New York's Expanded Estate Recovery Rules to be Repealed

Yesterday it was announced that Governor Cuomo and the New York Legislature had reached a deal on the 2012 New York State Budget.  Included in the new budget is a repeal of the expanded estate recovery rules that were enacted in last year's budget in an attempt to "recover" assets from the estates of Medicaid recipients.  As I explained in a previous post describing the estate recovery rules, the expanded estate recovery rules, among other things, would have unfairly penalized those thousands of New Yorkers who had years ago transferred title to their homes to their children while retaining a life estate in the home.

Prior to last year's enactment of the expanded estate recovery rules, a home transferred with a retained life estate would have been deemed an asset exempt from Medicaid recovery, so long as the Medicaid "look back period" (currently five years from the date of transfer) had elapsed.  Under the expanded estate recovery rules, the parent's life estate interest in the home was deemed an "asset" subject to recovery should the parent receive Medicaid benefits, even if the life estate transfer had been made years or even decades prior to the parent receiving Medicaid!  

The expanded estate recovery rules would have also played havoc with IRA's and similar retirement accounts, and would surely have led to expensive and protracted litigation.

Stay tuned, however, as New York will be looking for other means to raise revenue that will almost surely affect the elderly, the disabled and the poor.

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 As is widely known, the federal estate tax has been repealed in 2010 only; had Steinbrenner died in January (absent the enactment of new legislation), then his estate, which is estimated to exceed $1 billion, would have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.

Federal Estate Tax Repeal -- It Really Happened!

From the moment in June 2001 that President Bush signed into law the legislation that provided for the repeal of the Federal estate tax in 2010, “experts” have been convinced that Congress would by now have acted to “fix” what is widely acknowledged to be preposterous tax policy. Not only does the repeal exist for this year only, but the Federal estate will return with a vengeance in 2011, as the exemption returns to its 2000 level of $1,000,000 per person. Compared with the 2009 exemption of $3,500,000, 2011 will see many more “middle class” estates subject to the imposition of federal estate tax.

But just because there’s no federal estate tax in 2010 doesn’t mean that Congress has necessarily done taxpayers a huge favor. That’s because 2010 also brings the elimination of the unlimited “step-up” in basis for inherited assets. In 2010, only the first 1.3 million assets ($4.3 million if there’s a surviving spouse) will be valued at their “date of death” value for capital gains purposes. All other assets will be passed to the heirs at a “carryover” tax basis, and will result in the imposition of a capital gains tax if appreciated assets are later sold by the heirs. Trying to determine the original tax basis of many assets – especially stocks that may have been owned by a decedent for many years – will be a record-keeping nightmare.

We’re already seeing the impact of this irrational tax policy. A recent article in the New York Post described how 87 year-old Fritz Lohman died at 11:00 a.m. on New Years’ Eve. Since Lohman died in 2009, his $10 million estate will be subject to a total estate tax in excess of $3,500,000. Had Lohman survived thirteen hours, his estate would have been subject to a New York estate tax of about $1,000,000.

Why this tax roller coaster? When estate tax repeal was passed in 2001, the Senate’s budget rules required that the legislation had to “sunset” in 2011. The Republicans were then able to claim that they had lived up to their 2000 election promise to repeal the estate tax, leaving it to future Congresses and Presidential administrations to come up with a more permanent resolution. The Republicans came close to passing a permanent repeal of the estate tax during the latter years of the Bush administration, but fell a few votes short. Now, with the nation fighting wars on multiple fronts, with the need to fund health care on the horizon, and with the country’s economy stagnant, it seems unlikely that Congress will be willing to forego the revenue that would be generated by the estate tax beginning next year. At best, we may see legislation enacted that will return the tax to the 2009 per person exemption of $3,500,000.

What’s the average person to do? Married couples with total assets (including the value of the death benefit of life insurance) in excess of $2 million need to review their wills or living trusts to ensure that the estate tax planning language takes into account the possibility of a death in a year without a Federal estate tax. The absence of such a “savings clause” might result in unforeseen consequences that might be contrary to your intent.