providers and to recommend the most favorable one. Of course, the brokers charge a fee for their services. Viatical and life settlement brokers typically are not subject to the same scrutiny as providers, and brokers’ fees are largely unregulated.
It appears that there are far more viatical and life settlement brokers than there are providers. For example, the Life Insurance Settlement Association (LISA) Web site identifies 165 members. More than half are brokers, but fewer than 40 are settlement providers (the other LISA members provide services to the industry, such as legal services, or are financing entities). Similarly, the State of California’s insurance regulator’s Web site lists twice as many registered settlement brokers as registered providers.
Viatical Settlement Statutes
To counter the risks to viators who have little bargaining power, many states have enacted legislation to provide them with fair settlements and to protect them from unscrupulous providers. The National Association of Insurance Commissioners adopted a Model Act. According to a recent decision of the U.S. Circuit Court of Appeals for the Fourth Circuit, Life Partners, Inc. v. Morrison, 484 F.3d 284, 288, cert. denied, 76 U.S.L.W. 3287 (2007), approximately 38 states have enacted a version of the Model Act. One of those statutes, although not the one with which the Life Partners, Inc. case was concerned, is the Illinois Viatical Settlements Act, 215 ILCS 158/1 et seq.
Section 5 of the Illinois Act provides that the statute only protects an insured “who has a catastrophic or life threatening illness or condition.” Id. at 158/5. Thus, the Act has no applicability to life settlements, only to viatical settlements. Sections 10, 20 and 35, respectively, require viatical settlement providers doing business in this State to be licensed, to submit settlement contracts to the Director of Insurance for approval, and to make disclosures to the viator of material information concerning the contracts. Id. at 158/10, 158/20, and 158/35. The information that must be provided pursuant to Section 35(b) includes (1) possible alternatives to a viatical settlement contract, (2) the fact that the proceeds may be taxable and that the recipient’s eligibility for government benefits such as Medicaid may be adversely affected by selling the policy, (3) the policy owner’s right to rescind as described below, (4) the date when funds will be available and the source of the funds, and (5) a description of any policy benefits (such as additional purchase rights, waiver of premiums under certain circumstances, accidental death benefits, and policy conversion rights) that the insured will forfeit in the event of a viatical settlement.
Section 45 of the statute, id. at 158/45, also is important. Entitled “Rules,” it lists 10 requirements for all viatical settlements. Included are such mandates as a written statement from the viator’s licensed attending physician that the viator “is of sound mind and under no constraint or undue influence.” In addition, in a written and witnessed document, the viator must affirm that he or she “consents to the viatical settlement contract, acknowledges the catastrophic or life threatening illness, represents that he or she has a full and complete understanding of the viatical settlement contract [and] of the benefits of the life insurance policy, releases his or her medical records, and acknowledges that he or she has entered into the viatical settlement contract freely and voluntarily.” Id. at 158/45(a).
Section 45 also states that a viatical settlement contract must provide the viator with an unconditional right to rescind the contract for the shorter of 15 days from the insured’s receipt of the viatical settlement proceeds or 30 days after the contract is executed. If the viator dies or rescinds before expiration of the foregoing periods, the contract terminates subject, of course, to return of any settlement payments already made. Id. at 158/45(c). If the viator rescinds, the provider must notify the insurer promptly. Id. at 158/45(j). Immediately upon the provider’s receipt of documents to be used to effect the transfer of the insurance policy to the provider, the provider must pay the entire proceeds of the settlement into an escrow or trust account managed by an appropriate financial institution, with the proceeds to be remitted to the viator as soon as an acknowledgement of the transfer has been received from the insurer. Id. at 158/45(d). A viatical settlement provider or agent may not pay or offer to pay any compensation to a viator’s physician, attorney or accountant. Id. at 158/45(h).
Risks to Providers
The viatical or life settlement is not risk-free to a provider. The principal hazard is that the insured may live longer than anticipated. In that event, more premiums will have to be paid, and the delay in collecting the death benefit will be longer, than had been anticipated. Another risk is that the policy purchased may turn out to be subject to cancellation. For example, if it was obtained fraudulently due to false statements in the application, and there is no incontestability period or it has not expired, the insurer may be able to avoid payment of the death benefit. A third peril is that the provider may learn belatedly, or not at all, of the insured person’s death. Another potential nuisance is that the policy’s beneficiaries may challenge the fairness of the settlement. A risk, although rare, is that the insurer could become insolvent and, as a consequence, be unable to pay the provider when the death benefit comes due.
Conclusion
A viatical or life settlement is an option that is available to the owner of a life insurance policy who wants to trade it for cash before death. There are advantages and disadvantages to such a settlement. Insureds who are interested in learning more will find a lot of information on the internet but, if seriously considering a sale, they should consult one or more providers, brokers or knowledgeable attorneys or accountants.
