Columns

 Estate planning and settlements present challenges, risks and can oftentimes result in additional discomfort and disputes. :  

Jessica Harger

Estate planning and settlements present challenges, risks and can oftentimes result in additional discomfort and disputes. But it doesn’t have to be that way. With tax insurance, business succession implementation and estate administration after death can be less stressful and help reduce the risk during the emotional and legal journey of transactions. 

Although the “tool” of tax insurance has been around for some time, many are still unaware of it—or at least unfamiliar with how it applies in the estate tax context. But that is starting to change. 

Tax insurance is gaining traction both in the popular consciousness and as an effective risk mitigation tool with a surprisingly diverse range of potential applications.

For tax attorneys, financial advisors, executive decision-makers, and families and estate representatives trying to make thoughtful decisions with potentially significant financial consequences, an increasingly important priority is understanding tax insurance and its uses, benefits, and best practices.

What follows is a general overview of tax insurance basics, including who might benefit from a tax insurance policy and how and when it can be advantageous to consider tax insurance.

What is it and why now?

The law is notoriously full of gray areas—and tax law is no exception. There are a lot of very smart and capable tax professionals and attorneys who are adept at helping their clients navigate those uncertainties, and tax insurance offers another arrow in the quiver they can use to do just that. Tax insurance can be utilized in a variety of situations where the prospect of a potentially significant tax liability in the future impacts current planning or decision-making. 

This is not a new solution; the first tax insurance policies were written in the 1980s and the first users were predominantly hedge funds. For some time, however, it was a relatively niche tool, remaining somewhat obscure until recently. Tax insurance has become increasingly common in the last 5-7 years, primarily in mergers and acquisitions (M&A). That M&A usage has functionally created a broader market for tax insurance, with newfound popular awareness that has facilitated new applications. Today, education and awareness remain the biggest obstacles to growth, and have only begun to scratch the surface of the many scenarios where this could be helpful.

Who is using tax insurance and how?

While tax insurance can add critical flexibility and financial certainty in many different contexts, there are three primary areas where tax insurance policies are commonly used today.

The first is in M&A transactions, as a tool for corporate or private equity buyers to streamline deal negotiations. Tax insurance can be used to provide more certainty to tax positions and subsequently allow transactions to move forward more quickly and efficiently.

Another area where tax insurance is helpful is in the renewable energy space. As a growing sector with a relatively large number of opportunities to apply for tax credits—and, accordingly, lots of resulting tax uncertainty to investors—tax insurance can be utilized to great effect.

The third, most common, and perhaps fastest growing arena for tax insurance relates to regular tax planning, both in corporate settings and for family tax and estate planning. On the corporate side, it can be used as a risk management tool for companies taking tax positions on their returns as part of their day-to-day business processes to protect liquidity—especially in well-vetted tax scenarios with low risk but high exposure. 

Family offices and high-net-worth individuals utilize tax insurance in a similar context. When facing the settlement of an estate, there are often significant tax implications, whether specifically with respect to applicable estate/gift taxes or perhaps even corporate taxes related to a business restructuring or repositioning in the wake of a death.

For estate planning, tax insurance is exceptionally well-suited to addressing the tax questions that arise in next generation wealth and estate planning, as well as the often-messy complexity, uncertainty, and tax exposure that exists in the wake of a loved one’s passing. During an emotional and sometimes confusing and disruptive time, the last thing families need is additional questions about how potentially significant tax uncertainties factor into business changes and decisions about when and how to disburse property and assets. Those tax questions can delay settlement on an estate or even lead to conflict that further complicates an already fraught situation. Whether utilized by family offices, individual executors and/or beneficiaries, corporate entities, or the estate itself, tax insurance can mitigate the significant long-tail risk of future unanticipated tax burdens to streamline the estate settlement process.

What can we expect moving forward?

For legal and tax professionals considering tax insurance for their clients, the first step is to consult a trusted resource with experience in tax insurance options and policies.  As a flexible and strategic risk management tool, both institutions and individuals are utilizing tax insurance to reduce exposure to tax authority challenges and provide much needed clarity and security when it comes to tax planning and decision-making with tax implications. In that context, it’s not particularly surprising that tax insurance popularity and prevalence is on the rise. 

