Alert to our Clients and Friends on the Estate and Gift Tax Provisions

On December 17, 2010, President Obama signed the above Act into law.   The Act extends for two years the Bush Administration’s income tax rates and various relief provisions, many of which were enacted in the last few years as or part of the economic stimulus legislation, and temporarily reduces the payroll tax for one year.  In addition, the Act makes changes to the estate and gift tax law for 2011 and 2012 thus providing significant opportunities for taxpayers to transfer assets tax free to succeeding generations.  Although there is uncertainty on the continuation of the Estate and Gift Tax changes after 2012, an understanding of these provisions is relevant at this time for timely planning.

The Estate Tax and Generation Skipping Transfer Tax have been reinstated with both lower tax rates and larger exemptions than in the past while the Gift Tax remains at the same rate.  For decedents dying in 2010, an election is available to choose a carryover basis in lieu of paying the reinstated estate tax.  The Gift Tax exemption has been reunified with the Estate Tax exemption which creates significant opportunities for generational wealth transfers. 

Retroactive Reinstatement of the Estate Tax with a Maximum Estate Tax Rate of 35% and an Applicable Exclusion Amount of $5 Million:  The estate tax was repealed for decedents dying in 2010.  The repealed provisions, however, were scheduled to sunset at the end of 2010 restoring the applicable estate tax rates and exemption amounts to 2001 amounts.  The Act retroactively reinstates the estate tax for decedents dying after December 31, 2009.  However, estates of decedents dying in 2010 may elect a carryover basis on inherited assets in lieu of paying an estate tax on estates in excess of $5 million.  Each client’s situation should be analyzed to determine the best solution.  The estate tax applicable exclusion amount is $5 million under the Act and is indexed for inflation for decedents dying in calendar years after 2011, and with a maximum estate tax rate of 35%.

New York State Family Health Care Decisions Act

New York State Family Health Care Decisions Act

Article 29-CC of Chapter 45, Public Health Law

Effective June 1, 2010

Written by Stephanie M. Keating, Esq., Schwartz & Fang, P.C.

This newly enacted legislation is the result of a history of conflicts with hospitals and families of adult patients who do not have a written health care proxy in place.  The families have expressed their wishes to act on behalf of their loved one without such a document, and up until now, the hospital could not follow their requests.

This law shall apply to health care provided in a hospital to a patient who lacks decision-making capacity for health care decisions.  Prior to seeking or relying upon a surrogate for a patient pursuant to this statute, the attending physician will make reasonable efforts to determine whether the patient has a health care agent appointed. [i]In the event the attending physician cannot ascertain whether a patient has a health care agent, the attending physician will rely upon a surrogate for the patient.[ii] Under this statute, the surrogate is defined as the person selected to make health care decisions on behalf of a patient pursuant to §2994-d of this statute.[iii] The surrogate can notify the attending physician of their decision orally or in writing.[iv]

Prior to seeking or relying upon a health care decision by a surrogate, if the attending physician has reason to believe that the patient has a history of receiving services for mental retardation or a developmental disability; it reasonably appears to the attending physician that the patient has mental retardation or a developmental disability; or the attending physician has reason to believe that the patient has been transferred from a mental hygiene facility operated or licensed by the office of mental health, then such physician must follow additional steps to determine whether a guardian has been appointed and whether this law or a section of the surrogate’s court procedure act applies to this patient.[v]

For purposes of this Article, every adult is presumed to have decision-making capacity, unless a court order says otherwise, or a guardian is authorized under Article 81 of the mental hygiene law[vi].  An initial determination of capacity is made by the attending physician.  Such a determination concludes whether a patient lacks decision-making capacity to a reasonable degree of medical certainty.[vii] This determination includes an assessment of the cause and extent of the patient’s incapacity and the likelihood that the patient will regain decision-making capacity.[viii] An initial determination that a patient lacks decision-making capacity shall be subject to a concurring determination, made independently, by a party with certain qualifications, when required in certain circumstances.[ix] Once a determination is made that a surrogate will make health care decisions because the adult patient lacks decision-making capacity, notice of such determination will be given to the patient, where there is an indication that he or she has the ability to comprehend the information; to at least one person on the surrogate list highest in the order of priority; and if transferred from a mental hygiene facility, to the director of same.[x] Unless a court of competent jurisdiction has determined that the adult patient lacks decision-making capacity, has been adjudged incompetent for all purposes, or a special exception exists, if the patient objects to the determination of incapacity, or to the choice of a surrogate or to a health care decision made by the surrogate, the patient’s objection or decision shall prevail.[xi]

It is important to note that this determination of whether an adult patient lacks decision-making capacity shall not be construed as a finding that the patient lacks capacity for any other purpose.[xii] An attending physician will confirm the adult patient’s continued lack of decision-making capacity before complying with health care decisions made pursuant to this statute, although they are not required to inform the patient or the health care surrogate of the confirmation.[xiii] If it is later determined that the decision-making is regained by the patient, then the authority of the surrogate ends immediately.[xiv]

