New Estate and Gift Tax Law Set To Go Into Effect

It's official:  President Obama has signed into law new Estate and Gift Tax legislation that, while no providing complete repeal of the federal estate tax, does provide that all but the wealthiest estates will remain exempt from the imposition of federal estate taxes.  The fundamental provisions of the law are outlined here.

In my view, the most dramatic impact of the law is the new $5 million per person lifetime gift tax exemption.  Through 2010, lifetime non-charitable gifts (beyond the $13,000 per donee annual exemption gifts) made by any donor in excess of the cumulative sum of $1 million were subject to a gift tax at a rate of 35%.  In 2011 and 2012, donors can make cumulative gifts of $5 million without the imposition of any gift tax.  This hugely expanded amount will provide wonderful opportunities for owners of closely-held businesses and valuable real estate holdings to transfer those assets to their children and grandchildren without being subject to onerous gift taxes.  And, many clients will likely elect to make such transfers without relying upon valuation "discounts" that have forever been subject to IRS attacks.

If you have ever considered making large lifetime gifts to your loved-ones, the next two years might provide the best planning opportunities in our lifetime!

Congress Set To Vote on Dramatic Changes to Estate & Gift Taxes

After years of speculation, it is expected that before year's end Congress will vote on the compromise tax legislation hashed-out between President Obama and Congressional Republicans.  Incorporated in the legislation are dramatic changes to the federal estate & gift tax rules.  With much thanks to information disseminated by national expert Bob Keebler, here is a summary of the key modifications:

• The individual exemption amount for estate, gift and GST tax for 2010, 2011 and 2012 would be $5 million per person, $10 million per couple.
• The estate, gift and generation skipping tax rate will be 35% through 2012
• Beginning in 2011 the exemption amount will be indexed for inflation
• Estates of descendants dying in 2010 can choose either to apply the estate tax rules or the modified carryover basis rules that have been effect under the estate tax "repeal" for 2010
•  In a significant change from prior law, there will be "portability" of the individual estate tax exemption from one spouse to another; that is, a decedent's executor can transfer any unused exemption amount to the surviving spouse without the requirement that the deceased spouse's exemption amount pass into a credit shelter trust
• The estate and gift tax exemption will be "reunified" beginning in 2011

If it passes, the legislation will make only truly large estates subject to federal estate and gift tax liability.  Note, however, that for residents of states (like New York) that have "decoupled" from the federal estate tax regime, much smaller estates will remain subject to a state estate tax.  In New York, for example, the state estate tax exemption will continue to remain at $1 million per person. For a decedent with a $2 million estate, the New York State estate tax in 2011 would be $99,600.

Also, the new law will again "sunset" this time at the end of 2012.  So, depending upon which way the political winds blow, we could very well find ourselves in a similar state of uncertainly in 24 months. But in the meantime, the proposed legislation will provide a number of wonderful tax planning opportunities for larger estates.  And, those with "smaller" estates should not put-off estate planning even though they may believe they no longer have estate tax concerns. All the standard personal planning goals -- asset protection, divorce protection, catastrophic health protection, disability planning, long-term care planning -- remain as important as ever.

What the Return of the Federal Estate Tax Will Mean To You

Unless Congress enacts new estate tax legislation before December 31, the federal estate tax – which under the Bush 2001 tax laws was repealed for 2010 – will return with a vengeance in 2011.   Beginning January 1, estates for deceased individuals will be taxed at a rate of 55% for assets in excess of $1 million that pass to anyone other than a spouse.  Assets that pass to a spouse – either outright or in a qualified “marital deduction trust” – will qualify for the same “unlimited marital deduction” that existed under prior law.

The impact of a $1 million estate tax exemption will be dramatic for many estates.  For example, assume a widow residing in New York dies on December 31, 2010 with a $5 million taxable estate.  Her estate would be subject to payment of New York state estate tax of $391,600, leaving $4,608,400 to go to the widow’s heirs.  If she were to die on January 1, 2011, however, the total federal and New York state estate tax obligation would jump to $2,045,000, leaving $2,955,000 for the heirs.   

If the $1 million estate tax exemption in fact returns in 2011, here are a few key planning ideas for consideration:

• For married couples, your wills and/or living trusts should include estate tax planning clauses that allocate the maximum exemption amount to a “credit shelter trust” after the first spouse’s death.  This relatively simple strategy will ensure that each spouse will be able to use their respective $1 million exemption – thereby sheltering a full $2 million from federal and New York state estate tax.  One caveat is that each spouse (or their respective living trust) must individually own assets that will be made available for funding into the credit shelter trust after the first spouse’s death. If assets are owned jointly between spouses, the tax planning clauses will be rendered useless, since the jointly owned assets will pass automatically to the surviving spouse.
• For larger estates, life insurance held in an “irrevocable life insurance trust” will, in most cases, pass to the heirs exempt from both estate taxes and income taxes.   Life insurance held in this type of trust is especially helpful if a majority of your assets are illiquid, such as real estate or business interests.
• Couples (both married and unmarried) can use “spousal gifting trusts” that allow for the transfer of assets to each other that will be exempt from estate taxation in either partner’s estate. 
• Consider making annual gifts up to the exemption amount (currently $13,000 per year) to children, grandchildren or other desired beneficiaries.  Note that neither qualified medical expenses nor educational expenses (e.g., college or private school tuition) are subject to the $13,000 annual cap.

 Rarely in our nation’s history have we faced such a dramatic change in our estate tax law.  Given the ever-changing landscape, you’re well advised to seek competent professional advice to update your estate plan to ensure that both your tax and non-tax planning objectives are satisfied.

