Current Hot Topics

ELDER ABUSE AND ABUSE OF VULNERABLE ADULTS

-It Can Come in a Variety of Shades and Colors-

Many people view the subject of elder abuse as a matter of physical abuse and a rare occurrence.  The subject, however, is far broader and more common.  Elder abuse can involve financial exploitation, emotional distress, or negligent care.   For example, Mrs. M , a widow and aged, had a 2000 Cadillac with 26,311 miles and bought a brand new Volkswagen beetle for around town. She returned to the dealer and was convinced to trade-in her old Cadillac for a new one.   She was provide a $500 trade-in allowance (Kelley Blue Book listed its value at $6,150)  on a new Cadillac, for which she paid full price and bought  all the options and extra warranties: the Car Care Elite Service Plan, the Road Hazard Tire Coverage Service Contract, the Premier Paint Protection II Plan, and the Secure Etch Silent Guard Security Systems Service Agreement.  Mrs. M actually paid $3,750 over list price for the vehicle and lost $5, 650 as a result of the trade.   Mrs. M has been financially exploited, and Florida law entitles her to damages.   The Florida legislatures views this type of action as so serious, that treble (threefold) damages are available to an aggrieved party.  

Elder abuse can also involve actions of others that cause emotional distress or are a result of negligent care.  These are growing areas of concern in our society and a direct result of our aging population.  As a result state legislatures are actively seeking to protect this class of persons.  Elderly and the dying are entitled to various rights, including the right to comfort care and the right to be left alone and free of physically and emotionally invasive measures by others.  Not only are compensatory damages available for those physically or emotionally injured, but Florida law extends punitive damages to aggrieved parties, as a forewarning to those who might seek to violate these rights of a growing population who deserve more respect than others. 

It is important to recognize that the aged are not the only ones who are protected under some of these laws.  Elder abuse laws generally extend to those over age 65.  Financial exploitation laws will extend to any adult over age 18, who whose ability to perform the normal activities of daily living or to provide for his or her own care or protection is impaired due to a mental, emotional, sensory, long-term physical, or developmental disability or dysfunction, or brain damage, in addition to the infirmities of aging.

 

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NEW POWER OF ATTORNEY LAW EFFECTIVE OCTOBER 1

-Most Durable Powers of Attorney Should Be Reviewed-

Durable powers of attorney are a core part of a basic or Phase 1 estate plan.  Their place within a plan is much like a will, as a backup to a revocable living trust- which is the centerpiece of an estate plan and generally designed to avoid probate and guardianship.  A durable power of attorney (“DPOA”) is often used to fix estate planning deficiencies or to continue gifting or more advanced Phase 2 or 3 estate planning after a senior family member is unable to do so as a result of incapacity.  A more basic purpose of a DPOA is to assist with avoidance of guardianship proceedings and to allow certain ordinary and necessary routine matters of life to carry-on without the need for appointment of a court ordered guardian.  October 1, 2011, Florida law concerning powers of attorney (including those that are durable) changes and most durable or nondurable powers of attorney should be changed. (Note: durable means matters undertaken by the agent are not void if the person appointing them (the “principal”) is eventually adjudicated to have been incapacitated.)

The formalities associated with creation of a power of attorney; who may serve as agent and be compensated; the agent’s duties, authority, and liability exposure; the manner in which a third party must reject an agent’s appointment; and the liability of a third-party, such as a financial institution, for rejecting or refusing to honor the direction of an agent have all been changed by this new legislation.  Historically, having a financial institution respect even a close family member’s appointment could be time consuming, often depending upon the familiarity of and relationships with representatives of the institution.  Weeks or months of time could be lost convincing an financial institution, through their legal department,  to honor the appointment and requested action. After October 1, 2011, the financial institution has four business days to accept or reject the appointment and request of a DPOA agent, except in unusual circumstances.

A common deficiency in DPOAs is a failure to authorize certain actions needed to continue or perfect estate planning, or a failure to do so in a proper way.  Continuing gifts, specifying the type of gifts, and how gifts can be made; implementing or continuing additional tax reduction planning; creating or modifying trusts; issuing “crummy notices” as they relate to gift tax returns and compliance;  permitting a surviving spouse to disclaim; and creation or change of beneficiary designations are examples of provisions that are often important to have in DPOAs, but are often omitted or improperly drafted.  Under the new rules, these provisions may be contained in DPOAs but must be included in particular ways, that require the principal to sign or initial next to the grant of power or authority. 

DPOAs are secondary to the revocable living trust in the estate plan, but can be important.  Their importance is dictated by their common use in time of vulnerability, often at a time where death of the principal is imminent and timely use is needed to reduce taxes, avoid the costs of probate or guardianship, or to benefit the principal or their family in any number of possible ways.  The amount of effort that has gone into this new legislation and the scope of new laws highlights the importance of DPOAs and a recognition of their use in unique circumstances that can be important to families.

 

Joe Kempe

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WHY TAXES MAY RISE ANYWAY

 

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ESTATE TAXES

Estate Tax Bill Becomes Law
- Retroactive Reinstatement with Higher Exemptions and Lower Rates -
(December 17, 2010)

Late last night after delays and much debate, House members voted 277-148 to pass the Senate's version of the H.R. 4853 tax bill and send it to President Obama. Earlier, House members voted 194-233 to block efforts to add an estate tax amendment proposed by Rep. Earl Pomeroy, D-N.D., to the bill.  In addition to extending President Bush’s income tax cuts, the bill addresses the estate, gift and generation-skipping transfer (GST) tax laws for 2010, 2011 and 2012.   President Obama is scheduled to sign the bill into law at 3:50pm today.
               
Below is a summary of the estate, gift and GST tax provisions of the bill, and related planning points. An income tax summary will be provided on a later date. Some of these suggestions would need to be implemented prior to the end of the year.

Retroactive Reinstatement of the Estate Tax with Choice in 2010

For decedents dying in 2010, the estate tax applies. There is a $5 million estate tax exemption and a 35% top rate. The estate tax exemption will be indexed for inflation after 2011 (with rounding to the nearest $10,000). A full cost basis step-up applies. Estate tax returns for estates of decedents dying in 2010 will be due within 9 months after the bill is enacted (December 17, 2010).

