New York's Expanded Estate Recovery Rules to be Repealed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.

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.

Estate Planning Comes to Hollywood

As discussed in this excellent article in Forbes, the Oscar-nominated film The Descendents, starring George Clooney, is replete with estate planning-related issues.  While I thought the movie was overrated, I did think the film makers did a good job in their handling of such concepts as the need for a living will to handle end-of-life care; the complexity of intra-family relations  as it pertains to real property held in a long-term trust; the common law requirement that requires termination of a trust under the Rule Against Perpetuities;  and how best to pass an inheritance to a child in a manner that will not impair his or her incentive to be a productive citizen (also known as the condition of "affluenza"). 

I am pleased that the producers consulted with a law professor who teaches estate planning to ensure that the estate planning issues were handled appropriately.

Obama's Budget Proposal and Estate Taxes -- Back to the Future

As has been widely reported, President Obama's proposed 2013 budget would eliminate the Bush-era income tax cuts for the "wealthy," and would require those earning more than $1 million per year to pay at least 30% of their earnings in Federal income taxes.  In addition, the capital gains rate for higher income earners would increase to 20%.

Less widely reported are some of the key estate and gift tax related proposals:

• a $3.5 million per person estate and gift tax exemption
• elimination or restriction of several advanced estate and gift tax reduction techniques, including the use of minority discounts and Grantor Retained Annuity Trusts ("GRATs").
• elimination of the "Intentionally Defective Grantor Trust" ("IDGT") technique that presently allows for the sale of assets to a trust in which the trust assets grow outside of the grantor's taxable estate, with the grantor paid by the trust for the assets sold to a trust via a promissory note.  Since under the current grantor trust rules the sale of the assets to the IDGT is considered for income tax purposes a sale to the grantor himself, there is no recognition of gain on the transfer.

Elimination of some or all of these advanced estate and gift tax planning techniques would certainly pose challenges to estate planners in helping their clients reduce exposure to estate and gift taxes.

Given that we are in an election year, and given the acrimony between the Republicans and the President, the chance of Obama's proposed budget passing largely intact is virtually nil.  That being said, Congress faces a December 31st deadline for the repeal of all the existing Bush tax cuts, so something will have to give between now and the end of the year.  We shouldn't be surprised, then, if the estate and gift tax exemption is reduced  to $3.5 million, and if some if not all of the advanced estate and gift tax planning techniques are eliminated.

With all the uncertainty, we are advising all of our high-net worth clients to plan now at a time when we can rely on some wonderful planning techniques to achieve significant estate and gift tax savings.

If you're a true policy wonk, an explanation of the proposed budget can be found here.

Cautionary Tales of Estate Planning Failure -- and the Need to Update Your Planning

A recent article in Forbes uses estate planning disasters of the rich and famous to highlight the importance of getting your affairs in order -- and the pitfalls for leaving things to chance.  The article describes how Eva Gabrielsson, the long-time girlfriend of Stieg Larsson -- author of the wildly successful Girl With The Dragon Tattoo series -- ended up fighting with his family over Larrson's estate. Larrson died at age 50 without a will. Under Swedish law -- which apparently is similar to the intestacy laws in New York -- Gabrielsson was entitled to none of Larsson's estate, notwithstanding that they were a couple for 32 years prior to Larrson's death.  The very public fight over Larrson's estate quickly became ugly, with each side hurling nasty charges at the other.

The Larsson saga and others described in the article highlights an issue I run into frequently: how to answer the question, "when should I see you about my estate planning?"  My (tongue-in-cheek) answer is, "call me six months before your are going to be disabled or will die, and we'll be able to get your affairs in order."

This type of conversation points out the concern many people have about estate planning; namely, a fear that they might get their planning done "too soon" or "too late".  As the Forbes article points out in describing the Michael Crichton estate fiasco, the solution to that dilemma is to ensure that your estate plan is updated regularly. In our practice, we offer an annual maintenance program that ensures that our clients' plans are reviewed and modified every year to keep current with changes in our clients' lives, changes in the law, and changes in our knowledge and experience.  By participating in a formal maintenance program, you are assured that you will never do your estate planning "too early," as your planning will be modified to keep up with the many changes affecting your estate plan.

Click here for the link to the Forbes article.

Nursing Home Bed Shortage For Men

Yesterday's New York Times highlighted a little-discussed issue that I have seen grow worse as the total number of nursing home beds has decreased:  an absolute shortage of beds for men seeking a nursing home placement.  As noted in the article, the majority of nursing home beds are in semi-private rooms.  Since over 75% of nursing home residents are women, that leaves precious few available beds for our elderly male population.

I have seen a number of instances recently in the Hudson Valley where a family has had to scramble to find a nursing home bed for an elderly male parent or other relative.  With the possibility that Valley View may be shut down this summer, and the general decline in nursing home beds throughout the region, I don't see the problem improving anytime sone. 

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.