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Life Insurance with No Beneficiary

There are a number of reasons why a person might purchase a life insurance policy on herself. Often, the death benefit is to be used to pay for funeral expenses and other bills that the person still owed when she died. Another person should be named as the beneficiary if the policy purchased for this purpose. This person would be given responsibility for making these payments. However, life does not always go as planned.

When there is a named beneficiary, a life insurance policy is payable without having to go through the administration of an estate. When the company that issued it receives the necessary documentation, the money would be paid to this beneficiary, and, if used as planned, everything goes smoothly. Of course, the best laid plans of a deceased individual may go astray if events prior to her death do not follow the expected plan.

Often, the policy’s beneficiary is a child of the owner of the policy. This generally would mean the odds that the intended person will receive the proceeds. As long as the beneficiary uses the proceeds as the deceased parent requested, the plan will be a success. Then again, the odds may be in favor of this happening, but life does not promise, let alone guarantee, that something won’t go against the odds.

An elderly parent generally will outlive an adult child. When the adult child is the named beneficiary of the older parent’s life insurance policy, there could be a major problem if the child ends up dying first. Other variables of life may wreak havoc on what was expected. This example is based on a situation that occurred and is not all that rare. The other parent already had died. There were two adult sons, although only one was a beneficiary on the policy. He also had three children. When he died before his mother, her straightforward idea began to get complex and unworkable.

The Importance of Contingent Beneficiaries

After the son died, the policy’s contingent beneficiaries would be the crucial parties if the plan is to be implemented. A contingent beneficiary replaces a beneficiary who is unable to perform in this capacity. Sometimes, there is no contingent beneficiary, which will lead to potentially unintended consequences. The first problem is that the benefits remain to be paid. If no one was named to receive them under the new circumstances, the death benefits are paid by default to the decedent’s estate.

Since no Will existed, after the estate was opened and the policy was found by the estate’s personal representative who did then does what the insurer requires to prove that the named beneficiary could receive the death benefits while he (the other son) had the right to collect the asset on the estate’s behalf, the money ultimately would be paid to the parent’s estate. Being that she lived and died in Pennsylvania, the death benefits now must pass according to the intestacy laws of Pennsylvania – this result diverged considerably from what was intended.

Because the proceeds passed through the estate, any distribution and use would be delayed and may not follow the original plan that had seemed so carefully constructed. This could have been avoided, in part, by naming a contingent beneficiary in case the first beneficiary could not receive the death benefits. This was not done when the policy was purchased, and the mother did not update her beneficiaries after the son chosen to get them had died. Either way would have avoided payment to the estate. Also, if either path was taken, the likelihood that the policy’s benefits would be used as planned would have been better than the intestate distribution could promise since the parent had not discussed how the proceeds were to be used with anyone other than the original beneficiary.

Taxation always is concern and often is a reason that people pursue so-called nonprobate methods to distribute property. Life insurance proceeds that are paid to the beneficiary named in the policy have not been subject to Pennsylvania inheritance tax. However, after December 13, 1982, even when a policy’s proceeds are paid to the estate instead of a beneficiary, no inheritance tax is assessed. 72 P.S. § 9111(d). With this not being an issue, the question of what happens to the insurance proceeds that now were part of the estate is the main one in need of an answer.

The life insurance benefits now are another asset of the mother’s estate. The beneficiary designation is of no consequence because the one brother who was named already is dead. Since the mother had no Will at her death, Pennsylvania’s intestacy laws will determine what happens to the benefits after the insurance company has paid them to her estate.

Who Inherits if There is No Beneficiary?

The law is found in Title 20 of the Pennsylvania Consolidated Statutes in Chapter 21, “Intestate Succession.” Sections 2103 and 2104 provide the answers. The first section applies to an estate, such as this one, in which there is no surviving spouse. It provides the order in which property will pass based on the relationship to the person who has died. The mother’s issue are at the top of the list in intestacy so all the insurance proceeds will be distributed to those who meet the definition of issue. The surviving son qualifies here, but you have to look at the next section (“Rules of succession”) to determine his son as well as the shares for anyone else.