Choice:  Executors of estates of decedents dying in 2010 can elect out of the estate tax regime so that no estate tax is due. If such an election is made, the basis step-up rule will be limited to $1.3 million for non-spousal beneficiaries and $3 million for spousal beneficiaries and qualifying trusts. The IRS will publish rules on when and how the election is to be made. The Senate’s earlier version of the law would have done the same but only for decedent’s dying before December 2, 2010, and thankfully a partial year effective date was not enacted.

Election: If the value of the decedent’s estate is $5 million or less (including gifts made during life in excess of annual exclusion gifts), an executor would not elect out of the application of the estate tax. No tax will be due, and a full basis step-up will be permitted.

If the value of the decedent’s estate is over $5 million, the executor should generally opt out.  The benefits of the additional basis step-up will generally be outweighed by the estate tax, but in estates just over the exemption threshold, with substantial unrealized gains, this may not be advisable.  An analysis will be needed to determine whether incurring an estate tax is justified to secure the benefits of a full step-up in basis.

Recoupling - Gift Tax Exemption is $5 Million

For gifts made after 2010 and before 2013, both the gift and estate tax exemption is set at $5 million. Any exemption used prior to 2010 “eats into” the $5 million exemption available under the new law. The exemption is adjusted for inflation after 2011 (with rounding to the nearest $10,000).

Estate Tax Reduction Planning: The gift tax exemption has been increased by $4 million, which as reported in our recent Client Update newsletter opens-up tremendous estate tax reduction planning for client’s possessing larger taxable estates.  Clients should consider postponing until January 1, 2011 year-end taxable gifts (above annual exclusion gifts) that would cause gift tax. Gifts next year will be sheltered from tax to the extent of the increased gift tax exemption.

GST Tax Exemption is Increased to $5 Million for 2010

The amount of GST tax imposed on generation-skipping transfers in 2010 is zero, but a $5 million GST exemption applies for allocations to trusts.  The total exemption (zero tax) only applies to direct skips in 2010 and does not mean that gifts in trust occurring in 2010 will be exempt when distributions to grandchildren or more remote issue are later made.  Rather, for gifts in trust there is a $5 million GST exemption for 2010 and the automatic allocation rules apply.  As under the law prior to 2010, the taxpayer can opt out of the application of the automatic allocation rules. The GST tax exemption is indexed for inflation after 2011 (with rounding to the nearest $10,000).

Planning Points:
Clients can consider making outright gifts to grandchildren in 2010, as such gifts will not be subject to GST tax. There are ways of doing this without control being in the hands of grandchildren. The law is somewhat unclear on gifts in trust.  If a client makes a gift to a trust for grandchildren in 2010 (as opposed to an outright gift), there will be no immediate imposition of GST tax. With respect to whether distributions in a later year from these trusts to grandchildren will be subject to the GST tax at that time, the way the law is written, the result appears to be as follows:

•             The preferred answer seems to be that because of a rule in the Internal Revenue Code known as the “move down” rule,  once the gift is made the new “transferor” of that trust is deemed to be the grandchild’s parent. Thus, the grandchild is not a “skip person” – so that distributions from the trust to the grandchild should not cause GST to be imposed. This seems to be the correct interpretation but there is no guidance on this issue at this time.
•             When the grandchild dies, and assets pass to great-grandchildren, that will be a transfer to a “skip person” and GST tax will be imposed at that time.  This result can be mitigated if the assets of the trust are included in the grandchild’s estate for estate tax purposes. Note: this seems to be a fair result  – it allows gifts to adult and minor grandchildren to be treated in the same fashion.
•             In order to achieve this result, however, it is critical the donor elects out of the automatic allocation rules. Otherwise, the donor’s GST tax exemption will be automatically allocated to the gift. By electing out of the automatic allocation rules, GST tax exemption is preserved for gifts after 2010 when this special situation will not apply.

Direct skip bequests at death to trusts for grandchildren should be treated the same way – even if the executor opts out of the application of the estate tax. However, this is not clear. There are some commentators who believe that if there is no estate tax, there is no transferor, and as a result there would never be GST tax imposed on distributions from that trust. The bill states that the identity of the transferor will not change regardless of whether an executor elects estate tax or carryover basis.

Although above we recommended that gifts be postponed until 2011, that recommendation does not extend to gifts to grandchildren (or to trusts for their benefit). The ability to avoid GST tax for gifts made outright in 2010 remains an important opportunity, and we recommend that such gifts be completed before the end of 2010 to the extent possible.

Interesting planning will likely occur by gifting to grandchildren in ways that will permit them to gift back and up to their parents, using various trust mechanisms.

 The Law Does Not Eliminate Traditional Estate Tax Reduction Techniques

In prior versions of estate tax reform, and the Treasury’s “Greenbook,” GRATs, family partnerships, and QPRTs would have either been curtailed or eliminated.  The bill does not address these or any other traditional estate tax reduction techniques, leaving historically used estate tax reduction planning intact.

Planning Points:
The benefits of short term, rolling GRATs, qualified personal residence trusts, sales to defective trusts, and family partnerships have survived reform. Therefore, the “rush” to implement planning prior to 2011 has eased. However, now is still the best time to implement advanced planning because many work best in low interest rate environments, and we are currently in a historically low interest rate environment.

Portability of Estate Tax Exemption

If a decedent who died in 2010 leaves a surviving spouse who dies thereafter, to the extent the first spouse to die fails to use his or her estate tax exemption, the surviving spouse can use the unused portion. The surviving spouse’s executor has to make an election to accomplish this result, which creates a burden that can otherwise be avoided by using traditional credit shelter trust planning and not relying on portability.

Only the unused estate tax exemption of the “last” deceased spouse of the surviving spouse can be used. This rule is intended to avoid “serial marriages” to accumulate unused credits.  Note:  the “last spouse to die” may not be the spouse to whom the decedent is last married – the Elizabeth Taylor rule!