With awareness of this previously underutilized tool steadily increasing, it seems likely that the tax insurance marketplace will continue to expand both in size and diversity of offerings in the months and years ahead.

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Jessica Harger is the Aon Managing Director, M&A and Transaction Solutions

This article does not address any specific fact pattern and should not be relied on as legal, investment or other advice. 

 On October 15 Rite-Aid Corporation filed for bankruptcy. :  

J.J. Conway

On October 15 Rite-Aid Corporation filed for bankruptcy. There were several reasons listed as causes for the filing, including declining sales and legal exposure to mass opioid litigation. Rite-Aid filed for protection under Chapter 11 and hopes to restructure its national operations. The pharmacy retailer is another in a string of corporate bankruptcies that saw a significant rise in 2023.

Inflation, a tight labor market, and ongoing supply chain issues have been identified as potential contributing factors for the rise in recent bankruptcy filings. So, the question naturally arises, when a company chooses to file bankruptcy — either Chapter 7 or Chapter 11 — what happens to an employee’s benefits?

In a Chapter 7 bankruptcy, the company is liquidating its assets to pay creditors, and ceases operations whereas in Chapter 11, the company continues operating, while trying to reorganize its finances to stay in business. Each type of bankruptcy has a different impact on its employees, but the ERISA statute does offer some measure of protection for affected employees.

The Employee Retirement Income Security Act of 1974 — or ERISA — governs retirement plans, including pensions, profit-sharing, and 401(k) plans, in addition to welfare plans such as health, disability, and life insurance plans. ERISA also regulates the continuation of health care coverage through the COBRA and HIPAA statutes.

What happens to an employee’s retirement benefits in bankruptcy? If a bankrupt company terminates its pension plan — defined benefit plan or its defined contribution plan — the plan’s participants become 100% vested in their accrued benefits. If the employer terminates a defined benefit plan because it can no longer fund the plan or pay out promised benefits, the Pension Benefit Guaranty Corporation (PBGC) insures some (but not all) benefits, and typically pays benefits after termination up to a certain maximum guaranteed amount.

Although defined contribution plans, like 401(k) plans, are not insured by the PBGC, those amounts are protected from the company’s creditors. In a Chapter 11 reorganization, companies may decide to either terminate or continue their retirement plans. If a company chooses to continue them, they have the right to stop providing any future contributions or matching funds.

What about healthcare? For group healthcare plans of a bankrupt company, the plans must notify employees within 60 days of any material reduction in their covered benefits. If a reorganizing employer discontinues most plans, employees may be eligible to continue coverage in its remaining plan.

If employees are covered under the employer’s health plan and subsequently lose their job, have their hours reduced, or get laid off and lose coverage because of the bankruptcy, COBRA provides them with the right to purchase extended health coverage under the employer’s existing plan.

COBRA continuation coverage may not be available if the company discontinues its health plan entirely. Employees and their dependents will have to seek other coverage such as Health Insurance Marketplace or special enrollment in a spouse’s group health plan if available.

Health benefits for retirees or under collective bargaining agreements may be protected under special bankruptcy rules. If there are unpaid health claims and the plan sponsor has declared bankruptcy as well, a plan participant should consider filing an actual proof of claim with the bankruptcy court.

The key for adversely affected employees is to monitor the bankruptcy process and follow the plan rules that govern their retirement and health benefits and know in advance what happens to those benefits if they are terminated. There are a number of documents that outline the rights of participants, including Summary Plan Descriptions and the Summary Annual Report if available. Both documents contain important contact information for following up on pending benefit claims. Employees may also be able to  trace their rights by securing copies of the prior earnings, such as pay stubs and individual benefits statements. These documents should provide the amount of money or value in retirement or pension funds before the bankruptcy. In the event of a bankruptcy or reorganization, this documentation will be critical.