One person from the following list from the class highest in priority will be named as surrogate:1) a guardian authorized under article 81 of the NYS mental hygiene law; 2) the spouse, if not legally separated from the patient, or a domestic partner; 3) a son or daughter eighteen years or older; 4) a parent; 5) a brother or sister eighteen years or older; or 6) a close friend.[xv] A close friend is defined under the statute as “any person, eighteen years or older, who is a close friend of the patient, or a relative of the patient (other than a spouse, adult child, parent, brother or sister), who has maintained such regular contact with the patient as to be familiar with the patient’s activities, health, and religious or moral beliefs, and who presents a signed statement to that effect to the attending physician.”[xvi] If the attending physician is on the above list and becomes the surrogate, then he or she may no longer act as the attending physician.[xvii] Subject to certain limitations, the surrogate would have the same authority to make health care decisions just as the patient would.[xviii] The surrogate also has the right to receive updated medical information about the patient.[xix]

Decisions to withhold life-sustaining treatment are addressed in this statute, and the rules differ depending where the patient is being treated.  Certain additional conditions must be satisfied before the attending physician will authorize such treatment:

“1) Treatment would be an extraordinary burden to the patient and an attending physician determines, with the independent concurrence of another physician, that, to a reasonable degree of medical certainty and in accord with accepted medical standards, (a) the patient has an illness or injury which can be expected to cause death within six months, whether or not treatment is provided; or (b) the patient is permanently  unconscious; or 2) The provision of treatment would involve such pain, suffering or other burden that it would reasonably be deemed inhumane or extraordinarily burdensome under the circumstances and the patient has an irreversible or incurable condition, as determined by an attending physician with the independent concurrence of another physician to a reasonable degree of medical certainty and in accord with accepted medical standards.”[xx]

Health care, for purposes of this statute, does not include oral nutrition and hydration.[xxi]

If a patient resides in a residential health care facility, there are extra rules. A surrogate there may refuse life-sustaining treatment only if an ethics review committee including at least one physician not responsible for the patient’s care, or a court of competent jurisdiction reviews this matter and decides the standards above are met. [xxii] This rule would not apply to a decision to withhold cardiopulmonary resuscitation.[xxiii]

If the attending physician in a general hospital does not agree with the surrogate’s decision, then that decision will not be followed until the ethics review committee which contains at least one physician not directly in charge of the patient’s care, reviews the case and determines the standards above are met.[xxiv] Each hospital will establish its own ethics review committee.  The proceedings and records of an ethics review discussed above shall be confidential.[xxv] If the matter escalates beyond the ethics committee, the courts may intervene with a special proceeding and other options.[xxvi]

Up to now, this article has pertained to the adult patient.  When the patient is a minor, the parent will have the authority to act as surrogate, subject to the same limitations on withholding life-sustaining treatment above.[xxvii] There are additional provisions which may affect minors under certain circumstances.  Further, when the attending physician has reason to believe the minor patient has a parent or guardian, including a non-custodial parent who has not been informed of a decision to withhold life-sustaining decisions, then the physician should make reasonable efforts to determine if that parent/guardian has maintained “substantial and continuous contact” with the minor, and if yes, then make diligent efforts to notify that parent/guardian before following those instructions.[xxviii]

When an adult patient does not have a surrogate, and it is determined that the adult patient lacks decision-making capacity, to the extent possible, the hospital will look to the patient’s medical record to ascertain the wishes of the patient.[xxix] The attending physician is able to make decisions for the adult patient without a surrogate for routine medical treatment by themselves, and for major medical treatment in a hospital when also receives concurring recommendation from another physician designated by the hospital.[xxx] Decisions concerning withdrawal of life-sustaining decisions would be made by the attending physician and with concurrence of an independent physician designated by the hospital in a reasonable degree of certainty that no medical benefit would be gained by the patient because they face imminent death, or not providing such treatment would violate medical standards.[xxxi]

Once a patient, surrogate, or parent or guardian of a minor consent to withholding life-sustaining treatment, they may inform the attending physician of their wish to revoke his or her consent.[xxxii]

A Private hospital shall not be required to follow this statute if:

(a)     The decision is contrary to a formally adopted policy of the hospital that is expressly based on sincerely held religious beliefs or sincerely held moral convictions central to the facility’s operating principals;

(b)     The hospital has informed the patient, family, or surrogate of such policy prior to or upon admission, if reasonably possible; and

(c)     The patient is transferred promptly to another hospital that is reasonably accessible under the circumstances and willing to honor the decision and pending transfer, the hospital complies with …this (statute).  If the patient’s family or surrogate is unwilling to arrange such a transfer, the hospital may intervene to facilitate such a transfer.[xxxiii]

Individual health care providers are not required to follow this statute.  This is geared toward a general hospital setting.[xxxiv]

This new legislation is designed to help those families with patient who may not have put into writing their wishes concerning health care.  It is intended to supplement the medical ethics and add a number of procedural safeguards.  It may take time to smooth out any wrinkles in this statute when put into practice.  However, its intentions are good and it should help relieve a majority of the conflicts that arise now.