Planning Points:

Creating exempt, credit shelter, trusts on the first spouse’s death will remain the recommendation for all but the rare client.  The sooner wealth can become exempt, the better. The most important reason to do so is protection from “unfriendly hands” (e.g., creditor protection) by holding assets in trust.  Furthermore, funding an exempt or  credit shelter trust on the first spouse’s death allows any increased value of the trust assets that occurs between the first death and the second death to avoid estate tax. Using the portability rule will not allow that increase between deaths to avoid estate tax.  In addition, in most cases, both spouses want to use their GST tax exemptions ($5 million per spouse, and indexed for inflation beginning in 2012). Unfortunately, the GST tax exemption is not portable. Thus, in order for the estate of the first deceased spouse to use the GST tax exemption, a credit shelter trust should be used.

It is important to recognize though, that when a spouse dies first without sufficient assets to use his or her entire estate tax exemption, portability will be of great benefit.  This will eliminate the need to create lifetime QTIPs for the “poorer” spouse, or the need to give assets to the “poorer” spouse to allow him or her to use the estate tax exemption at the first death, assuming that the executor of the estate of first spouse to die elects to pass on unused exemption. However, the need to “equalize” estates between a “richer” spouse and a “poorer” spouse will still persist with regard to GST tax planning because the GST tax exemption is not portable.

No Limits on Discounts

As alluded to above, valuation discounts are used with various estate planning techniques (i.e., family limited partnerships) to reduce estate and gift tax exposure. As the Treasury proposed in their “Greenbook” it had been rumored that the new tax bill would include limits on the ability to discount the value of assets in estate planning transactions. The bill as enacted does not include such limits.

Planning Points:

Valuation discount planning continues to be an effective way to reduce estate and gift taxes. It is one of the best strategies, particularly if coupled with other available estate planning measures.

What To Know- Summary

The above rules apply for two years and expire after 2012.  In two years we will again be where we have been- wondering what Congress will do.  Nevertheless, we finally have answers and the guidance that is needed now, but with a few lingering questions that should be answered soon with Treasury regulations.  Client’s who have died during 2010 with large estates have passed without estate tax.  Significant reporting is however required to elect out of estate tax and to comply with the carry over basis rules. Failure to do so results in material penalties. 

Gifting large amounts to grandchildren is the main opportunity for the rest of 2010, since no generation skipping tax will apply. Nevertheless, large gifts to grandchildren is not a common objective. Unique planning may use this opportunity in conjunction with trust mechanisms to allow children to benefit.  Going forward into 2011, significant opportunities exist for estate tax reduction planning.  Increasing the gift tax exemption from $1 million to $5 million is a huge opportunity, particularly since traditional estate tax reduction techniques, like GRATs, QPRTs, family partnerships, sales to defective trusts, and others have been left intact.

Merry Christmas, Happy Holidays and All The Best For The New Year,

Joe Kempe

 

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CANADIAN AND FOREIGN INVESTMENT IN U.S. REAL PROPERTY

This topic is particularly timely given the relative strong Canadian dollar and diminished U.S. dollar within the currency markets, the significant drop in the value of U.S. real estate, and the existence of  favorable mortgage rates.  Furthermore, there is a push to eliminate certain provisions of the Foreign Investment in Real Property Tax Act (“FIRPTA”).  FIRPTA was enacted in 1980 to discourage foreign investment in U.S. real estate in order to reduce demand during an inflationary time.  The opposite is true now, where some in Congress want to stimulate foreign investment in U.S. real estate.

Residence:

One of the primary objectives of a foreign person visiting the U.S. or buying U.S. real property should be to avoid having themselves classified as a U.S. resident.  Classification as a resident can have many potential detriments.  For example, a Canadian might lose their Canadian health insurance benefits under OHIP or another Province protocol.  Staying too long in the U.S. and establishing too close a connection (establishing Florida or U.S. domicile) can result in the foreigner becoming a U.S. resident for tax purposes, exposing them to U.S. taxation on their worldwide income, and exposing their estate to U.S. estate tax on their worldwide estate. Furthermore, once resident, becoming nonresident again can result in a substantial departure tax.

 

In general, with proper planning, it is not difficult to avoid residence and domicile.  With or without planning though, a green card holder is treated as a permanent U.S. resident for income tax and other purposes.  

Unlike other states, Florida does not expose a non-resident individual to state level income tax and has plenty of warmth and sunshine.  It is therefore a U.S. state often chosen by Canadians and other internationals who desire a U.S. residence.

Buying U.S. Real Property:

When buying U.S. real property, non-U.S. residents should take steps to avoid potential U.S. income and estate taxes.  Upon a sale of U.S. real property by a foreign person, a withholding tax of 10% of the gross sale proceeds generally applies and must be collected by the seller at closing.   There are several exceptions to this rule. Furthermore, if a non-U.S. resident dies owning U.S. real property or other U.S. sited property (shares in a U.S. corporation, tangible personal property, debts of U.S. persons, etc.), that property is subject to U.S. estate tax.  As such, steps should be taken to avoid exposure to U.S. estate tax using various common legal structures.

Florida Property Tax:

An owner of Florida real property is subject to a state property tax.  That tax is generally assessed at a rate of just under 2%, and is dependent on the county in which the property is located.  U.S. residents who have their primary home in Florida are entitled to special benefits that are not available to foreigners.   These benefits are associated with property rising to a status where it is classified as “homestead.”  Non-residents are not entitled to these benefits because their property can’t be classified as homestead.  A resident alien possessing a “green card,” however, may own homestead property.  Furthermore, in some circumstances, if nonresidents are married to permanent residents or U.S. citizens, or have children who are U.S. citizens or permanent residents, homestead status may be achievable with proper planning.

Summary:

With routine planning and some knowledge, a Canadian or other non-U.S. resident will find no difficulty in avoiding a change of tax residence.  Depending on the type of property and its value, various ownership structures can avoid the impact of U.S. income and estate tax laws.  Florida welcomes nonresidents with relatively low property taxes and an absence of state income taxes.

 

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HOSPITAL RIGHT TO TEMINATE LIFE

What is Sure to be an Evolving Issue
Posted May 5, 2010

A New Jersey appeals court heard arguments Tuesday over whether a hospital can end life-sustaining treatment for a patient in a persistent vegetative state contrary to his family's wishes.

