I Should Have Gone To Nursing School

Not that I'm complaining about my career choice, but practicing elder law seemingly pales in comparison to serving as a private nurse for a wealthy client.  

Hadassah Peri was the long-time private nurse for eccentric copper heiress, Huguette Clark.  Ms. Clark, who died childless in May 2011 at the age of 104, had a $400 million fortune that she inherited from her father, former U.S. Senator and copper magnate William A. Clark. 

During the last five years of Clark's life, Peri received "gifts" of approximately $26 million. In addition,  Clark's will left Peri another $30 million.  This information has come to light during the administration of Clark's estate.  Clark's accountant, Irving Kamsler, and her attorney, Wallace Bock, were recently suspended from serving as executors for the estate by New York Surrogate Kristen Booth after evidence surfaced that both men engaged in tax fraud by failing to pay to the IRS $90 million in unpaid gift taxes, interest and possible penalties.

Both Kamsler and Bock claim they at all times acted in Clark's best interest, and have denied the allegations.   The Manhattan D.A. is investigating, and it is likely that the Justice Department will launch an investigation into the alleged tax fraud.  It probably won't help Kamsler's case that he is already a convicted felon and registered sex offender, having plead guilty in 2008 for attempting to distribute child pornography.

Click here to read more details about this case.

Federal Government Agrees That Non-Assignable Annuities Should Be Treated As Income

The Deficit Reduction Act ("DRA"), which was enacted in 2006, specifically provides that a non-cancellable, non-assignable immediate annuity is to be treated as a stream of income rather than as an available resource for Medicaid eligibility purposes.  Some states, however, have taken an aggressive posture in attempting to claim that despite the stated prohibitions, these types of annuities may have value in the secondary market, and thus should be treated as a resource.

Connecticut has been among the most aggressive states in challenging the validity of a number of commonly used Medicaid planning strategies.  In the pending case of Lopes v. Starkowski, Connecticut has denied a Medicaid application on the grounds that an immediate annuity purchased by the community spouse -- Mrs. Lopes -- is in fact a resource rather than an income stream, and thus the state claims that Mrs. Lopes has "excess resources" that renders her husband ineligible for Medicaid.

The facts here are straightforward.   After Mr. Lopes' long-term care insurance benefits ran out, Mrs. Lopes purchased an immediate pay annuity from The Hartford for about $167,000.  This sum represented the approximate amount by which Mrs. Lopes' assets exceeded Connecticut's Community Spouse Resource Allowance ("CSRA").  The annuity is paying Mrs. Lopes monthly income of $2,340.83 per month for a term of six years.

While such an annuity would ordinarily be assignable -- and thus deemed an available resource under the DRA -- at the time she purchased the annuity Mrs. Lopes signed a specific assignment restriction that specifically prohibits Mrs. Lopes from assigning any of her rights under the contract to any third party.  Such an assignment prohibition would seemingly make Mrs. Lopes' annuity fully DRA compliant.

Connecticut, however, saw it differently, and claimed that they had found a third party -- Peachtree Funding -- that might be willing to purchase Mrs. Lopes' annuity income stream for a lump sum.  On that basis, Mr. Lopes' Medicaid application was denied.

Mrs. Lopes subsequently filed suit in Federal court challenging Connecticut's denial of her husband's Medicaid application.  The District Court granted summary judgment in Mrs. Lopes' favor, holding that because the annuity is non-assignable, it is to be considered an income stream rather than a resource.  The state appealed the District Court's decision, and the case is now before the Second Circuit Court of Appeals.

What's especially interesting about this case is that the Second Circuit asked the U.S. Department of Health and Human Services ("HHS") to submit an amicus curiae ('friend of the court") brief summarizing the federal government's position as to the treatment of a non-assignable, immediate pay annuity.  In its brief, HHS stated unequivocally that such an annuity should be treated as a stream of income rather than a resource, and that so long as the appellate court were to hold that Mrs. Lopes' annuity was in fact non-assignable, then "the district court's decision should be affirmed."

One would hope that the Second Circuit pays heed to HHS' position and confirms that a properly structured non-cancellable, non-assignable immediate annuity is to be treated as an income stream rather than a resource for Medicaid eligibility purposes.

Click here to see the HHS brief in its entirety.

Democrats Fire First Volley in 2012 Estate Tax Debate

In late November Democratic Rep. Jim McDermott introduced the Sensible Estate Tax Act of 2011.  Under the bill, the federal estate tax exemption would revert to $1 million per person, an exemption amount that last was in effect in 2001. The exemption amount would be indexed for inflation, and McDermott's bill would continue "portability" under the current law that permits spouse's to use their deceased spouse's unused federal estate tax exemption -- thereby effectively allowing married couples to exempt up to $2 million from the imposition of federal estate tax. Under the proposal, the estate tax rate would jump from the current 35% to 55%, which is the same percentage that existed prior to the 2011 EGTRRA law. 