“Issue” includes siblings and, when applicable, their descendants. This is applicable in the current case. The brothers would have been in the same degree of consanguinity because they directly descended from the same ancestor – their mother. However, with only one son surviving, the number of equal shares is defined at this level of survivorship since he is the closest surviving relative. Since there were two sons, this means that there will be two equal shares. The surviving son will receive half of the benefits from the life insurance policy now. It is worth noting that this section contains a survivorship clause – anyone who would inherit under Pennsylvania’s laws of intestate succession must outlive the decedent by five days. He did, so this becomes a meaningless footnote here.

There still is the second one-half share of the insurance proceeds to be distributed. The statute dictates that this share passes by representation to the three children of the deceased brother, which gives each an equal share of one third of what their father would have received under the laws of intestacy. In the end, by not naming a contingent beneficiary in the life insurance policy, the mother altered her intended plan to a considerable extent. Instead of one person receiving all of the proceeds from the policy, her estate will distribute half of the benefits to her surviving son and a one-sixth share to each of the surviving children of the deceased son, who was supposed to receive all of the proceeds when the life insurance policy was purchased by the mother.

This situation provides a good lesson regarding any estate planning. When circumstances change, your plan may not represent your intentions. If the resulting change to your estate plan is significant, then you need to revise that plan as soon as you can because you’ll never know when it had to be implemented.

Habitability & Residential Leases, Pt 2

Now that we will looked at what the implied warranty of habitability is in residential leases, we should look at your options for enforcement of this right. Court cases have stressed that the landlord must be aware of the circumstances before you take action to solve the problem. Because the stakes are so important (having a place to live and living in a place that is safe, sanitary, and healthy), you should provide notice to the landlord in writing. You need to describe the problem, request that the landlord fixes it, and state what you will do if the repair isn’t made. In your notice, you need to give the landlord a reasonable amount of time to make the repair.

Although a “reasonable amount of time” is hard to define, the deadline depends on how urgent the repair is. For example, a lack of heat in the middle of winter probably needs to be handled sooner than an infestation of cockroaches that’s limited to one room since bitter cold generally would be a bigger threat to health. You also need to keep a copy of the writing that you give to the landlord, and you should consider sending the letter to the landlord by certified mail, return receipt requested, in an attempt to get additional proof that you provided notice.

If the landlord lets a reasonable deadline pass without making a repair that involves habitability of your rental unit, then you can take the action that you stated in the writing to the landlord. As for what you might consider, there are some common options. ”Repair and deduct” often is a good choice. Find someone who is qualified make the necessary repair and pay for the reasonable cost of this work. Then, when you pay your rent, you deduct this cost from the rent and include documentation of the cost of the repair with this payment — provide the landlord with a copy and keep the original bill.

You might try for a court order requiring the landlord to make the repair, or you might decide to sue the landlord for rent that you paid for uninhabitable portion of your unit after the landlord knew of the breach of the warranty of habitability. Violations of the housing code that a county inspector found serious enough could give you the option of being protected by the Rent Withholding Act, but the remedies from the breach of the implied warranty usually are more comprehensive, making them more helpful.

Two final options merit mention. If a place is completely uninhabitable, then you could give notice to the landlord and move. This is risky because the landlord may sue you for breaking your lease. As mentioned before, this is why you need evidence that you should begin collecting when you have reason to believe at least some of the rental unit is uninhabitable for safety or health reasons. Photos and witnesses can help you make your case. Copies of all correspondence with the landlord about the problem should be saved as well. Proof that the landlord did not make the necessary repairs within a reasonable time also is important.

In addition, having estimates from a professional regarding the cost of the repairs can be useful as well. If you have to go to a hearing, you should ask whether the person who gave the estimate is willing to attend. She or he may not come for any number of reasons, but there is no harm in asking.

The last option to be discussed here is similar to the Rent Withholding Act’s escrow account for certain housing code violations but is a more flexible remedy for most tenants: rent abatement, in which at least a portion of the rent is placed into a separate financial account until the situation is resolved. You could attempt to estimate the portion of your residence that was not habitable and put this part of the monthly rent into the account while you take action to get the problem cleared up. You could place all rent into the account – if you do, do not touch these funds until the inevitable lawsuit is finished since you may have to pay at least some of this money to the landlord depending on the case’s outcome.