An employer’s bankruptcy can be a difficult process for employees, if only on an emotional level. When a company goes through a formal reorganization or liquidation, the best course of action is to be well-informed about the proceedings and the employee’s plan-based rights, and to move quickly to protect those rights.

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John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and litigator.

 Audio and video have always proved to be reliable evidence for lawyers and prosecutors presenting their cases.  :  

A. Vince Colella
Moss & Colella P.C.

Audio and video have always proved to be reliable evidence for lawyers and prosecutors presenting their cases. For example, surveillance footage of a robbery in progress, clearly showing a person armed with a gun walking into a store, robbing a clerk and escaping would normally be an open and shut case for a prosecutor. However, advancements in AI technology have now made it possible to alter sounds and images in a manner that is nearly undetectable. The manufacturing or altering of evidence is not something entirely new. However, the ability to distort reality has taken an exponential leap forward with “deepfake” technology. Lightning advancements in artificial intelligence have not only created an ability to alter images, but to create videos of actual people doing and saying things that never occurred. Machine learning has made these created images much more realistic and nearly incapable of detection. An evidentiary nightmare for the court system.

Fake video depictions of real people began to emerge on the internet in late 2017. Surprisingly, the technology did not require elaborate Hollywood cameras and editing equipment. The new technology allows anyone with a smart phone to mimic the movements and words onto someone else’s face and voice to make them appear to say or do anything. And the more video that is fed into the dep-learning algorithms, the more convincing the result. The danger of deepfake technology is two-fold. First, it may be used, as in the example above, to demonstrate the commission of an act or statement attributable to a person that did not take place. Second, it opens the door to deepfake bias that can be used to delegitimize actual audio and video evidence. Recently, Tesla was sued by a family of a man who died when his car crashed while using the self-driving feature. During the trial, the family’s lawyers cited a statement made by Tesla founder, Elon Musk, in 2016 claiming that its Model S and Model X vehicles were capable of being driven autonomously with greater safety than a person. While the statement was in fact uttered by Musk at a conference, lawyers for the car company suggested that Musk was the subject of several fake videos saying and doing things that he had not said or done — casting doubt on whether his statements about the safety of his vehicles were true.

The capacity for creating undetectable videos of everyday people has created a shroud of ‘doubt’ over what we have come to accept as reliable. Thus, the ability to manufacture images and sound undoubtedly may cause jurors to question otherwise reliable evidence. A double edge sword of evidentiary deceit.

This has opened the floor to debate among legal scholars on how to remedy deepfakes and the bias it creates. The challenges include (1) proving whether audiovisual evidence is genuine or fake; (2) confronting claims that genuine evidence is a deepfake; and (3) addressing a growing distrust and doubt among jurors in audiovisual evidence. From an authenticity standpoint, we might see a sharp rise in the use of AI experts to confront and present evidence.

Analysis of metadata and source information will likely be used to prove the veracity of an image. Experts will also be required to weigh in on unusual or unnatural elements within an image. For example, if an image has perfect symmetry of flawless patterns typical in AI-generated images, experts can be called to testify to these unauthentic features. However, deep scientific dives into reliable video evidence will not only prove costly to the litigants but also be disruptive to the efficiency of our judicial system.

Complex legal issues caused by the evolution of science and technology are often solved with the basic tenets of jurisprudence. Historically, solutions to problems surrounding the presentation of evidence in legal proceedings were governed by existing, non-exhaustive means of authentication in the state and federal rules of evidence. While authenticity can be proved in several ways, lawyers primarily rely on witnesses to confirm that what we see and hear in audio-visual reproduction exists in real life. However, because artificial intelligence is so difficult to detect, forensic and scientific examination will likely be the best way to ferret out reliable evidence from the deepfakes.

The importance of maintaining judicial integrity cannot be overstated. Therefore, forensically keeping pace with artificial intelligence is paramount to the fair administration of justice and to preserve our country’s faith in the system.

Lawyers and judges must stay mindful of the potential for fraudulent audio-visual evidence and to ensure that jurors are not duped into thinking something is suspicious when it is not.