Medicare and the "Improvement Myth"

It is a familiar story:  an elderly woman falls down in her home and suffers a broken hip or other serious injury.  After a too-brief hospital stay, she is sent to a nursing home for rehabilitation.  Since the woman was in the hospital for at least three days prior to entering the nursing home, Medicare assumes the initial responsibility for covering the costs of her care in the nursing home.  Assuming that she is qualified, Medicare will pay 100% of the cost of  the first 20 days of skilled care, and will pay a percentage of the cost for days 21 through 100; in New York, the patient – or their supplemental insurer, if any – will pay a co-payment of $137.50 for days 21 through 100.

In practice, there is no guarantee that a Medicare will pay for the full 100 days.  Medicare directs nursing homes and home healthcare providers to terminate Medicare coverage upon a determination that the patient has failed to “improve” as a result of their treatment and is no longer in need of “skilled” care, but requires only “custodial” care.  The “failure to improve” standard has become so ingrained in Medicare lore that these determinations are rarely questioned. 

Contrary to common belief, the “failure to improve standard” is not found in any Medicare statute or its implementing regulations.  Rather, this rule is derived from references in various Medicare practice manuals, and has become “gospel” within the health care field.

Two recent Federal court decisions have affirmed that it is not required that a patient show improvement in order to receive Medicare coverage for their rehabilitation treatment.  In Papciak v. Sebelius, the U.S. District Court in Pittsburgh ruled that Medicare was improperly denied for an 81-year-old woman being treated for a broken hip whom, the nursing home claimed, was unlikely to improve.  In determining that continued Medicare coverage was warranted, the court stated,

[t]he restoration potential of a patient is not the deciding factor in determining whether skilled nursing services are needed.  Even if full recovery or medical improvement is not possible, a patient may need skilled services to prevent further deterioration or preserve current capabilities.

Likewise, in Anderson v. Sebelius, the U.S. District Court in Vermont held that a 60-year-old woman was improperly denied home care Medicare coverage after suffering a second stroke.  The court noted that, “[a] patient’s chronic or stable condition does not provide a basis for automatically denying coverage for skilled services.”

Both of these court decisions confirm that the “failure to improve” standard that is almost reflexively employed in Medicare denials has no basis in law.  Patients denied Medicare on that basis may challenge these determinations and retain the coverage to which they are entitled.  Even better, perhaps the Federal Government will advise nursing homes and other health care providers to follow the appropriate guidelines in determining their patients’ ongoing eligibility for skilled nursing coverage under Medicare.

The New York Times Discusses Long-Term Care Insurance

The New York Times  recently reported that sales of long-term care ("LTC") insurance policies have stalled.  In fact 2009 was the first year the sale of LTC insurance policies did not increase since tracking of LTC insurance policies began in the late 90's.  The article cites a number of reasons why the sale of LTC insurance policies has lagged, including: 

• The widespread misconception that Medicare covers long-term care needs (in fact, Medicare provides very little in the way of long-term care coverage)
• The belief that they will likely not need long-term care (in fact, 45% of people 65 or older will file a claim on an LTC policy)
• The presumption that they will qualify for Medicaid (which, while available with planning, does typically result in the loss of at least some assets, and Medicaid home care coverage is spotty)

Another impediment to the sales of LTC insurance is that the costs for the policies is beginning to skyrocket, as more people begin to go on claim than the insurance companies anticipated.  In fact, just today I heard that MetLife is going to stop writing LTC insurance policies in New York State (and maybe throughout the United States).

For those who can afford it, LTC insurance can be a great safety net.  For those who elect not to purchase LTC insurance, however, meeting with an elder law attorney to review proactive planning strategies -- often including the use of Irrevocable Asset Protection Trusts -- is a wise move.

Here's a link to the NYT article.

New York TImes Columnist Paul Sullivan Weighs-in OnThe Importance of Legacy

This past week the New York Times' personal finance columnist, Paul Sullivan,  wrote an excellent column describing the process he and his wife went through in creating a true "legacy plan" for their family that went way beyond a discussion of financial issues.  For over a decade I have been counseling clients on the importance of passing to their heirs their values as well as their assets.  Sullivan's column, which can be read here, confirms the wisdom of that approach

New York Revises Its Power of Attorney Form -- Again

Just over a year ago – September 1, 2009, to be exact – the New York legislature enacted legislation that substantially revised the statutory “short form” Power of Attorney (“POA”).   Perhaps the most significant change was the requirement that the “principal” executing the POA execute a separate Statutory Major Gifts Rider (“SMGR”) if the principal wished to allow the agent to make “major gifts” of the principal’s assets.  This statutory revision was predicated on the widespread belief that, under the prior POA form, it was too easy for senior citizens to unwittingly authorize unscrupulous agents to make gifts of the principal’s assets – often to the agents themselves. 

Immediately following enactment of the 2009 revisions, attorneys began inundating the New York State Bar Association with complaints about the new POA form.  Many attorneys complained that the new form was too lengthy and difficult for many elderly clients to sign.  Business attorneys complained that many routine transactions that did not involve any gifting still required the Principal to execute the SMGR.  In response to those complaints, the Law Revision Commission went back to work in an attempt to further amend to law to make the POA form more “user friendly.”

In response to these concerns, New York enacted its latest revision to the statutory “short form” POA, which became effective September 13, 2010.   The following are a few of the most significant changes to the 2009 POA form: 

• A new section 5-1501C of the statute specifically excludes from coverage under the new short form POA a number of commercial and governmental transactions, such as the exercise of shareholder voting rights with respect to a corporation, or a power authorizing acceptance of service of process on behalf of the principal.
• Gifting authority within the main form POA is limited to an amount not to exceed $500 per year; any gifts by an agent in excess of that sum can only be made under the Statutory Gifts Rider. 
•  Under the 2009 statute, execution of a new POA would specifically revoke all prior POA’s executed by the principal unless the principal specified that one or more prior powers was not to be revoked.  The 2010 statute specifically states that signing a new POA does not revoke prior powers of attorney; rather, the principal can provide for such revocation by including such a provision under the “Modification” section of the document. 
•  The new statute makes it easier for a principal to revoke an agent’s authority; now, delivering the revocation is effective by delivering notice to the agent in person, or by sending a signed and dated revocation by mail, courier, electronic transmission or fax to the agent’s last known address. 
• The Statutory Major Gifts Rider has been renamed the Statutory Gifts Rider (“SGR”).  The statute provides that the SGR is required to make “gifts or changes to interests in your property” (emphasis supplied). The SGR is not required to complete other non-gift transactions, which can be authorized in the Modifications section of the main form. However, there remains some ambiguity whether transactions affecting “interests in property” can actually be addressed within the main form; it is likely that an additional amendment to the POA statute will be required to eliminate this ambiguity.