Just remember that the implied warranty of habitability always protects you in a residential lease situation, no matter what the landlord says or tries to do. Use it when you have a good reason to do so but also remember that it only applies to serious problems and not, for example, to a faucet that leaks a little. When it does apply, it can be a powerful tool providing powerful options against a bad landlord. However, you should be careful that a court is likely to see a habitability issue before you do anything. For this reason, you should consider consulting with an attorney before you act.

Habitability & Residential Leases, Pt 1

In Pennsylvania, whenever you rent a residence – whether it is an apartment, a house, or even a mobile home – you are protected by an implied warranty of habitability. The lease can be in writing or it can be a verbal agreement – the warranty will exist. Furthermore, your landlord cannot get you to waive this right in a residential lease because it automatically exists even if it is not expressed in the lease or a landlord expressly attempts to get rid of it. It protects you, as the tenant, from being forced to live in a place that is not safe, sanitary, and healthy. This is a powerful weapon against so-called slumlords, but, like all weapons, you must understand its purpose and how to use it for it to be useful.

The implied warranty of habitability was established by the Pennsylvania Supreme Court in the case of Pugh v. Hughes in 1978, and it is through court decisions that its meaning has developed. The basic idea is that a lease is a contract, which provides obligations for landlords and tenants. A tenant is supposed to pay rent, and this action requires the landlord to provide a safe and healthy place in which the tenant lives. If either party to the lease fails to live up to her or his obligation, then the other party cannot be forced to do what would be required here – these are considered to be mutual obligations because the failure of one to live up to the responsibility relieves the other of his or her obligation.

The idea sounds straightforward but becomes more complicated as you look at the details that come along with it. Tenants who do not pay their rent face eviction. Landlords who do not make repairs do not necessarily breach their obligation to provide a habitable residence for their tenants. Habitability goes to the ability to live in a place without some type of danger to the welfare of tenants due to the condition, which was under the landlord’s control. In other words, if you caused the problem that made the condition of your residence (or some part of it) a danger to safety or health, then you cannot blame the landlord for breaching the implied warranty.

Habitability refers to livability. Examples of conditions that can prevent a place from being livable include a lack of running water, the absence of heat in the winter, the presence of rats or cockroaches, and a leak in your ceiling. However, you must keep in mind that habitability is not an all-or-nothing thing. A ceiling leak that leaves the bedroom unusable does not necessarily make the rest of an apartment or house unlivable. As we will see later, this is a factor that can affect your options when you deal with the landlord and, potentially, with the legal system.

If at least part of your residence cannot be used due to the landlord’s lack of upkeep while you have remained current with your rent payments, you are in position to move forward with enforcing the implied warranty. At the same time, you must be sure not to move to soon in implementing one of the options that a breach of the warranty would provide – there are steps to take in order to protect yourself from an action by the landlord, such as eviction, while you act to protect your rights.

When you decide that the place that you rent has some area that is not habitable due to conditions like the examples listed earlier and that the landlord is at fault, you need to do what you can to protect yourself from the landlord blaming you. You want to have evidence that the problem exists, which becomes particularly important if you end up in the legal system by your choice or your landlord’s choice. Evidence can be in the form of photos, for example. Having witnesses who would be willing to describe what they have seen also can be beneficial. You could have an inspector from the county check for housing code violations. Whether or not you take actions like these before the next step really is up to you, but you definitely would work on these and other actions if you are headed toward the legal system. The step that you must take before you pursue any options is notifying the landlord so we will look at this prior to considering your remedies and other matters in the second part of this post.

Income Tax: Priority Debt in Bankruptcy?

The general rule for income taxes owed to federal, state, and local governments is that they will not be discharged in a Chapter 7 bankruptcy – you will owe them after your bankruptcy ends because they often are classified as priority debts. However, as with all generalizations, there are exceptions. We will look at both the general rule regarding priority debts as well as some exceptions. Also, the way that these taxes are handled in Chapter 13 bankruptcies will be mentioned briefly.

The first point to remember is that we aren’t looking at taxes for which a lien exists. For example, if the IRS files a federal tax lien against you for income taxes that you did not pay, there are no exceptions because this makes the tax debt into a secured debt that must be paid.

