News and Notes

I apologize for my readers -- I'm a bit behind in posting to the blog.  To get you up to speed, here's a few recent developments in the world of estate planning, estate administration and elder law:

• An Executor is not absolved from liability for late filing of estate tax returns notwithstanding attorney's obvious malpractice (and even criminal conduct) -- In Thomas Friedman vs. U.S., 109 AFTR 2d 2012-723, the executor of an estate hired an attorney who claimed to be experienced in estate administration matters to file the federal estate tax return.  The attorney apparently suffered from a myriad of "physical and mental ailments" resulting in the attorney's neglect in properly handling the administration, including the filing of the estate tax return.  Only three years after the filing due date did the executor learn that the estate tax return had not in fact been filed.  The executor then paid the tax due, as well as interest and significant late filing penalties. The executor subsequently sought a refund of the penalties and interest, relying on the doctrine   that he reasonably relied upon the attorneys' assurances that the attorney was taking care of the filing.  The Federal District Court in Pennsylvania, citing the precedent of a 1985 Second Circuit  decision, held that a taxpayer's duty to file a timely tax return is nondelegable, and that misplaced reliance upon professional assistance will not fall within the safe harbor of reasonable cause.

•  Mere retention of a testamentary power of appointment in a irrevocable "Medicaid Trust" alone may not be sufficient to render the trust "incomplete" for gift tax purposes.  The IRS recently issued this memorandum, which provides that transfers of assets to an irrevocable trust in which the grantor retains a testamentary power of appointment, without more, constitutes a completed gift of the transferred assets and requires the filing of a federal gift tax return (assuming the value of the transferred assets exceeds $13,000).  Although when Medicaid planning for a modest estate there would be no payment of gift taxes, the troubling issue with such a determination is that if there is a completed gift during lifetime, the trust assets would not be included in the grantor's estate at their death, and thus the trust assets would not be eligible for "step up in basis" treatment.  So, in the common situation where a primary residence is transferred to such a trust, the heirs (typically the grantor's children) will inherit the home at the parent's death with the parent's "carryover" cost basis, not the (usually much higher) date of death cost basis.  If, for example, the parents have a cost basis in the home (e.g., purchase price plus capital improvements) of $50,000, and the children sell the home after the parent's death for $250,000, without the benefit of the step-up in basis, the children will pay capital gains tax on the full $200,000 gain.  One solution to this issue is to include in the trust that the grantor(s) will retain some lifetime rights over the transferred property.  Such control might include a right to trust income, or the retention of a lifetime (rather than after-death) power of appointment.  Fortunately, our firm already routinely includes such lifetime income and power of appointment powers in our "Medicaid" trusts, so I am confident that clients for whom we have created such trusts will gain the benefit of the step-up in cost basis for the trust assets upon the grantor's death.

• The options for purchasing long-term care insurance continues to shrink. Prudential recently announced that it is following other prominent companies (including MetLife and Travelers) in abandoning the individual long-term care insurance market (Prudential will still sell group long-term care policies).  This excellent Wall Street Journal article discusses the increasing difficulty consumers will have in purchasing affordable long-term care insurance, and includes tips on how to shop for those policies that remain available.