Be aware that any New York short form POA that was executed prior to enactment of the new statute remains a valid legal document.  However, it is probably a wise idea to execute the most current form anytime you are revising your estate plan

Estate Planning for Blended Families

In 2010, “blended” families became the predominant family form in the United States.  Couples in such relationship are often conflicted with the desire to not only provide for the needs of the surviving spouse upon the first death, but also to ensure that their own children receive their “rightful” inheritance. 

Unfortunately, too often the estate planning done by remarried couples consists of simple “I love you” wills that provide that all the couple’s assets pass to the surviving spouse.  Not only does such a disposition forfeit a number of planning advantages – including preserving each spouse’s estate tax exemption, protecting assets from creditors and from a potential remarriage of the surviving spouse – but under this scenario, the first spouse to die (the “Deceased Spouse”) would have no assurance that upon the remaining spouse’s death, the surviving spouse (“Surviving Spouse”) will in fact leave the assets of the Deceased Spouse to that spouse’s children. 

A better solution is for each spouse to establish one or more trusts to hold their assets upon their respective deaths.  Upon the Deceased Spouse’s death, his or her estate plan may provide that all or a portion of his or her trust assets passes to a “Marital Trust” for the benefit of the Surviving Spouse.  The Marital Trust would provide income from the trust to the Surviving Spouse for life, and may provide distributions of principal to or for the benefit of the surviving spouse at the Trustee’s discretion. Upon the Surviving Spouse’s death, the trust assets would be distributed to the children of the Deceased Spouse, either outright or preferably in a creditor-protected trust.  One caveat is that the assets in the Marital Trust would be taxable in the estate of the Surviving Spouse; it is critical that the trust instrument provide that the estate taxes, if any, attributed to the Marital Trust assets be payable by the appropriate parties (typically the Deceased Spouse’s children).

If there is a concern that the children of the Deceased Spouse may have to wait too long to receive their inheritance, a portion of the Deceased Spouse’s assets may go directly to his or her children upon death, either outright or in trust.  In 2011, the first $1,000,000 distributed to anyone other than a Surviving Spouse will be exempt from both Federal and New York State estate tax.

Trustee selection is critical in these cases.  Due to the inherent conflict, it is poor practice to have the Deceased Spouse’s children serve as Trustee of the Marital Trust for the Surviving Spouse.  A better choice is typically a professional trustee such as a trust department of a bank or other financial institutions.  Regardless of Trustee selection, it is important that the Marital Trust include explicit instructions describing the circumstances, if any, when the Trustee may provide trust principal to or for the benefit of the Surviving Spouse.

One final piece of “blended” family planning is the need for each spouse to sign a waiver of their spousal right of election.  In the absence of such waivers, the Surviving Spouse would be able to upend the couple’s planning by simply asserting his or her right to the statutory share of the Deceased Spouse’s assets – which in most states is at least one-third of the Deceased Spouse’s assets, and often more.

Congress Continues to Fumble The Estate Tax

Despite Senator Chuck Grassley's recent prediction that Congress would "solve" the federal estate tax uncertainty by reinstating a $3.5 million per person estate tax exemption before the end of 2010, others on Capitol Hill remain uncertain if or when Congress might act to prevent the federal estate tax exemption to revert to $1 million on January 1, 2011. Included in the Democrats proposal to extend the Bush era income tax cuts to those earning $250,000 per year or less was a proposal to reinstate the federal estate tax exemption at $3.5 million per person, indexed for inflation.  In an effort to bridge the gap between the parties, Republican Senator John Kyl and Democratic Senator Blanche Lincoln have instead proposed a $5 million per person exemption.  But as one Congressional observer was quoted in The Hill, “I hear all sorts of things, which means I hear nothing.”

For the complete article, click here.

Estate Tax Planning With Spousal Gifting Trusts

On January 1, 2011, estates in excess of $1 million will be subject to payment of federal estate tax.  With the federal exemption reverting to $1 million, far more Americans will be impacted by the estate tax.  For example, in 2008 the federal estate tax exemption was $2 million per person.  The estate of a New Yorker dying in 2008 with a total taxable estate of $2 million would only have paid a New York State estate tax in the amount of $99,600.  In contrast, a New York resident with a $2 million estate dying in 2011 will be subject to a combined federal and New York State estate tax of $435,000.

Given the huge sums at stake, planning to minimize estate taxes will take on greater importance. One powerful and relatively straightforward planning technique for couples with a moderate to high net worth is the Spousal Gifting Trust (“SGT”).

In very basic terms, the SGT works like this: each spouse establishes an irrevocable trust, with the wife typically serving as a Trustee of husband’s trust, and the husband typically serving as a Trustee of wife’s trust.  Depending upon the client objectives, a co-Trustee may be named as well. 

Once the SGT’s have been established, both spouses will make gifts to their respective trusts in an initial amount not to exceed $5,000 per year.  As the value of the trust grows over the years, the amount that can be gifted to the SGT annually can be increased.  Ultimately, the maximum amount that can be gifted to the SGT annually without utilizing any portion of the donor’s annual $1 million gift tax exemption is a sum equal to the annual gift exemption (currently $13,000 per year).  The beneficiary spouse will have a temporary right to withdrawal the gifted sum, typically for a period of thirty days.  If the gifted amount is not withdrawn from the SGT, it can remain in the trust and invested in whatever financial vehicles the Trustee chooses.  Once funded into the trust, the assets in the trust can be used for the beneficiary spouse’s needs at any time.