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Vince Colella is a founding partner of Southfield-based personal injury and civil rights law firm Moss & Colella.

 The UAW strike is putting benefits back in the public eye. And with good reason. Employee benefits are a significant portion of an employee’s total compensation.  :  

J.J. Conway

The UAW strike is putting benefits back in the public eye. And with good reason. Employee benefits are a significant portion of an employee’s total compensation. Years ago, when employers distributed glossy benefit guides to their employees, they usually contained a letter from the company’s chairman extolling the generosity of the “hidden paycheck.” The hidden paycheck referred to the company’s benefits package. These guides encouraged a company’s workforce to look beyond the biweekly payroll cycle and take stock of the entire financial picture that came from one’s employment.

Estimates vary, but the most reliable data finds that approximately one-third of an employee’s overall compensation is delivered in the form of benefits. The most popular group benefit program offerings include individual and family healthcare, term life insurance, short and long-term disability programs, and defined contribution retirement accounts (e.g., 401(k) plans).

And a legal term most commonly used to describe these employee benefit plans is “qualified.” A qualified plan is one that enjoys favorable tax treatment by the state and federal government. A qualified plan delivers direct monetary benefits to an employee without being taxed. Health insurance, for example, may cost an employer upwards of $20,000 per year to insure an employee and a family of four. With its qualified status, that healthcare benefit translates into around $26,000 (or more) in extra compensation that is paid directly to an employee and is tax-free.

Today’s benefit programs can be a serious recruiting tool for employers in competitive industries. The better the benefit plan, the better the talent pool. Some plans offer remarkable benefits – months of paid leave for both parents, reimbursement of adoption-related expenses, education reimbursement programs, sabbatical underwriting, and so on. Many of these programs receive favorable tax-treatment.

Employee welfare benefits, such as healthcare, life insurance, and disability insurance, act like a protective backdrop until they are needed. When they are, these plans quickly emerge into the foreground and become a major focus of an employee’s or the employee’s family’s financial life.

A few examples might help illustrate just how important certain benefits are for an employee and that employee’s family. Consider an employee who earns around $90,000 per year and has a standard benefits package. The employee’s wages are subject to state and federal taxes along with Social Security and Medicare withholdings. After these deductions, the employee’s net pay is reduced to around $58,500.

If this same employee enrolls in the company’s health plan, the employee is provided healthcare coverage on a tax-free basis. That benefit has its own value (the cost of the insurance and no accompanying taxes). Now, if the employee suddenly suffers an acute medical situation, the employee may require emergency services, and those services may be followed by intensive care at a hospital. Then, the employee may need recovery services after discharge. In such a scenario, the medical charges could easily reach $200,000 or more – almost four times the employee’s net salary.

In an expensive healthcare case like the one in our example, the healthcare coverage offered to an employee and/or the employee’s family is the essential employee benefit. Here, the healthcare plan protects not only an individual’s actual physical or mental health, but a family’s financial health and savings as well.

Now, let’s say, this same employee is unable to return to work full-time and earn the same $90,000 salary. Here, the focus shifts to the benefit of long-term disability insurance. The employee who is (for lack of a better term) an income-producing asset, has suddenly stopped producing an income. What happens now? The bills don’t stop, and the mortgage isn’t paused. Here, the disability plan is called upon to make up for the lost income.

Suddenly, these two welfare benefits are funding the employee’s entire financial life and protecting whatever net worth the employee has amassed. If either of those benefits fail, financial peril soon follows.

Benefit plans are an important part of an employee’s overall financial wellbeing. They are contracts, set forth individual rights, and contain enforceable promises. When valid claims for benefits are submitted and denied, there is a natural emotional reaction that develops. With so much at stake, if there is a breach, the losses can quickly exceed the employee’s total income and can rapidly wipe out a family’s savings. In such a scenario, enforcing the promises of the “hidden paycheck” may be the only hope of surviving financially.

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John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and founder of J.J. Conway Law in Royal Oak.