A year ago, a Union County, N.J., judge said no, granting an injunction requested by the comatose patient's guardian despite hospital doctors' opinion that further treatment would be futile.

The hospital appealed, and though the patient has since died, the state Appellate Division proceeded to invite briefs and schedule arguments in the case, Betancourt v. Trinitas Regional Medical Hospital, A-3849-08.
The hospital's lawyer, Gary Riveles of Dughi & Hewit in Cranford, N.J., insists judicial guidance is needed because the case's circumstances are not uncommon and a similar situation is bound to recur.

Equally interested are amici representing disabled patients, who fear a ruling in the hospital's favor would pave the way for caregivers to freely pull the plug in the interests of expediency and cost savings.

Spectators who jammed into the small New Brunswick, N.J., courtroom included half a dozen people in wheelchairs bearing orange stickers with the logo of Not Dead Yet, a disability-rights group that is among the amici.

Ruben Betancourt, who was 72 at his death, had been unconscious and unable to communicate since suffering complications from a January 2008 operation at Trinitas Hospital in Elizabeth to remove a malignant thymus gland. After being shuttled to various facilities, including a nursing home, he was readmitted to Trinitas in July 2008 with a diagnosis of renal failure. He received dialysis treatments, breathed through a ventilator, and was nourished through a feeding tube.

Although family members said he seemed to respond to their presence, doctors said he was in a persistent vegetative state, His treating physician tried to convince the family to end dialysis, but they refused. Then, notifying the family that Betancourt's bill was more than $1.6 million, the hospital said it intended to cease dialysis.

Superior Court Judge John Malone first entered a restraining order against terminating dialysis and, after two days of hearing, enjoined the hospital on March 4, 2009, from withdrawing life support without the consent of Betancourt's daughter, Jacqueline, who was appointed his guardian. Betancourt remained at Trinitas, where he was fed, kept on a ventilator and given thrice-weekly dialysis until his May 29 death.

At Tuesday's arguments, the three-judge panel seemed primarily interested in what compelled a decision on the merits, given the case's facial mootness.

"How do we know [the situation] comes up frequently?" Judge Victor Ashrafi asked Riveles "Unfortunately, the record is relatively barren on that issue," observed Judge Philip Carchman.

Judge Anthony Parrillo answered for Riveles, saying, "we haven't seen it before but will see it in the future."
"We may see it in the future," Carchman corrected him.

Carchman added that the case carries "baggage," namely the large, outstanding bill for Betancourt's treatment and the potential for his family to sue the hospital for malpractice.

"There are all sorts of issues floating around which say maybe this case is not the case to decide this issue," he said.

John Jackson, representing the amici Medical Society of New Jersey, New Jersey Hospital Association and other healthcare organizations, said the numerous parties that were allowed to join the case on both sides illustrated the "vibrancy of the issue" and weighed against mootness.

But the lawyer for Ruben Betancourt's family, Todd Drayton of Martin, Kane & Kuper in North Brunswick, N.J., asked the court to find the appeal moot, saying the hospital failed to provide support for its premise that the circumstances of the case were likely to recur.

The number of amici "does not portend whether an issue is of great public importance," he said. "That's not an appropriate basis for this court to determine whether this issue is moot or not."

Carchman asked attorneys on both sides what they would like the court's holding to be if it ruled on the merits.
Riveles said the patient and his family "should not have the unfettered right to dictate the standard of care."
Carchman asked whether that meant the ultimate decision on continuing treatment should rest with the doctor and hospital. Riveles said yes, but that another option would be to have a panel of outside medical experts decide.

Carchman asked Drayton whether a patient has a unilateral right to decide what treatment he receives. Drayton said the Supreme Court addressed the issue in In re Jobes, 108 N.J. 394 (1987), which held that a court's role is not to decide on removal of treatment but to respect the patient's right to self-determination.
Though Jobes presented the opposite situation from the case at bar -- one of a family seeking the right to remove a vegetative woman's feeding tube despite doctors' objections -- the principle is the same. "It is a fundamental right of the patient to direct his or her own healthcare," Drayton said.

"What is your position in terms of who makes the ultimate decision?" Carchman asked.

"I think the courts are clear. In that narrow circumstance, if the hospital is unable to find a suitable alternative, they have to continue providing care," Drayton said.

One of the amici who argued, Thaddeus Pope, a professor at Widener University School of Law, said it would be "helpful if [the court] restates what the current law is: that physicians have a duty to comply with patients' preferences."

Pope said the court could provide for a hospital's right to relocate the patient to a different facility or seek removal of the patient's guardian in cases where treatment is futile.

 

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ROTH IRA CONVERSIONS

(December 8, 2009)

A Roth individual retirement account, unlike a traditional IRA, allows for tax free growth of the capital base and tax free distributions (after the account has been in existence at least five years). Effective January 1, 2010, The Tax Increase Prevention and Reconciliation Act of 2005 will eliminate the existing income threshold governing conversions of existing individual retirement accounts to Roth accounts.  Under the current law, many taxpayers are not eligible to execute a ROTH IRA conversion because their modified adjusted gross income exceeds $100,000.  Starting on January 1, 2010 the $100,000 limitation will no longer apply.   Taxpayers may choose to convert all or a portion of their individual retirement accounts to a Roth account.  The conversion requires the taxpayer to recognize the value of the converted individual retirement account as ordinary income and pay current income tax on that income.  The income tax burden can be spread over two years.

When considering a Roth conversion, a taxpayer must be cognizant of current income tax rates, estate tax rates and his current estate tax exposure, life expectancy, and cash flow needs.  Future income tax rates and estate tax rates should also be considered.  The benefits to a conversion not only include the tax free growth of the capital base along with tax free distributions inherent to all Roth accounts, but also that required minimum distribution rules do not apply.  This latter benefit may appeal to individuals looking to accumulate funds for their heirs.  After the taxes have been paid on the amount converted, taxpayers may experience lower income taxes in future years due to the elimination of a taxable required minimum distribution.  This may result in a reduction in the amount of social security being taxed and also reduces the income base for purposes of medicare premiums, possibly resulting not only in lower income taxes but also reduced medicare premiums.