The proposed legislation would also revive the state death tax credit, a devise that allowed the states that have a separate estate tax -- including New York -- to derive significant revenue by collecting a "pick-up" tax.

Even were the Democrats to control all three branches of government after the 2012 elections -- with a filibuster-proof majority in the Senate -- it is hard to envision a return to a $1 million federal estate tax exemption from the current $5 million exemption.  Of course if Congress does not act by December 31, 2012, then we will see an automatic reversion to the pre-EGTRRA exemption of $1 million, with a 55% rate. 

My guess is that the Democrats, after years of allowing the Republicans to set the agenda on this issue, are feeling emboldened to take a tougher stand given polling that seems to indicate that many people would like to see the deficit reduced by both spending cuts and higher taxes on the "wealthy."  But I believe that a $1 million exemption -- although it would likely only apply to approximately 3% of all estates -- is a non-starter.  Instead, a more likely outcome would be a $3.5 million exemption per person, with a continuation of portability.

That being said, a permanent repeal of the federal estate tax -- which seemed to be a real possibility just a few years ago -- appears to be highly unlikely as we head into 2012.

Click here to read more about Congressman McDermott's proposal.

Life Insurance -- Is it Really Tax Free?

Life insurance can be a critical part of an estate plan. The death benefit from a life insurance policy can provide both vital income replacement upon the death of a main “breadwinner,” and can cover the cost of estate taxes for larger estates. 

Many people are unaware that under existing law, life insurance that is not properly owned and administered may provide far less to the family than anticipated, with a significant portion of the death benefit potentially lost to estate taxes.  Why is this so?  Because life insurance is typically purchased in the following manner: the insured is also the owner of the policy, with the spouse as the primary beneficiary and the children as contingent beneficiaries.  Under this arrangement, upon the insured’s death, the entire amount of the death proceeds are included as part of the insured’s taxable estate.

  

Consider the following example:  Frank, a forty-five year old single father, lives in Goshen.  Frank owns a $2 million term life insurance policy insuring his life, and has other assets totaling $1.5 million. His two children are the beneficiaries of the insurance policy.  Frank dies in 2011.  Because he is the owner of the life insurance policy, upon his death his taxable estate will be $3.5 million.  With the current $5 million federal estate tax exemption, there will be no federal estate tax. However, because New York’s estate tax exemption is only $1 million per person, the New York estate tax bill will be $229,200.  Had the life insurance been excluded from Frank’s estate, the New York estate tax bill would have been $64,400.

If you cringe at the thought of your heirs paying an estate tax bill of $229,200 on a $3.5 million estate, consider the result if Frank were to die in 2013, when the federal estate tax exemption is scheduled to be reduced to $1 million per person.  Given the same $3.5 million total estate, of which $2 million consists of life insurance, upon Frank’s death the total federal and New York state estate tax due would be $1,220,000.  If the life insurance death benefit were not taxable in Frank’s estate, the total New York and federal estate tax obligation would be reduced by over $1 million, to $210,000.

Fortunately, removing life insurance for your taxable estate is fairly straightforward.  If in our example Frank’s life insurance policy had been owned in a properly structured and administered Irrevocable Life Insurance Trust (commonly referred to as an “ILIT”) for at least three years prior to his death, none of the death benefit would have been included as part of his taxable estate.  Instead, the entire $2 million would pass to his children free of federal or New York state estate taxes.

The ILIT would provide other benefits. The death benefit can be held in one or more creditor-protected trusts for the benefit of a spouse, children and other generations.  ILIT’s can also be used effectively to create “Dynasty Trusts” which can hold assets in trust for multiple generations free of both estate and generation-skipping taxes. 

ILIT’s can be set up for individuals or couples.  With married couples, we often fund a joint ILIT with one or more “second-to-die” joint and survivor policies, which pay out the benefits only upon the death of both the husband and wife.  These policies are typically used to provide liquidity to cover any estate taxes the couple may incur upon the death of the second spouse.  Because the insurance covers two lives, it is often substantially cheaper than a single-life policy.

One Caveat: if existing policies are transferred to an ILIT, the insured must live at least three years from the date of transfer to have the death proceeds excluded from his or her taxable estate. If possible, it is best to replace existing policies with new policies that are owned from the outset by the ILIT trustee; under this arrangement, the death proceeds will be fully excluded from the insured's estate from day one.

When There's Lots of Money Involved, the Knives Come Out

Forbes has posted a two-part article describing some recent (and mostly ongoing) battles over the lucrative estates involving various celebrities, including Michael Jackson and Whitney Houston (no, she's not dead -- it involves Whitney's father's estate and Whitney's vicious fight with her step-mother).  Part 1 is found here, and Part 2 is here.

More than anything else, these cases point out how vitally important it is to regularly update your estate plan.  Our practice offers an annual estate plan maintenance program, which ensures our clients that their documents will remain current with changes in their lives, their finances, the law, and our own knowledge and experience.