When there is no lien, any income taxes that you owe are unsecured debts. While the general rule with unsecured debts is that they are dischargeable in Chapter 7 bankruptcies, general rules – while not made to be broken – do bend at times under our laws. There are a number of unsecured debts that have been classified as priority unsecured debts. These must be paid prior to other claims, which is why they are termed “priority debts.” Although the nondischargeability makes them look like secured debts, this category of debts has no collateral protecting the creditor. However, their payment is considered more important than most unsecured debts, which is why this category exists.

Income tax debts – when not secured by liens – belong to this select group of unsecured debts given priority in bankruptcy. I had mentioned that income taxes generally are not discharged but need to explain when they are given priority. First, taxes on income for a year that ends no later than the date that you file your bankruptcy petition “for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition” are given priority. When these words from the Bankruptcy Code read very carefully, they basically mean that, if you fail to file a tax return that was due within three years before you filed for bankruptcy, you face a priority debt for any taxes that you owe for that tax return.

A second factor also can create a priority debt. The tax liability must have been assessed by the government within 240 days of your bankruptcy filing. When an “assessment” is made is defined by federal and state laws, but this date is when the amount of taxes that you owe has been determined by the government. In addition, if an offer in compromise existed or was pending during the 240 days, then the length of time that the offer existed is added to this period, along with an additional 30 days. In addition, there also are times when a bankruptcy previously filed during this time frame can extend the period for filing a new bankruptcy beyond the 240 days.

A third way that income tax debts can become priority unsecured claims is when you don’t file a tax return when it was due, which usually is April 15th of the following year for individuals. If the tax return was not filed, you cannot get the tax debt discharged in a Chapter 7 bankruptcy. You also can’t get the debt discharged if you failed to file the return when it was due and only filed it fewer than two years before filing for bankruptcy. In addition, if you filed a false return or simply attempted to evade paying your taxes, then you have created a priority debt. Income taxes that are assessable after a bankruptcy is filed will remain after the bankruptcy ends, as well.

As for interest and penalties on any income tax debts, you should expect these to be nondischargeable, too. On occasion, a tax penalty might be discharged if it is found to be punitive, which basically means that the penalty is so excessive to be a punishment instead of reflecting the cost of investigating and the loss based on what you did (or didn’t do), for example.

Although this is a somewhat simplified version regarding how income tax debt becomes a priority debt, some exceptions that will allow these debts to be discharged need to be noted. An income tax debt that is more than three years old with a return filed when it was due can be discharged. Another exception is when a return was filed late but was filed more than two years before the bankruptcy was filed – this debt may be dischargeable. In addition, any assessment of your tax liability by any of the taxing authorities (federal, state, or local) that occurred more than 240 days before you filed for bankruptcy can lead to a discharge of the tax debt. As mentioned earlier, older income tax debts are much less likely to be classified as priority debts.

Income tax debt also has implications in Chapter 13 bankruptcies. To summarize Chapter 13’s treatment of income tax debts, a lien again creates a secured debt, and this must be paid. Without the lien, an income tax debt can become a priority debt when it falls within the criteria outlined for a Chapter 7 filing. Although interest could be dischargeable, it is likely to remain when the tax debt has priority status. Likewise, penalties on these debts are nondischargeable to the same extent as they would be with Chapter 7. Therefore, your Chapter 13 plan would have to account for making payment of these debts.

Finally, it should be remembered that, when only one spouse owes the tax debt, a married couple’s property owned by the entireties is protected in a bankruptcy. In addition, this applies to the property of a spouse who does not owe taxes and is not part of the bankruptcy filing. And there is a last word of caution that anyone with income tax debts needs to remember: you can’t get around the priority nature of income tax debts by paying them with credit cards or other types of debt instruments – your new debt will be nondischargeable, even though your tax debt is gone.

As this brief look at priority debts that involve income taxes owed to federal, state, or municipal governments illustrates, this can be a difficult area of the law to navigate successfully. Of course, the same can be said of bankruptcy in general. This is why, if you are thinking of filing for bankruptcy, you also should think of discussing the possibility with someone who has experience helping individuals through this process. You do not want to get yourself into a situation that might do you more harm than good in the end.