How does funding an SGT provide any estate tax benefits?  The magic here is that the amounts gifted by each spouse to their respective SGT’s will not be included in the taxable estate of either spouse!   The key is that in making the gifts to each SGT, the couple is intentionally not utilizing the “unlimited marital deduction” that would ordinarily apply to spousal gifts.  While using the unlimited marital deduction will ensure that a gift made by the donor spouse would not be taxable in his estate, the spouse receiving the gifted assets will ultimately have those assets included in her estate.  By instead gifting some of the couple’s assets to SGT’s, the assets in each spouse’s SGT will grow over time completely exempt from estate tax inclusion.

To demonstrate the cumulative power of an SGT, imagine that a husband and wife, each 45 years old, contribute $5,000 to their respective SGT’s each year for 30 years.  If the assets in each SGT were to grow annually at an average of 6%, the value of the assets in each SGT would be $395,291 – or a combined value of $790,582 – none of which would be subject to federal or New York estate tax.

A final point: despite its name, the SGT can be used by same-sex and unmarried couples to provide an estate tax-exempt repository of assets.

Is New York's Medicaid System to be Overhauled?

It's no secret that New York has one of the most expensive (and generous) Medicaid program of any state.  Outgoing Lt. Governor Richard Ravitch just released this report that recommends that the state legislature carefully examine New York's Medicaid system to see if changes should be implemented to reduce the costs of the Medicaid program, without reducing services to those who need them. 

Ravitch's report notes that New York's spend-down and spousal refusal rules are just two planning techniques that are often used by middle class people to preserve assets while still qualifying for Medicaid long-term care coverage.  If New York's legislature in fact wishes to reduce the state's long-term care Medicaid costs, these techniques will likely be among the first to be restricted.  Given the dysfunction that is New York politics, however, it will likely be some time before any of the issues discussed in Ravitch's report will be scrutinized, and even more time before any changes are made to New York's rules.

News Alert -- Upcoming Radio Interview

On Wedenesday, October 6 at 7:00 p.m. ET, I will be interviewed by WTBQ radio's Teddy Smith about current issues in estate planning.  Orange County residents can tune in to 1110 AM, or 99.1 FM.  WTBQ also streams at http://www.wtbq.com/.

I hope you will be able to listen-in!

The WSJ Weighs-in On the Estate Tax Debate

The Wall Street Journal recently ran a special report on the future of the federal estate tax.  Among the articles are recommendations from various estate planning experts providing advice for how people should be planning given the uncertainty surrounding the estate tax. The most common suggestion is for those with larger estates to take advantage of the temporary "estate tax free" and low interest rate environment to shift wealth between generations this year.  Some common techniques would include selling assets to Intentionally Defective Grantor Trusts (IDGTs) or transferring assets via short-term Grantor Retained Annuity Trusts (GRATs).  Using short-term GRATs may be a limited opportunity, as Congress is considering limiting or eliminating this strategy.

Life Estate Deed or Trust? It's No Contest!

In my practice, one of the most commonly requested legal services is for the preparation of a deed transferring the client’s home to their children, with the parents reserving a “life estate” interest in the home.  The general purpose of such an arrangement – often referred to as a “life estate deed” -- is to protect the home if the parents someday need long-term care assistance and hope to qualify for Medicaid.  However, under virtually any situation transferring a home to a Medicaid Asset Protection Trust (“MAPT”) is a better option than use of a life estate deed.

If successfully implemented, both the life estate deed and the MAPT will protect a primary residence so long as the homeowner does not apply for Medicaid long-term care coverage for at least five years from the date the strategy is implemented.  But the MAPT has a number of significant advantages over the life estate deed that makes the MAPT the strategy of choice.  Here are some of the key differences:

• If the home is sold after being conveyed to the MAPT, the entire capital gain will qualify for the capital gain exemption that is available only to owners of a primary residence ($250,000 exemption for individuals, $500,000 for married couples). By contrast, if the home is sold after being conveyed via a life estate deed, the portion of the home that has been transferred to the “remainder beneficiaries” – that is, the children – will be subject to capital gains tax.

 Example:  A 73-year-old widow transfers her home to her two children, who both reside in New York, using the life estate deed technique.  Two years later the widow decides to sell her home and move in with one of her children.  The home, which has a cost basis of $50,000, is sold for $250,000.  Under the federal government’s life estate tables, the children’s remainder interest is about 48% of the total property value. Since the capital gain from the sale is $200,000, the children will have to pay a capital gains tax of about $20,000 (based on the approximately 20% state and federal capital gains tax on the children’s $96,000 portion of the gain). A similar sale from a MAPT will result in the payment of no capital gains tax, as the entire sale proceeds are deemed to “belong” to the widow for capital gains tax purposes.

• A transfer to children via a life estate deed is typically an irrevocable transfer.  If a parent later has a falling-out with a child, the parent will be unable to “undo” the transfer made under the deed.  By contrast, a properly structured MAPT will include a “limited power of appointment” that permits the parent to change the trust beneficiaries during the parent’s lifetime, and retains for the parent the right to decide who receives the trust assets after the time of the parent’s death. 
• If a parent someday enters a nursing home and the children elect to sell the parent’s residence, with the life estate deed technique Medicaid will be entitled to reimbursement for the portion of the sale proceeds equal to the value of the parent’s remaining life estate interest at the time of sale.  So, if a 75-year-old is on Medicaid and the home is sold for $250,000, Medicaid will be entitled to reimbursement for the parent’s 52% portion of the sale proceeds (or $130,000). In contrast, there is no Medicaid reimbursement requirement if a residence held by a MAPT is sold while the parent is receiving Medicaid assistance.

Book Signing Party on Tuesday!