Taxpayers who can pay the tax due upon conversion with funds outside of their IRA accounts stand to benefit the greatest from a conversion.  By utilizing outside funds to satisfy the tax due upon conversion, a greater amount of the capital base is maintained in the newly formed Roth IRA account. Because Roth IRA accounts allow for tax free growth and are not subject to the required minimum distribution rules, a greater amount of wealth could be generated and ultimately preserved for the taxpayer’s heirs.  Conversely, if a taxpayer does not have adequate funds available outside of his IRA account, and plans to use IRA funds to pay the tax due upon conversion, a ROTH IRA conversion becomes a less attractive option.  Taxpayers in this situation may still benefit from a conversion or a partial conversion to a Roth account, but further considerations will need to be given to the taxpayer’s life expectancy, current and future marginal tax rate and cash flow needs.
           

A Roth conversion is not a “one size fits all” solution for taxpayers.  Each individual’s circumstances are unique and can greatly impact the effectiveness of a Roth conversion.  A financial analysis should be performed that considers all of the factors above before a Roth conversion is pursued.  Further, various estate planning techniques should also be considered with any proposed Roth conversion to maximize its benefits, and should become an important component of this analysis.

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What to do now: inter vivos reverse qtip marital trust worth considering now

Timely Estate Planning Tool Facing Tax Reform
Posted December 1, 2009

An intervivos reverse QTIP Marital Trust is a timely tool to use now in light of potential estate tax reform.  It offers a way of preserving the current $3.5 million generation skpping tax ("GST") exemption now, without adverse gift tax.   The technique offers substantial flexibilitiy if undertaken at this time, since actual decisions on the planning don't have to be made until April 15, 2010.  Consider the following:

• You decide to fund the trust in 2009, but want to avoid a taxable gift?  You would file a QTIP election for the marital deduction on the 2009 gift tax return by the return due date.  You have until 4/15/2010 to decide (or 10/15/2010, if on extension).
• What if Congress doesn't extend the $3,500,000 exemption beyond 2009 and you want to allocate the 2009 GST exemption to the trust?  You would include a reverse QTIP election on the 2009 gift tax return.  You have until 4/15/2010 to decide (or 10/15/2010, if on extension). 
• What if Congress extends the $3,500,000 GST exemption before it expires or enacts permanent estate tax reform with a $3,500,000 GST exemption?  Then, you might want to do your GST exemption allocation planning differently, in which case you wouldn't make a reverse QTIP election.  You have until the gift tax return due date to monitor legislative developments and decide (4/15/2010, or 10/15/2010 if on extension).
• What if Congress re-unifies the estate and gift tax, resulting in an increased gift tax exemption?  If Congress increases the gift tax exemption (e.g., to $3,500,000) so that the gift no longer results in gift tax payable, then you would likely not make the QTIP election to use the marital deduction.  Advantage: the value of the gifted asset and future growth avoids estate tax at both spouses' deaths.  You have until the gift tax return due date to monitor legislative developments and decide (4/15/2010, or 10/15/2010 if on extension).

An intervivos QTIP trust is drafted to benefit both spouses during their lives, with the result that wealth is removed from the wealth transfer tax system while remaining an available means of cash flow and financial security for you for life.

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CLIENTS SECURE FAVORABLE IRS RULINGS ON QPRTs, PRESERVING HOMESTEAD STATUS

Timely Action Can Substantially Reduce Property Tax Increases on Expiration

Many clients with taxable estates undertake to reduce their estate tax exposure by using qualified personal residence trusts ("QPRTs" or "RITs"). QPRTs are trusts that offer an exception to normal estate and gift tax laws. They are used to remove the value of homes from a taxable estate in a favorable manner. Traditionally, the most common approach to their use would cause loss of Florida homestead status after a set term of years has passed. We have recently established a process that has been approved by the IRS, on behalf of several clients, that permits the successful use of QPRTs while also preserving homestead status after that set term expires. The result of this process is a client’s ability to maintain continued use of their home while removing its value from their taxable estate, and while qualifying the home for favorable Florida homestead status.

The law on which QPRTs are based was made statutory under the Revenue Reconciliation Act of 1990. QPRTs thus began to be created as far back as 1990, and their stated terms are maturing in more frequent numbers. With the value of a typical home placed in a QPRT having appreciated substantially from its creation date, the prospect of having a home's earlier assessed value adjusted to current fair market value presents a risk of substantial property tax increase. This is because the traditional IRS sanctioned approach to maintaining continued use of a home after the QPRT term has expired involves renting the residence. Renting a home that was previously classified as homestead property violates Florida homestead rules, permitting the county property appraiser to readjust taxable value to current market value and to deny further homestead status. We have secured the first rulings of their kind on alternative methods that have been approved by the IRS and county property appraiser's offices that preserve continuity of homestead status. We would be happy to discuss whether these alternatives are feasible in your circumstances, without cost or obligation.

 

 

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"MADOFF" CASE MAY FOLLOW PATH OF "BARLOW CLOWES," TWO DECADES LATER

- Participants Who Turned A "Blind Eye" May be Chased for Years -

The Madoff ponzi scandal is strikingly similar to the largest financial fraud in United Kingdom history, two decades ago in 1988 - yes, the year after the 1987 stock market crash and exactly twenty years prior to one of the worst recessions and market corrections in U.S. history (2008). The criminal activities of both Madoff and Barlow Clowes were exposed as a result of the collapse of financial markets, when their ponzi schemes could no longer be maintained, spiraled down, and then out of control because no means existed to cover their activities with future gains. In 2000, and as part of my (Joe Kempe's) second post doctorate studies program in tax law, I was able to investigate and chase certain participants of the Barlow Clowes scandal as part of an Offshore Financial Center class I was taking at St. Thomas University. Coincidentally, my chase for Peter Henwood ended in Mauritius, an island in the Indian Ocean off of the coast of South Africa, where he was recently found to have established residency. Mr. Henwood was chased for almost 20 years because of his participation in creating certain offshore structures that facilitated Barlow Clowes' fraud. The courts found that Mr. Henwood had turned a "blind eye" on, or possessed "Nelsonian knowledge" of, the illegal activities of Peter Clowes. Nevertheless, the courts in 2007 found that an English bankruptcy law judgment could not be enforced against him as a resident of Mauritius, because of that State's independent bankruptcy protection laws. Mr. Henwood's £ 10 million was therefore protected from attachment by the United Kingdom bankruptcy court.

