Recon’s Black Ops

07/06/2006: I’m not a lawyer, but I am studying financial planning on the side. The death of Ken Lay has provoked serious discussions regarding the Enron case, as it definitely throws some uncertainty into the plans of many interested parties.

This has caused no small amount of speculation as to the cause of death and the potential ramifications thereof. Was it suicide? Was it really a heart attack? What would either scenario do to the criminal case against him? Would any pending civil cases be impacted?

Tentatively, the coroner is saying that Lay had a massive heart attack. Given that he was 64 years old, and–after a significant criminal conviction in federal court–was facing life in prison, that kind of stress could drop a healthier man of younger age.

Ergo, the heart attack, while raising the ire of conspiracy theorists, is very believable.

On the other hand, it is possible that Lay commited suicide. The same stress that could trigger a heart attack could also drive a man to commit suicide.

Given that Lay was all but broke, his death–irrespective of the cause–may provide cash flow for the rest of his family that is untouchable by government or by claimants in any pending lawsuits against Lay.

If Lay had properly-structured life insurance policies–meaning neither Lay nor his estate had an “incident of ownership” in any insurance policy in the last three years or at the time of death (or he sold any “incidents of ownership” for fair market value), and that the contestibality period, usually one or two years, had passed–then the proceeds are generally exempt from estate taxes, and would likely be exempt from any civil judgments against Lay’s estate, even if his death was a suicide.

(If the contestability period was in force, then a suicide would be cause for the insurer to void the policy or policies altogether.)

On the other hand, if Lay was the policyowner, or had transferred any “incidents of ownership” for less than value within the last three years, or if Lay’s estate was the primary beneficiary (in which case his financial planner should have his license yanked), then all life insurance proceeds would be included in his gross estate.

That means they would be subject not only to estate taxes (which would include gift taxes), but also would be fair game in any government or shareholder lawsuits against his estate.

From the standpoint of his criminal conviction, however, his death may nullify the conviction.

The Wall Street Journal is reporting that decisions from the 5th Circuit Court of Appeals have held that someone who is convicted–but dies while his conviction is in the appeals process–is not convicted; ergo Lay’s conviction could be erased.

However, Lay’s estate is hardly protected from civil suits, and there are many of those coming down. The bar for winning those suits–a preponderance of evidence–is lower than that for gaining a criminal conviction. The Securities and Exchange Commission (SEC), and Enron investors, are gunning for those assets, and anything in Lay’s estate–after it clears the probate process–is fair game for any such plaintiffs.

But properly-arranged life insurance policies would not be touchable.