A reminder:  we will be hosting a book signing party this Tuesday, September 14, 2010 from 4:00 p.m. to 6:00 p.m. at the BSRB Education Center, 10 Matthews Street, Goshen, New York.  Each attendee will receive a personally signed copy of my contributory book, The Complete Guide To Estate & Financial Planning in Turbulent Times. 

Please join us!

Will Congress Act on Estate Tax Reform in 2010?

According to a report in The Hill, Sen. Chuck Grassley (R. Iowa) predicts that Congress will act before the end of 2010 to prevent a return of the federal estate tax in 2011.  Unless Congress acts this year, an individual decedent's federal estate tax exemption will be only $1 million as of January 1, 2011.

Grassley, who is the ranking Republican on the Senate Finance Committee, believes that Congress will enact compromise legislation that will provide for a $3.5 million per person federal estate tax exemption.  While Republicans have been strenuously advocating to make estate tax repeal permanent, Grassley's prediction appears to signal that the Republicans are finally ready to compromise, rather than see the estate tax exemption revert back to the same $1 million amount that was in effect back in 2000. 

Of course if Republicans make significant gains in the House and Senate in November's election as many pundits are predicting, they may well take a harder line on this issue.  But Grassley's comments reflect the reality that, regardless of the results in November, the Democrats will retain control of Congress through the end of this year.  Even if the Republicans gain control of both the House and the Senate, without estate tax reform this year -- which will require a compromise with the Democratic leadership -- the federal estate tax exemption will automatically revert to $1 million in January, and would remain so for such period of time until a new bill were to pass both the House and the Senate.  And, even if a Republican majority were to succeed in passing a bill providing for significantly larger exemption amount -- say $5 million per person, or even complete repeal -- such legislation would almost certainly face a Presidential veto.

Given that Republicans were unable to enact permanent estate tax repeal throughout the Bush years -- during a time when Republicans controlled both the House and the Senate as well as the White House -- it seems plausible that the Republicans would agree to a $3.5 million exemption that would be effective as of January 1, rather than risk the wrath of their supporters were the exemption to revert to the $1 million figure, which would be the case as things currently stand. 

There seems very little risk to Republicans to agree to such a compromise, which would almost certainly take place after the November elections.  While the Republican "base" might howl at the thought of any accommodation with the Democrats, Republicans in Congress would certainly continue to press for complete estate tax repeal in the months and years ahead.  Depending upon future election results -- especially in the 2012 presidential election -- Republicans might finally realize their long-held dream of permanently killing the federal estate tax.  In the meantime, if the $3.5 million exemption is instituted as of January 1, they will have at least ensured that all but the wealthiest American families will be exempt from paying any federal estate tax.

Click here to read the article.

A Historical Perspective of the Estate Tax

The conservative Heritage Foundation has posted this summary of the history of the estate tax in the United States.  A key point is that, assuming we do in fact revert to a $1 million per person federal estate tax exemption next January, the relative exemption in 2011 will be about one-tenth of the exemption amount as was in effect when the "modern" estate tax was first implemented in 1916 

Thinking of Doing a Life Estate Deed? Think Again!

As people enter their "golden years," they become more acutely aware that they may someday need long-term care assistance. They may hear horror stories from family and friends about other people in similar circumstances who had to go to nursing homes and had their assets wiped-out by the costs, which in the Hudson Valley exceeds, on average, $10,000 per month.

Given the prospect of the potential loss of their life's savings, people understandably look for ways to protect their assets.  One commonly used strategy over the years has been for parents to transfer title to their home to their children, with the parents retaining a "life estate" interest.  On its face, a transfer of a home with a retained life estate holds great appeal.  It is a simple strategy to implement, and the execution of the deed immediately triggers commencement of the five-year "look back" period imposed by Medicaid for asset transfers.  That is, so long as the parent does not require long-term care for at least five years after executing the life estate deed, the home will no longer be subject to a lien by the county Department of Social Services should the parent thereafter apply for long-term care Medicaid coverage.  Because the parent retains "life rights" in the home, they retain sole and exclusive occupancy rights to the home, and ll property tax exemptions, including STAR, Enhanced STAR, and Veteran's.

However, there are serious disadvantages associated with the life estate deed.  This recent news article highlights one of the greatest deficiencies of this planning tool. As described in the article, an ailing 81-year-old widow, Joan Fleming, owns a home on Long Island that is valued at $300,000.  Some years ago, Mrs. Fleming executed a deed to her two children, reserving to herself a life estate interest.

Unfortunately in Mrs. Fleming's case, "the estate planning move went horribly wrong" when her son Michael subsequently filed for bankruptcy.  Since upon execution of the life estate deed Michael owned a vested interest in the home, the bankruptcy court ordered that Michael's 50% share of the remainder interest be put up for public auction to satisfy his creditors.

As a practical matter, Mrs. Fleming's life rights cannot be disturbed by any successful bidder for Michael's share of the remainder interest in his mother's home.  But since Mrs. Fleming's motives for engaging in this planning strategy almost certainly included preserving the value of the home for her children, these developments will undermine her goals.


What could Mrs. Fleming have done differently?  She, and her children, would almost certainly have been better served had she instead transferred her home to a Medicaid Asset Protection Trust ("MAPT").  Like the deed with a retained life estate, transferring a home to a MAPT triggers commencement of the Medicaid look back" period upon execution of the deed.  Unlike the life estate deed, however, none of the children or other trust beneficiaries receives a vested interest in the home during the parent's lifetime.  Had Mrs. Fleming conveyed her house into a MAPT, Michael's creditors would have had absolutely no claim on his interest in the home during Mrs. Fleming's lifetime.  Even betters, were such a MAPT structured to provide that after Mrs. Fleming's death the trust property was to be held in separate creditor protected trusts for each of her children, Michael's creditors would even then be unable to seize Michael's interest in his mother's home, regardless of the extent of his indebtedness.

Don't Wait Until Congress Acts to Work on Your Estate Planning!