Misconceptions About the Estate Settlement Process

People typically have only a vague idea of the steps necessary to settle an estate upon a person’s death.  Often they have heard “horror stories” regarding the expense and time needed to complete an estate administration. While there are certainly instances where estate settlements have dragged on for years and have cost the estate hundreds of thousands of dollars in legal fees and other administration expenses, it does not have to be that way.

Estate settlement is largely dictated by the form of ownership of the assets possessed by a deceased person (the “Decedent”).  Assets owned in the Decedent’s individual name are typically subject to the probate process, whether or not the Decedent has executed a will.  But for many people, a significant portion of their assets are not owned in their individual name.  Rather, assets may be owned jointly with another person, or the assets may pass to one or more persons who are the named beneficiaries designated to receive the assets at the Decedent’s death (for example, a bank account that includes an “in trust for” designation).  All such assets will not pass as dictated in the Decedent’s will, but instead will pass to the surviving joint owner or the designated beneficiary outside of probate.

Assets held in a revocable or irrevocable living trust will be distributed as provided in the trust document, and will not be subject to the probate process.  This result can be especially helpful when a person owns real estate in more than one state, or desires to disinherit children or other close relatives. If the trust is fully funded by the client during his or her lifetime, the probate process can be avoided and there will be no legal requirement to notify potentially litigious children or other relatives about the nature of the Decedent’s assets and dispositive wishes.

Whether a will or a trust has been used as the foundational estate planning tool, all estate administrations must follow certain procedural steps.  These steps include income tax return filings, and possibly the need to file federal and state estate tax returns.  Since a probate estate is a taxpaying entity, the executor of a probate estate will obtain a federal taxpayer identification number for the estate.  Trustees of any trusts created by the Decedent will also need to obtain taxpayer identification numbers for those trusts.  Whether the estate and/or trust(s) will owe federal or state income taxes depends upon the types of assets owned by the various entities, and the income produced.

Estates for New York Decedent’s owning assets of $1,000,000 or more – which amount includes the death benefits for any life insurance policies owned by the Decedent insuring his or her own life -- will need to file a New York State Estate Tax return, while estates for Decedents owning assets of $5,000,000 or more will need to file a Federal Estate Tax return as well.  Whether any estate taxes are ultimately due depends upon many complex factors, especially whether the Decedent is survived by a spouse, and how the assets are to be distributed upon the Decedent’s death.  Even in cases where no estate taxes are owed, the returns must be filed if the minimum asset threshold is reached.

One caveat:  people have often been led to believe that if you have a living trust, the estate settlement requirements will not apply to your estate.  While a fully-funded living trust will "avoid probate," all other estate administration requirements described above will apply.  While living trusts can be exceptional planning tools, establishing one with the objective of avoiding post-death administration (and all associated expenses) is unrealistic.  Ignoring the formalities of the estate administration process based on such misinformation can lead to trouble down the road, which may include the IRS or New York State assessing interests and penalties for the failure to timely file the requisite tax returns and pay the required amount of taxes.

Since We're Going to Spend Money on Health Care, Spend it Wisely!

As noted in my last post, the CLASS Act -- a provision of the Obama health care law that included modest long-term care benefits (not exceeding $75 per day) for those willing to pay the premiums -- has been scrapped as financially unsustainable.  The fact that has gone largely unspoken, however, is that their is money available to cover a substantial portion of long-term care expenses.  As former New York Times reporter Jane Gross points out recently in this excellent column, it's not that we lack the funds to cover a substantial portion of long-term care costs; rather, Medicare spends too much on the wrong type of care. 

As but one example supporting her argument, Gross points out that Medicare will cover the costs for a hip replacement for a frail senior citizen who will likely require long-term care with our without the procedure.  If the senior ends up in a long-term care facility, however, Medicare will at most cover a portion of the cost for 100 days' of rehabilitation.  Once Medicare stops paying the tab, if the senior is already of limited means -- or becomes impoverished as a result of an asset spend down -- then taxpayers, through the Medicaid program, will be on the hook for the senior's long-term care costs for the rest of her life. 

Why, you may ask, does it matter whether Medicare or Medicaid covers the cost of care -- both of federal programs, right?  As Gross points out, however, Medicare is supported by payroll taxes and thus at least has a significant element of being a self-funded program.  Medicaid, in contrast, is essentially a pure "welfare" program that is completely taxpayer supported.

The solution, Gross argues, is to have a serious national conversation about the reallocation of our precious health care dollars away from pointless and wasteful procedures (hip replacements for Alzheimer's patients) and towards the costs of custodial long-term care that is increasingly bankrupting our seniors.  Of course such a conversation will inevitably lead to the "R" word -- that is a discussion of the rationing of health care services.  I am continually amazed that conservatives who  complain about runaway government spending will decry rationing of health care -- even raising the phony spectre of "death panels" -- and seem unwilling to have a serious conversation about the irrational nature of spending on health care in this country.