 On Aug. 30, the U.S. Department of Labor issued its much-anticipated notice of proposed rulemaking (“NPRM”) to update the Fair Labor Standards Act’s overtime exemptions. :  

Anne Marie Welch
Clark Hill

On Aug. 30, the U.S. Department of Labor issued its much-anticipated notice of proposed rulemaking (“NPRM”) to update the Fair Labor Standards Act’s overtime exemptions. If finalized, the rule would raise the salary threshold to qualify for the executive, administrative, and professional (EAP) exemptions to $55,068 per year — up from the $35,568 annual salary under the current rule.

Beyond the salary increase for the EAP exemptions, the rule also proposes a salary level increase for the “highly compensated employee” (“HCE”) exemption; an automatic update to these earnings thresholds every three years; application of the standard salary threshold to U.S. territories subject to the full federal minimum wage; an increase of the special salary levels for American Samoa (84% of standard salary level) and the motion picture industry ($1,617/week or a proportionate amount based on the number of days worked); and, maintenance of the existing duties test for executive, administrative and professional employees.

Employers have 60 days from the date the NPRM is published in the Federal Register to submit comments regarding the NPRM. The DOL may make adjustments after reviewing the comments submitted and the rules may also be the subject of legal challenges. 

None­theless, employers should begin reviewing their practices now to determine whether changes would need to be made to comply with the new rule and consult with their counsel regarding how best to implement those changes if and when the rule is finalized.

1. Increase in the salary threshold for certain exemptions

Under the current EAP exemption, an employee must generally be paid on a salary basis, primarily perform executive, administrative, or professional duties, and be paid at least $684/week (which is equivalent to $35,568 annually). The proposed new rule would significantly increase the weekly salary threshold to $1,059/week ($55,068 annually) for executive, administrative, and professional employees to be exempt from overtime.

2. Increase in the annual salary level for employees to qualify for the highly compensated exemption

The rule also proposes an increase in the salary level required for employees to qualify for the highly compensated employee exemption. Under the proposed rule, employees will have to earn at least $143,988 annually to qualify for the exemption (up from the current annual threshold of $107,432).

3. Automatic increases every three years

The last increases to the EAP salary threshold and HCE total compensation requirement became effective in 2020. Under the proposed rule, the EAP salary threshold and the HCE total compensation requirement would automatically increase every three years to reflect current earnings data. The EAP would be adjusted to remain at the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage census region (currently the South). The HCE total annual compensation requirement would remain at the annualized weekly earnings of the 85th percentile of full-time non-hourly workers nationally. The DOL proposes to publish a notice with the new earnings levels at least 150 days before the effective date of the update.  In the event of unforeseen economic or other conditions, however, the DOL would retain the discretion to delay a scheduled automatic update.

4. No changes to the duties test for the exemptions

For an employee to qualify for one of the exemptions under the FLSA, the employee must satisfy a salary test and a job duties test. The job duties test examines whether the employee’s actual job functions meet the requirements of the applicable exemption.  Under the proposed rule, there are no changes to the duties test.

5. Adjustments to the current salary thresholds applicable to U.S. territories

The DOL proposes to apply the $1,059 weekly EAP salary threshold to employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands, where the federal minimum wage is applicable. The DOL would set a special salary threshold for employees in American Samoa equal to 84% of the standard salary level until 90 days after the minimum wage for American Samoa equals the federal minimum wage. Thereafter, the full $1,059 weekly EAP salary threshold would apply.

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Anne Marie Welch is an attorney at Clark Hill, PLC. She defends employers in lawsuits and administrative proceedings against wrongful discharge, discrimination, harassment, retaliation, and related statutory and tort claims. She also prosecutes and defends against breaches of non-competition, non-solicitation, and confidentiality agreements. 

 In recent media appearances, attorneys for Donald Trump suggest that despite what Trump said in the days leading up to the January 6 insurrection, he had no criminal intent.     :  

Samuel Damren

In recent media appearances, attorneys for Donald Trump suggest that despite what Trump said in the days leading up to the January 6 insurrection, he had no criminal intent.  