Are you waiting until Congress enacts a "permanent" federal estate tax to do your estate planning?  This article points out many (but by no means all) of the reasons why estate planning is so much more than just estate tax planning.

Back From Vacation

This is off-topic, but I was down in Orlando last week for the family summer vacation and have a few observations:

•  The new Harry Potter "world" at Universal is spectacular, and the "Forbidden Journey" ride inside "Hogwarts" is the best attraction I've ever been on.
• The crowds at Universal and Islands of Adventure greatly exceeded those of the two Disney parks we visited -- Epcot and Disney Hollywood Studios.  Disney better act fast to develop new attractions that appeal to older children and teens if it doesn't want to lose more market share.
• America's obesity epidemic is spiraling out of control.  The grotesque size of the portions at many restaurants does not help the situation.
• We must be crazy to go to Florida in August -- the heat, and especially the humidity, were oppressive.
• Delta's "bag drop" line is a joke.  Having checked-in online and printed off boarding passes, you would think that dropping off your bags should be an expedited arrangement.  Think again.
• I read The Big Short by Michael Lewis about the sub-prime mortgage mess.  The book confirmed my opinion that the top executives at most of the major investment banks should have been indicted for fraud, or at least some form of criminal negligence.

An Estate Plan That Didn't Work

Recently a client of one of my litigation partners called me. This client – I’ll call him “Robert” – is, along with his brother, the beneficiary under his mother “Eleanor’s” will. Eleanor, who died in 2008 a resident of New Jersey, had a gross estate of over $6 million. Eleanor’s husband had predeceased her some years before her death.

I knew from my partner that Robert once had a thriving business, but that the “Great Recession” has left him with potential liabilities to various creditors in the millions of dollars. Robert’s creditors would surely be interested in getting their hands on Robert’s share of his mother’s estate.

Robert explained to me that he needed to “set-up” the trust established under his mother’s will for the benefit of he and his children. To determine what exactly needed to be done, I obtained from the New Jersey law firm that was administering Eleanor’s estate copies of her will and the filed estate tax returns.

In reviewing Eleanor’s will, I determined that Eleanor had established generation skipping trusts for both Robert and his brother “Alan.” Since Eleanor’s generation skipping tax exemption was $2 million at the time of her death in 2008, each of her son’s respective generation skipping trusts will be funded with $1 million. The good news is that if properly administered, the assets in each of her son’s trusts should be protected from the reach of their creditors, as well as creditors of any of their descendants. Assets in Robert’s trust can thus be used to pay for the “needs” of both himself and his descendants without being subject to invasion by any of their creditors.

While the generation skipping trusts established under the will might be deemed a planning “success”, other aspects of her estate plan leave much to be desired. In addition to the $1 million to be funded to his generation skipping trust, Robert is in line to inherit over $900,000 as an “outright” distribution. The problem here is that because Robert will be receiving those “excess” funds in his own name, his many creditors will have “first dibs” on those assets. It is unlikely that Robert will ever see a dime of that money.

What might Eleanor have done differently to protect her sons’ entire inheritance? Quite simply, she could have established “lifetime protective trusts” for each of her sons to be funded with their share of the inheritance in excess of the generation skipping tax exemption amount. Each such trust could have been designed to be accessible by Robert and Alan for their needs, but also to be out of the reach of their creditor claims.

So, why didn’t a woman of such means have such a provision in place? My guess is that at the time Eleanor executed her will years before her death, both of her sons were financially secure – or at least appeared to be. Her attorney likely did not focus on asset protection as an important element of Eleanor’s planning, but was rather more concerned with maximizing the generation skipping tax exemption. Robert’s financial condition did not begin to unravel until around the time of Eleanor’s death, and by then the die had been cast.

The other major problem with Eleanor’s estate plan was that from her over $6 million estate, the total estate tax bill exceeded $2.2 million. While her estate plan effectively manages the generation skipping tax exemption, Eleanor could have implemented a number of strategies that could have minimized, or even eliminated, her estate tax obligation. The attorney who drafted Eleanor’s will surely had the expertise to have implemented estate tax savings strategies. But such “advanced planning” techniques require a significant financial commitment from the client, and perhaps Eleanor was unwilling to get past the “cost” to engage in any of those advanced planning techniques. Or, perhaps she believed that Congress would have completely repealed the estate tax by the time of her death. Whatever the reason, a significant portion of Eleanor’s personal wealth was diverted to the government for its use, rather than to her loved ones.

Breaking News -- Release of My Contributory Book!

Last week the Collaborative Press released The Complete Guide to Estate & Financial Planning in Turbulent Times, a 300-page hardcover book that provides answers to commonly-asked questions on estate and financial planning topics.  I was privileged to be one of 24 professionals from all over the United States who was invited to participate in this project.

While I'm obviously biased,  I believe that readers will find the book an informative read that provides a wealth of information regarding a wide-range of topics including the proper use of revocable and irrevocable trusts, retirement planning, long-term care and Medicaid planning, charitable planning techniques, the best ways to pass-on a vacation property to heirs, the importance of buy-sell agreements for business owners, and business succession planning

Click here to learn more about both the book and each of the contributing authors.  Readers of this blog who would like to receive a copy can contact me directly at rshapiro@mid-hudsonlaw.com.

Wisdom During Trying Times

I never knew Rob Jaffee, but he appears to have been the type of client any estate planning attorney would enjoy working with. As described in this article written by Rob's brother, Chuck Jaffee, Rob had the wisdom to convince his reluctant wife to meet with an estate planning attorney to design and implement their estate plan. Two years later, Rob died at 57 just weeks after being diagnosed with a rare disease.

I was moved by these comments Rob made to his brother as the end came near:

Eileen [Rob's wife] didn't want to go meet the lawyers and set everything up, because it was focusing on death and dying at a time when everything was good and happy. But focusing on death and dying while you are living, that's easy; having to focus on death when you are dying, that would be unimaginable. ... Tell people not to let that happen.