This is the first in a series of articles on retirement planning for lawyers. It is a generally held view that there is insufficient savings for retirement by the baby boom generation. What I find with my own clients is either the denial that a problem exists or an unreasonable fear that enough is not being saved. The second emotion seems to be driven by marketing by mutual fund companies that are hammering on the concept that people need to save more and more. The purpose of this article is to help you establish a comfort level as to where your savings should be.
I will provide some rules of thumb that will hopefully be useful as a quick check. As in many rules of thumb, they are not complicated, and, at the same time should not be viewed as comprehensive. They are a starting point and not the entire solution. The examples I use can be easily extended for comparisons at different levels of income.
The assumption for this article is a married couple age 56 that may be 10 years to retirement. At age 66, the couple will be able to receive full social security benefits. It is also assumed that the attorney is self-employed and that the spouse may not be working full-time. The income level of the couple is $100,000.
An often-quoted goal is to replace at least 75 percent of income in retirement. When you look at their current expenses, you will note that the attorney is paying both sides of the social security tax and lets hope that they are saving 12 percent of their income. If that is the case, the couple is now living on about 73.4 percent of current income. So, the goal of 75 percent is not unreasonable, because they are probably spending less than 75 percent of their income at this time.
There will be issues that will impact this percentage. First, will they have a mortgage in retirement? If so, they will have a tax deduction, but more money will be taken out of their accounts to service the mortgage. A higher stream of income will be necessary and maybe the deduction is not that big a deal. Payoff the mortgage, before retirement!
Second, many lawyers are charitable, but you may consider reducing your money contributions and increasing your donated time.
Third, the early stages of retirement are more expensive than later in life. There is more travel and activity in general. Also, a review of all expenses is necessary. Health care expenses will be up, expenses related to children will be down and certain life style changes, such as eating out less often, will impact the retirement expenses. Are they willing to move to a less expensive location?
Fourth, there will be inflation, and while the amount is unknown, it should be factored. I would suggest running an alternative savings scenario with 100 percent income replacement as an inflation hedge.
Fifth, do they plan on leaving a financial legacy or to spend down their assets? This decision will cause the largest variance.
Now, before we get into the math, a discussion on the Rule of 72 is appropriate. This rule states that 72 divided by your rate of return is the time period that your assets double in value. For example, an 8 percent return doubles your current assets in nine years. My illustrations will use a return of 7.2 percent, because I feel this is a reasonable return and also it doubles the value of current investments in 10 years.
The next step is to determine an income stream. The social security administration has been great at providing annual information on benefits. A couple with one working at or near the maximum contribution level may receive $2,000 per month, with the other, who may have had an interruption in employment, receiving at least one-half (1/2) of the larger check for an additional $1,000 per month for a total of $3,000 per month. This is an estimate that requires homework on your part, but for the next step I am using $3,000 per month.
Assuming that this is the only pension payment, there is a shortfall of $3,250 per month for an annual income of $75,000 per year, and a $5,333 per month shortfall for an annual income of $100,000 per year.
What total investment asset value outside of their residence do they need to accumulate to satisfy these monthly payments?
For an income of $75,000 per year with an investment return of 7.2 percent, they need assets equal to $412,777, if they plan to spend down over 20 years. If they desire to leave a financial legacy, a 4 percent withdrawal rate has a good chance of maintaining their principal, and would require assets of $975,000. For an income of $100,000, the respective asset values are $677,335 and $1,600,000.
In their analysis, they have decided that they want to fund for a $75,000 retirement income, a spend-down of maybe one-half (1/2) of assets and still have one-half (1/2) of assets as a legacy. Then a target could be total investment assets of $700,000. Also, their safety net is a mortgage free residence.
If they invest $1,000 a month for 10 years with a return of 7.2 percent, they will accumulate about $175,000. With the same return, their current assets will double in 10 years. So, to make up the difference, they currently need investment assets of $262,500. If they have less than this amount, they obviously need to increase their monthly investment. You can easily project from the examples I have used in this article and the attached exhibit.
Further articles in this series will discuss asset allocation and life cycle funds, the sale of your practice and how to maximize its value and whatever other topics you may express to this section council.
Exhibit
Assets Rate of
Return Investment Value
$100,000 7.2 % 10 yr. $200,423
$100,000 7.2 % 15 yr. $283,741
Investment per Month Rate of
Return Investment Value
$1,000 7.2 % 10 yr. $175,003
$1,000 7.2 % 15 yr. $322,532
Asset Value Rate of Return Long-term payment on 20 yr. Payout
$100,000 7.2 % $787.35/per mo.
For Example: $3,250 per mo. / $787.35 per mo. = 4.12777
4.12777 x $100,000 = $412,777
There is one caution. You should save as much as you reasonably can. Some savers are behind schedule and the minimum amounts listed in this article are targets for them.