For example, when Trump asked the Georgia Secretary of State to “find” an additional 11,780 Trump votes, attorneys now contend his request was merely “aspirational.”

To many, this suggestion rings of the Humpty Dumpty approach to the meaning of words depicted in Lewis Carroll’s “Through the Looking Glass” published in 1871:  

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean – neither more nor less.”  

“The question is,” said Alice, “whether you can make words mean so many different things.”  

“The question is,” said Humpty Dumpty, “which is to be master – that is all.”

That quote and issue attract many desperate litigants. Not surprisingly, the Humpty Dumpty approach to the meaning of words is routinely rejected by courts. 

In an article on contract interpretation published nearly 30 years ago in “Law and Philosophy,” I analyzed the Humpty Dumpty approach contrasted with the views of Oliver Wendell Holmes, law professor Arthur Corbin, and philosophers of language. 

This commentary, however, will examine the history of Humpty Dumpty.  

Humpty Dumpty originated as the protagonist of a nursery rhyme recited to children in the English countryside. The verse, which everyone knows, was a riddle. So, recite the verse and ask – what is Humpty Dumpty? Answer: a wobbly egg.

But if you ask - who is Humpty Dumpty, you get different answers.

In Carroll’s parable, Humpty Dumpty tells Alice that he is, in fact, part of the “History of England” and its kings, but does not identify a particular king. That omission led to speculation in literary circles as to which king, Lewis Carroll intended to skewer through the parable of Humpty Dumpty. 

From this frolic, two candidates emerged: Charles I and Richard III.

Charles I was King of England1625-49. He reigned during the English Civil War (1642–51), a time of charged religious and political strife where he and supporters of the monarchy warred against opposing Parliamentarian forces.

In 1648, Parliamentarian soldiers held siege to the strategically important town of

Colchester with the Royalists trapped inside. Despite repeated attacks, they were unable to take the town due to a strong battery of canons positioned atop the town walls. One large squat cannon causing considerable damage was nicknamed 

“Humpty Dumpty.” 

During an exchange of artillery, the town wall was finally breached and Humpty 

Dumpty tumbled to the ground, breaking apart such that it could not be re-assembled. The Royalists fled Colchester.

That story does not provide much foundation for a skewer of Charles I by Carroll, which leads to Richard III.

Richard III was King of England 1483–85 and forever vilified by William Shakespeare in his 1597 play by that name. As portrayed by the Bard, Richard was a vicious, licentious villain who hid behind clever words to both manipulate adversaries and inspire allies to perform his dirty work.  

In the play, Richard’s rise to power in the “tottering State” was punctuated by conspiracy, violence, and his unending determination to secure personal advantage through the betrayal of anyone and any institution.

In 1485, Richard met his demise at Bosworth Field, the final battle of the Wars of the Roses. Reportedly, he rode into battle on a horse named “Wall.” When ultimately surrounded by opposing soldiers, he was toppled from the steed and bludgeoned to death. 

Some contemporary historians dispute the accuracy of Shakespeare’s dark portrayal of Richard, but in the times of Shakespeare and Lewis Carroll, there were no contrarian views.

If Carroll did intend to skewer an English king through the parable of Humpty 

Dumpty, it was clearly Richard III.

In 1995, Shakespeare’s play was updated to film and re-set in mid-20th century England as the fictional story of the rise of a Nazi styled leader portrayed by actor Ian McKellen. In the film and verbatim from the play, Richard makes a particularly disturbing proposition to another royal. She angrily asks, “Shall I be tempted by the Devil?” Richard responds “Yes, if the Devil tempts you to do good.”  

A version of that Shakespearian tragedy will play out on American stages of courtrooms and ballot boxes in the coming year. The outcome of the election may depend on how many white evangelicals continue to view Donald Trump as a savior of sorts while other voters begin to see him as more engaged - Humpty Dumpty/Richard III style – in yet another scheme to tempt and falsely deceive them.

As a prelude to 2024, the movie “Richard III,” is well worth watching.

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Samuel Damren is an Ann Arbor attorney and author.