People often ask me, "when is it the right time to 'do' my estate plan?"  My standard (and somewhat flip) response:  "six months before you know your going to die, give me a call and we'll get to work."  Coming from an estate planning attorney, my recommendation that people get their estate planning done now may come off as self-serving.  But perhaps reading Rob Jaffee's profound thoughts of the benefit to he and his family of putting together an estate plan before a crisis struck will strike a chord with some people who know they need to do an estate plan, but always find an excuse not to find the time. 

Don't Be an Enabler for Your Children's Poor Financial Decisions

I frequently counsel clients about how, if at all to provide assistance to their financially irresponsible adult children or grandchildren. This past week's Parade Magazine included this excellent article summarizing the "do's and don't's" for parents considering providing financial assistance to an adult child. Bottom line: a little assistance for a financially strapped child is ok; but don't become an enabler for their poor personal financial habits!

Will Geroge Steinbrenner Get The Last Laugh Over the Tax Man?

It appears that George Steinbrenner has outsmarted everyone again. While many people thought his fleecing of CBS in 1973 when he purchased the Yankees for the paltry sum of $10,000,000 could not be topped, his sudden death yesterday may save his estate from paying millions of dollars in federal estate taxes. As is widely known, the federal estate tax has been repealed in 2010 only; had Steinbrenner died in January (absent the enactment of new legislation), then his estate, which is estimated to exceed $1 billion, would have been subject to a federal estate tax of 55% for all assets in excess of $1 million.

Estate planning experts quoted here speculate that Steinbrenner likely had engaged in various estate planning techniques that would have minimized the estate tax hit had he died in a year when the federal estate tax was in force. I too would be surprised if Steinbrenner hadn't put in place GRATs, sales to Intentionally Defective Grantor Trusts, Charitable Trusts and other planning tools to lessen the estate tax hit. But unless Congress retroactively reinstates an estate tax for 2010 (which appears less likely the further into 2010 we get), then any such advanced planning may prove to have been unnecessary in this instance.

Aspatore Book Project

I apologize for not having posted the past couple of weeks. Intertwined with the July 4th Holiday, I've been working on a chapter for a book to be released this coming winter by Aspatore Publishing, a division of Thomson Reuters. Titled Inside the Minds: Strategies for Trusts and Estates in New York, 2011 ed., the book is part of Aspatore's "how to" series geared to allied professionals. Aspatore's legal series feature contributions from attorneys at some of the most prominent law firms in the United States, and I am honored that I was recruited to participate.

My submission, which has grown to over 11,000 words, is due tomorrow. When published this winter, the book will be available at book stores and at Amazon, Barnes & Noble, and other on-line line booksellers.

I'll keep readers of this blog posted as to the release date.

The Estate Planning Process: It's A Two Way Street

When retaining an attorney to assist with their estate planning or elder law matters, people often expect that the attorney, who has the “expertise” in the subject matter at hand – and is the person being paid for the work – is solely responsibility for a successful outcome. Without meaningful and active client participation in the process, however, an estate plan that “works” is unlikely. We have a saying in our office: your estate planning won’t work if we care more about it than you do!

So, how can you best work with an estate planning attorney to achieve the desired results? Here are a few recommendations:

• Be prepared to fully disclose to your attorney all of your assets and liabilities, and who holds title to the assets (e.g., whether they’re individually owed, jointly owned, held in a business entity, an “in trust for” account, etc.). When planning for the protection and distribution of your financial assets, it is critical that the attorney have a clear picture of what the client’s financial picture looks like. Many attorneys will provide an intake form for the client to list of this information. You do neither yourself nor your attorney any favors by coming to an initial meeting and saying, “I didn’t have time to complete the form.” You would be better off rescheduling the meeting until after you have completed the paperwork.

• Expect to have an open and honest conversation with the attorney regarding the family dynamic. Keep in mind that while the attorney has the legal expertise, the client is the “expert” about family matters. Remember that the conversations with your attorney are confidential; while no one likes to discuss potentially embarrassing information about themselves or their children, it is critical that the attorney knows about all the “skeletons in the closet.” Many parents, for example, are reluctant to inform the attorney that a child has a drug or alcohol problem, that a child has financial problems, or that a child’s marriage is shaky. But it is critical that the attorney be made aware of this information so that he or she can work with the client to design an estate plan that provides the appropriate planning to protect that child’s inheritance.

• In advance of the initial attorney meeting, give careful thought about what you are hoping to accomplish. Is estate tax planning a major concern? How concerned are you about protecting assets if you someday require assistance with long-term care? Do you want to provide different amounts to different children, or even disinherit a child completely? Are you interested in making charitable gifts as part of your estate plan? Do you have pets that you want to be assured will be taken care of? Your attorney should thoroughly discuss your planning objectives, and the different ways to achieve those goals. When we schedule an initial meeting with our clients, we provide them with a “Goals” form” that serves as a starting point for that important conversation.

• Think carefully about who would be the appropriate “helpers” in the event of your disability or death. These would include executors under your will, trustees for any trusts, guardians for minor children, agents under your power of attorney, and health care agents for your health care proxy. If no suitable family members exist, you are often better off choosing a professional fiduciary, such as a bank trust department, rather than a child or other family member who is ill-suited to the task.

“Successful” estate planning depends upon complete trust and interaction between the client and the attorney – it really is a “two way street.” Unless the client is fully engaged in, and committed to, the process, the client’s planning will likely fail to meet the client’s needs, regardless how knowledgeable or skilled is the attorney

The Supreme Court Nomination Charade

Here is the best analysis I've yet seen regarding the joke that has become the Supreme Court nominating process. While I believe Elena Kagan has the background that should make her a fine Justice, nothing we've seen in these hearings would lead you to that conclusion. It's really just the typical posturing by the usual Senatorial buffoons for consumption by their constituents at home.