Where a participant in fraudulent activities bears a fiduciary relationship with those wronged, statutes of limitation may be extended for many years until their involvement is uncovered. Like in Barlow Clowes, how many tentacles there are and how far they extend have not yet been determined. Once found, normal statutes of limitations may not be sufficient to protect them from claims by those wronged. The chase is on and will likely continue for many years.

In the interim, it is important for Madoff investors to monitor the case, perfect their rights, evaluate SIPC and other recourse, and evaluate tax reporting and refund positions. Prompt and timely evaluation and reporting may be important in given cases. Many Madoff investors have commented to us that their current standards of living and wealth were built off of Madoff and, without Madoff, they wouldn't be where they are in life today. This position, however, complicates relief where a contrary position by the government could be that no loss was realized for SIPC or tax purposes, since the returns over the years amounted to the return of their original investment. For example, a Madoff investor for seven years will have received back his entire investment and, if longer, an actual return on that investment. This position has not yet been taken by the government for tax or SIPC purposes and investors are encouraged to take contrary reporting positions, at least until differing guidance or direction is issued by the government.

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NEW FLORIDA HOMESTEAD AND PROPERTY TAX LAW

- “Amendment One” Criticized and Controversial -

Florida voters this year approved Amendment One, a significant change to Florida's "Save Our Homes" ("SOH") assessment cap. It was promoted as an attempt to stimulate the real estate market in Florida and to deal with perceived unfairness in the taxing scheme. Amendment One does three primary things: (1) it raises the homestead exemption from $25,000 to $50,000, (2) it allows you to transfer the SOH benefit cap associated with your present exemption to a newly purchased home (this is known as “portability”); and (3) it offers some relief for nonhomestead property.

The most significant of the changes is portability of your exemption from one home to another. This benefit applies to homes sold in 2007 or later, as long as the homeowner purchases a new home within two years. Unlike many other provisions of Amendment One, portability is also applicable to school taxes. The method of calculating the benefit conferred on a newly purchased home depends on whether it costs more or less than the prior homestead. With a more expensive newly purchased home, the assessed value differential from market value that can be transferred is the difference between the former home’s market value and the SOH assessed value, not to exceed $500,000. For example, if a former homestead had a value of $1,000,000 but an assessed value of $500,000, the $500,000 differential may be transferred to the new home. If the new home cost $1,500,000, its initial SOH assessed value should not exceed $1,000,000. If, however, the existing homestead was sold for $1,500,000 and had an assessed value of $1,000,000, and the new home cost $1,000,000, a ratio must be determined and is applied to the differential between the old home’s value and SOH assessed value. The ratio is the value the new home bears to the value of the old home or two-thirds $1,000,000/$1,500,000 (66.67%) in this example. This ratio is applied to the differential between the assessed SOH value ($1,000,000) and the market value ($1,500,000) of the old home (a differential of $500,000). Thus, the preserved SOH that can be transferred to the new home, of lesser value, is $333,350 (66.67% of the $500,000 differential). Note: The higher the market value the more differential that can be transferred to the new home, creating a second matter of potential contest with the property appraiser’s office.

Amendment One also added an assessment cap for non-homestead real property. It is not applicable to certain tangible personal property, which affects some business real property more so than others. The cap is set quite high (10%), and does not apply to school taxes, so few may actually benefit from it. Non-homestead real property is broken-down into two groups for purposes of permitting a reassessment over and above the cap. If non-homestead residential property (9 or fewer dwelling units or residential land) is involved, a change of ownership or control (a change of more than 50% of the ownership of an entity that owns the property) will result in a reassessment. With business or investment property (including nonresidential land and rental properties with more than 9 dwelling units), either a change of ownership or control, or an improvement that increases the value of the property by at least 25%, will result in resetting the assessed value. The legislation implementing this law requires a property owner seeking protection under this non-homestead cap to file an application before March 1st of each year, but significant penalties are provided if you are not entitled to the cap. In light of the minimal potential benefit and penalty exposure, most would be advised not to apply for protection.

Lastly, Amendment One provides a $25,000 tangible personal property exemption for businesses. The exemption can generally be used on a per county basis if a person has operations in multiple counties, thus potentially substantially increasing the exemption. Certain property, however, is excluded for this purpose.

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DISPARITY BETWEEN STATE AND FEDERAL ESTATE TAX EXEMPTIONS RISE

- Effects of Decoupling Increases in Many States -

The disparity between the federal and state death tax exemptions has increased substantially, causing significant exposure to state death taxes where no federal death tax otherwise exists. In states such as Massachusetts, New Jersey, New York, Connecticut and others, the potential negative impact caused by states who have decoupled from the federal exemption scheme has grown greater. With the federal estate tax exemption in 2009 at $3.5 million, and the state tax exemption in New Jersey, for example, at only $675,000, the potential cost of fully utilizing the federal exemption is $229,200 of state tax. The benefit of full use of the federal estate tax exemption for a married couple and incurring this $229,200 cost on the death of the first spouse, however, is less tax on the surviving spouse's estate, at possibly a much later date. Therefore, a time value of money analysis is generally undertaken to determine whether to incur the state tax prematurely in order to preserve the full federal exemption, or to waste a portion of the federal exemption in order to avoid the premature payment of state death taxes. Employing the use of QTIP trusts within estate plans can provide flexibility in many cases so that different courses can be taken by election based upon the facts and circumstances existing at that time.

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CLEARING AWAY CONFUSION ON FDIC AND SIPC PROTECTION

What You Need to Know and How You Can Enhance Your Protection

With recent bank failures, the goverment’s take over of Fannie Mae, Freddie Mac, and AIG, and the collapse of Bear Stearns and Lehman Brothers, clients are understandably concerned and questioning their exposure to institutional failure. We have therefore compiled a summary of the relevant law and how protection can be enhanced. Proper planning can significantly multiply the extent of coverage that is generally offered by the FDIC and SIPC, but steps need to be taken. Enhancing protection often involves use of certain trusts and methods of titling accounts, but the most significant protection (100%) can sometimes be gained for securities (stocks and bonds) through a particular account type held with the financial institution.

