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