Many Cancer Patients Receive Aggressive Treatments in Final Days

Studies confirm that many Americans receive aggressive but ultimately futile treatments in the final days of their lives. While this may be partly because of ineffective end-of-life counseling, it appears just as often that the patients are unwilling to give up that last glimmer of hope.

There are no simple solutions to these cases, which will vary based on the patient's age, type of treatments and their own personal belief system.

Billionaire Estate Tax Surtax Proposed

Three Democratic Senators, led by Bernie Sanders of Vermont, are sponsoring legislation to include a 65% "billionaire surtax" for estates in excess of $500 million. The trio makes the argument that in an era of increasing federal debt, the largest estates should pay their "fair share."

Although it is unclear in this article, it appears that the intent of this proposal would be to add this surtax on top of whatever estate tax is ultimately enacted by Congress.

The proposal would also make the estate tax retroactive to January 1, 2010; such a result would almost certainly lead to constitutional challenges from estates that, at present, would have no federal estate tax obligation in 2010.

Big Change Under NY Law: Lawyer May be Sued By Estate for Malpractice in Drafting Will

On June 17, 2010, the New York State Court of Appeals issued a ruling that permitted an Executor of an estate to bring a legal malpractice action against an attorney who allegedly committed malpractice in drafting the decedent's will. According to the executor, the attorney's malpractice caused the estate to owe estate taxes that could have been avoided with proper drafting. The ruling in the case of Estate of Schneider v. Finmann, et.al.,, overturned New York's longstanding rule that required an allegedly injured party to have "privity" -- essentially, a contractual or other relationship with attorney -- in order to have standing to bring a claim of legal malpractice.

In estate cases, the problem for parties claiming to be aggrieved by an attorneys' alleged malpractice in drafting a will or a trust is that the only party that would typically have privity with the attorney is the decedent who engaged the attorney to draft the estate plan. Since the attorney's "error" is typically not made apparent after the decedent's death, the parties that suffer the real injury -- the estate and its beneficiaries -- would lack privity with the attorney and thus have no recourse.

Over the years a majority of states have modified or eliminated the strict privity rule for estate planning matters. With this decision, the Court of Appeals is recognizing that privity in this context is out-of-step with a more modern approach in determining liability for professional negligence.

One important qualifier in this case is that only the Executor or other fiduciary may bring a claim on behalf of the estate; individual beneficiaries still would need privity to maintain a claim against the attorney. The Court reasoned that the Executor "stands in the shoes" as Personal Representative of the decedent, who in fact had privity with the attorney. Permitting individual beneficiaries who do not have privity to bring claims, the Court concluded, "would produce undesirable results -- uncertainty and limitless liability."

I hope that one consequence of this decision is that it will convince many attorneys who only "dabble" in the field to realize that it's not worth the risk to continue doing estate planning without a thorough knowledge of the field.

Not All Gifts Will Disqualify You From Medicaid Eligibility

It is commonly believed that if a senior makes gifts to family members and subsequently needs long-term care services within five years after making the gifts (the five-year window being commonly referred to as the “look-back” period), such gifts will automatically cause a period of Medicaid ineligibility. While the statutory presumption is that all gifts during the look back period will affect the donor’s subsequently Medicaid eligibility, there are a number of exceptions to the general rule.

One important exception to the transfer penalty rules is set forth in Section 366.5(d) of the New York Social Services Law. Under that provision, gifts made during the look back period will not create a period of Medicaid ineligibility for the donor if a “satisfactory showing is made that … the asset was transferred exclusively for a purpose other than to qualify for Medicaid.”

A 2009 case out of Suffolk County shows the importance of this rule. In that case, an 83 year-old widow (“Mrs. X”) suffered a fall in late 2008 and needed nursing home care. Prior to the fall the woman had been in good health and lived comfortably in her own home.

Beginning in March 2006 and continuing through July 2007, Mrs. X made gifts to various children and grandchildren totaling $71,000. Critically, the testimony showed that Mrs. X’s children were going through various financial hardships – one son was in and out of the hospital and had significant medical bills; another son had lost a job and was teetering on the edge of bankruptcy. Other children and grandchildren needed help to keep up with their own living expenses. The Hearing Examiner noted that even after the gifts, Mrs. X remained financially solvent and was able to comfortably meet her living expenses.

Shortly after Mrs. X entered the nursing home in December 2008, she applied for Medicaid coverage to cover her nursing home expenses. The Suffolk County Department of Social Services (“DSS”) approved her eligibility, but under the transfer penalty rules imposed a six month “penalty period” on account of the $71,000 gifts made by Mrs. X to her family. After DSS’s determination, Mrs. X’s daughter was able to recover from some of the children only $28,000, leaving Mrs. X without the means to cover the nursing home costs during the bulk of the penalty period.

Mrs. X challenged DSS’s imposition of the penalty period, claiming that her gifts were made for a purpose other than to qualify for Medicaid and fell under the exception to the transfer penalty rules found in Social Services Law Section 366.5(d). In her decision, the Hearing Examiner agreed with Mrs. X’s claim that, despite her relatively advanced age, “the gifts were made at a time when there was absolutely no indication that [Mrs. X] would need nursing home level of care,” and that “the record failed to establish that [Mrs. X] made any of the gifts in order to qualify for Medical Assistance.” Accordingly the Hearing Examiner reversed DSS’s imposition of a six month penalty period, rendering Mrs. X immediately eligible for nursing home Medicaid.

Implicit in this decision is the importance of having the right facts. If Mrs. X had evidence of chronic health conditions (e.g., early dementia, arthritis, etc.) at the time the gifts were made, it is almost certain that DSS imposition of a penalty period would have been upheld. But in a circumstance such as Mrs. X’s case where a senior in seemingly good health has made gifts to family members but then suffers a sudden decline in health, a strong argument can be made that the statutory exemption under Social Services Law Section 366.5(d) should apply, precluding DSS from imposing a Medicaid penalty period.