The Federal Deposit Insurance Corporation, or FDIC, is an agency of the U.S. government that insures accounts with banks and thrift institutions. It does not insure investment securities which, therefore, excludes from FDIC coverage, mutual funds, stocks, bonds, annuities, and non-FDIC insured money funds. FDIC coverage does insure qualified certificates of deposit (CDs) and FDIC insured money market accounts. In general, each account owner is insured for up to $100,000, and certain retirement accounts are insured for up to $250,000.

Enhancing FDIC coverage is not difficult. Commonly used revocable living trusts can be drafted, in many cases, consistent with estate planning objectives to increase coverage into the millions. Trust coverage is based upon the number of "qualified beneficiaries," and qualified beneficiaries can include a spouse, children, and grandchildren, who are the customary objects of estate plans. Making them qualified beneficiaries is a function of how the trust is drafted, which should always take into consideration federal and state estate, gift, and generation skipping tax laws. To an experienced estate planner, this is generally not a difficult task. Furthermore, additional account title planning and use of other family entities can increase coverage.

SIPC, or the Securities Investor Protection Corporation, is a private nonprofit corporation that is capitalized by its members. It is not a U.S. government agency, and is privately funded by member broker-dealers. Each customer of a participating broker is protected against loss as a result of broker-dealer’s insolvency for up to $500,000 in securities, which may include $100,000 in cash. However, this is misleading and may be irrelevant in the event of an institution’s collapse, where 100% protection may be available if your accounts are properly qualified.

Most standard form brokerage and investment firm account agreements have a provision that allows them to register all of your securities in "street name," which means their own firm name. They then essentially owe you the securities reflected in your account. The securities are not separately vested in you. This is typically desired by brokerage and investment firms, as it permits them to conduct margin and futures trading activities using your securities as collateral. Even if a financial institution suffers financial loss with your securities, they owe you what is stated in your account agreement. You are ostensibly no different than any other creditor in the event of a failure of the institution and would be exposed to the extent the firm is insolvent. However, if your account is in street name, certain rules and laws enhance your position in the case of a failure or bankruptcy over and above general creditor status. But, risk is not completely removed as it is with customer name securities status. Accounts that are classified as "customer name securities” (bankruptcy law terminology), or those "registered in the name of customers" (SIPC terminology), provide a complete form of protection.

If a SIPC member firm collapses and is either liquidated under the Securities Investor Protection Act of 1970 (“SIPA”) or the Bankruptcy Code, your recovery of your investments will depend on the type of account you have and, in general, a three-tier recovery process. Customer named accounts offer a status that is superior to all others, since your securities remain yours. Securities in customer name are returned to you or, upon your direction, transferred to another member firm in the event of insolvency. No loss should therefore be incurred. Cash and other securities held for customers (including stocks and bonds that are, for example, held in "street name") by an insolvent investment firm are divided among all such customers on a pro rata basis. This leaves the possibility for a shortfall if all available securities in street name do not adequately cover the total of street name account positions. Any shortfall in what is owed to street name account owners places them in the position of a general creditor, and this is where SIPC coverage provides protection. Protection offered by SIPC is $500,000 for securities, which may include $100,000 in cash per customer. Like with FDIC rules, proper use of trusts and multiple forms of ownership can enhance and multiply coverage, in many cases exceeding millions where family circumstances and estate plans permit.

If an institution were to fail, and your accounts did not possess customer name securities, and your loss exceeded available SIPC insurance coverage, many financial institutions possess private insurance. This coverage would compensate you for losses above the statutory limits under SIPA. (Remember, the SIPA limits can be multiplied with proper planning.) Some well known firms obtain this insurance from Lloyd's of London, while some have formed a captive insurance company known as Customer Asset Protection Company or CAPCO. This coverage, however, is not per account, as sometimes customers are lead to believe, but is cumulative coverage for all accounts having losses. Furthermore, the level of protection is subject to the solvency of these insurers.

Although securities held by a broker-dealer in a customer's name are largely without risk, most securities are held by broker-dealers in street name and would be available to satisfy other customers' claims in the event of a broker-dealer's insolvency. As a practical matter, it may not always be possible to hold any significant percentage of securities in customer name, which therefore encourages planning to multiply the extent of coverage. Most broker-dealers or investment houses will resist customer name security accounts. Therefore, and where this is the case, steps should be taken to enhance protection using trusts and other vehicles, such as family partnerships. Nevertheless, a customer should closely monitor the financial condition of broker-dealers. Inasmuch as securities that are registered in the name of a customer would be transferred to another firm in the event of a broker-dealer’s failure, customers with significant portfolios should consider establishing accounts with several different broker-dealers. This will facilitate the expeditious transfer of customer name securities in the event of failure, and will have the important benefit of further enhancing and multiplying coverage.

As a further option, most custodial or trust accounts held with trust companies are in the nature of customer name securities. Stocks and bonds are generally segregated from the bank or trust company’s assets and are vested in the trust or account owner. Generally, there is an added cost with the use of a trust company for this purpose, but some investors choose to do so even when discretionary management is undertaken by outside money managers.

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FDIC Coverage on Bank Accounts

- A Focused Look at Expanding Coverage -

With the recent news of bank failures and the prospect of more on the horizon, we have been receiving many inquiries regarding FDIC insurance coverage on bank accounts. As such, we took this opportunity to study the area and we offer this advice to you. Specifically, this article addresses how your revocable living trust can be used to increase your FDIC insurance coverage. You should also understand, however, that there are additional ways of increasing your FDIC coverage that are not explained in this article.

FDIC insurance coverage for certain trusts can be significantly greater than for individuals. If appropriate, revisions to your revocable living trust(s) can substantially increase FDIC coverage. If an institution where you hold a revocable trust account fails, your coverage will be determined based on the number of “qualifying” beneficiaries or “nonqualifying” beneficiaries entitled to an interest in the trust upon your death. Qualifying beneficiaries include your spouse, children, grandchildren, parents and siblings. 12 CFR §330.10(a). Any other beneficiary is a nonqualifying beneficiary, including charitable organizations. Your combined revocable trust accounts at any one institution will be insured up to $100,000 per qualified beneficiary. 12 CFR §330.10(f)(1). For purposes of determing insurance coverage, qualified beneficiaries that hold a life estate interest are deemed to hold an equal share to that of any remainder beneficiary, unless the trust agreement provides otherwise. 12 CFR §330.10(3). All interests attributable to nonqualifying beneficiaries are cumulatively insured to the extent of $100,000. 12 CFR §330.10(f)(2). The easiest way to demonstrate the application of these rules is by way of examples:

Example 1: Revocable Trust to Spouse Outright

Husband creates a Revocable Trust. Upon his death the assets of the trust are to go to Wife outright and free of trust. This trust is insured to the extent of $100,000, because there is only one qualifying beneficiary.

Example 2: Revocable Trust to Spouse in Trust, Remainder in trust for Children

Husband creates a Revocable Trust. Upon his death, the assets of the revocable trust pass to a newly created trust for the benefit of Wife. Wife will receive all of the income from this trust for her life and discretionary distributions of principal. Upon her death, the assets will pass to her two children. This trust has three qualifying beneficiaries and is thus insured to the extent of $300,000.

Example 3: Revocable Trust to Spouse in Trust, Remainder in Trust for Children and Grandchildren.

Husband creates a Revocable Trust. Upon his death, the assets of the revocable trust pass to a newly created trust for the benefit of Wife. Wife will receive all of the income from this trust for her life and discretionary distributions of principal for her needs. Upon her death the assets will continue in trust for the benefit of their two children and five grandchildren, who can receive discretionary distributions of income and principal for their needs. This trust has eight qualifying beneficiaries and is thus insured to the extent of $800,000.

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Who’s Minding the Crummeys and Are They Hanging?

- A Lapse of Judgment and Other Gifting Nuances involving Irrevocable Trusts-

The 1968 Ninth Circuit Court of Appeals case of D. Clifford Crummey v. Commissioner of Internal Revenue established the strategy that is relied on today to permit tax free gifts to certain trusts using the donor’s annual $12,000 gift tax exclusion. Providing "Crummey Notices" to trust beneficiaries establishes the requisite rights to property or cash gifted to qualify it for the "present interest" requirement of the Internal Revenue Code. Many accountants and lawyers stop there and do not assess the gift tax consequences to the holder of the Crummey Notice, who has a temporary right to withdraw trust property. A lapse or release of that right, which almost always occurs because beneficiaries are encouraged not to withdraw the trust property contributed, often has unintended gift and generation skipping tax consequences and proper accountings should be maintained for many years to monitor these consequences.

When a holder of a Crummey Notice fails to exercise the power to withdraw property contributed to a trust or releases it, an unintended gift by the power holder is deemed to occur. For example, if in 2008 parents make a gift of $24,000 to a trust in which two children are beneficiaries and that is their only gift for the year, the gift will not be taxable if the two children are provided with a Crummey Notice, or a notice of right to withdraw the gifts for 30 days. Upon their release of the power to withdraw, or the expiration of the 30 days, the children too are deemed to be making a gift of the same amount to the trust. It is as if they received the $24,000 and then made a gift back to the trust. The problem with failure to recognize this is that the children may have future unintended gifts for which they must account and unintended generation skipping tax consequences may result to the original donor. For example, since the children are making gifts back to the trust and are also beneficiaries, an allocation of the generation skipping tax exemption to the trust would often waste that exemption because the property gifted back will be taxed in their estate. What is important to recognize is that sometimes this allocation of generation skipping tax exemption is automatic, unless a timely filed gift tax return is filed opting out of the automatic allocation. Some trusts or Crummey Notices are designed to minimize the impact of a lapse of the right to withdraw property provided by a Crummey Notice using what are called hanging powers. In general, a lapse (distinguished from a release) is not deemed a transfer of property by gift back to the trust by the Crummey power holder to the extent the amount that lapses does not exceed the greater of $5,000 or 5% of the property over which the power exists. Hanging powers are designed to provide power holders with an indefinite annual right to withdraw using this 5 & 5 rule until no gift will be made as a result of a lapse.

As hopefully can be seen from this explanation, accounting records should be kept of Crummey Notices and hanging powers. This should be done as part of annual gift tax compliance, as more often than not gift tax returns should be filed. Many are unaware of this, which complicates future planning and tax compliance for both senior family members, as donors, and junior family members, as beneficiaries. Both are potentially adversely impacted by relatively small gifts to irrevocable insurance or gifting trusts, and this oversight or “lapse in judgment” should be cured.

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STANFORD BROKERAGE ACCOUNT CLAIMS PROCEDURE NOW OPERATIVE

Effective April 6, 2009, holders of frozen Stanford Group Company customer brokerage accounts may submit information to the Receiver which may lead to the release of their accounts. Clients affected by the Stanford scandal may submit their request through our firm or directly through the Receivership website: https://stanfordselfcert.ftitools.com/selfcert/

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FIRM'S WORK ON HOMESTEAD AND QPRTs RECEIVES NATIONAL ATTENTION

The Firm's series of private letter rulings authorizing so called "reverse qtips" have been recognized by commentators on a national basis as "startling," in that the IRS approved the strategy.  Our efforts in this area were highlighted April 6, 2009 in a regarded national estate planning journal published by Steve Leimberg. See LISI Estate Planning Newsletter # 1440 (April 6, 2009) at http://www.leimbergservices.com/  .  The results of this work for our clients is substantial estate tax savings, while preserving homestead status for their homes.

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The content of this site is general and should not be relied upon without review of your specific circumstances by competent legal counsel. Reliance on the information herein is at your own risk, as it expresses no opinion by the firm on your specific circumstances or legal needs. An attorney client relationship is not created through the information provided herein. This site and its content is meant to alert you to legal services, issues, and planning measures that may be appropriate for you, and is not a substitute for an attorney client relationship where specific advice is provided. Calculations and exemption amounts illustrated are changing and should be considered inaccurate and only examples of results that may be achieved.

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