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[i] Chapter 45 of the New York Consolidated Laws – Public Health Law, Article 29-CC Family Heath Care Decision Act, § 2994-b(2).

[ii] P.H.L. § 2994-b(2).

[iii] P.H.L. § 2994-a(29).

[iv][iv] P.H.L. § 2994-d(5(e).

[v] P.H.L. § 2994-b(3).

[vi] P.H.L. § 2994-c(1).

[vii] P.H.L. § 2994-c(2).

[viii] P.H.L. § 2994-c(2).

[ix] P.H.L. § 2994-c(3).

[x] P.H.L. § 2994-c(4).

[xi] P.H.L. § 2994-c(6).

[xii] P.H.L. § 2994-c(5).

[xiii] P.H.L. § 2994-c(7).

[xiv] P.H.L. §2994-d(3)(b).

[xv] P.H.L. § 2994-d(1).

[xvi] P.H.L. § 2994-a(4).

[xvii] P.H.L. § 2994-d(2).

[xviii] P.H.L. § 2994-d(3).

[xix] P.H.L. § 2994-d(3)(c).

[xx] P.H.L. § 2994-d(5)(a).

[xxi] P.H.L. § 2994-d(5)(d).

[xxii] P.H.L. § 2994-d(5)(b).

[xxiii] P.H.L. § 2994-d(5)(b).

[xxiv] P.H.L.  § 2994-d(5)(c).

[xxv] P.H.L.  § 2994-m(6).

[xxvi] P.H.L.  § 2994-r.

[xxvii] P.H.L.  § 2994-e(1).

[xxviii] P.H.L.  § 2994-e(3).

[xxix] P.H.L.  § 2994-g(1).

[xxx] P.H.L.  § 2994-g(4).

[xxxi] P.H.L.  § 2994-g(5).

[xxxii] P.H.L.  § 2994-j(1).

[xxxiii] P.H.L.  § 2994-n(1).

[xxxiv] P.H.L.  § 2994-n(2).

Reverse Mortgages

These days looking for cash in your home is difficult to do with a home equity line of credit.  In certain circumstances, a Reverse Mortgage may be the best answer for someone who is equity rich and cash poor.  Common uses for the loan proceeds are to pay living expenses in retirement, or to fund a business opportunity.

For example, a borrower could take a Reverse Mortgage and use money to pay property taxes.  If the borrower takes a lump sum payment option, and in 10-15 years the money runs out the borrower could then refinance on the theory that the house is worth more, and they could be older and would be eligible to borrow more.  The amount to receive in a second Reverse Mortgage depends on the facts and circumstances at time of refinance.  However, beware; at refinance you must pay 4-5% again for closing costs.  Further, the value of the house may have declined, and the borrower therefore may not be eligible to have a second Reverse Mortgage.

With a Reverse Mortgage, there is no pre-payment penalty; the reverse mortgage can be repaid at any time.  This must be a loan against your primary residence, and the borrower remains on the deed as full title owner.   A  Reverse Mortgage can be done with a life estate: where a life estate is owned by the borrower/parent, and the children are on title as remainder.  The children must sign on loan documents.  As this is a non-recourse loan, the credit of the children will not be impaired because they are not personally liable.

There are several payment options for the borrower: a tenure plan, where there are monthly payments for life; a term plan, where there are monthly payments for a specified period of time; a line of credit, where advances are available in any amount, at any time; or a lump sum payment, where all funds are received at disbursement. The first three options offer a more cautious, slower rate of payment to the borrower, and may be a better choice for the borrower in order to be more eligible for Medicaid purposes.  A lump sum would more likely disqualify them for Medicaid eligibility, and could be more dangerous to some borrowers to have such a large amount up front.   The interest rate on a Reverse Mortgage can be adjustable or fixed.

As part of the Reverse Mortgage application process, the Borrower must receive counseling from an independent third party, obtain a certificate from that session and give same to the lender before the loan can be closed.  The lender must give the borrower at least ten (10) names of independent counselors from which to select the required counselor.

There is no residency requirement for reverse mortgages.  A borrower can do a reverse mortgage on a purchase.  For example, a borrower may sell a property, take a forward (conventional) mortgage for part of cost of the purchase of the smaller new home, and reverse mortgage for the balance.

Before a Reverse Mortgage can be closed, all mortgages and any other lien on the property must be paid.  The closing costs, which run 4-5% of the appraised value of the property, are paid by the borrower up front. The appraisal of the property is done at the outset of the loan, and there is no re-inspection of the property during the loan term. The current maximum appraised value of the property could be $625,500.  To illustrate, if the house is worth $1,000,000, then the closing costs would be based on a value of $625,500.  Further, if the house is worth $500,000, then the closing costs would be based on a value of $500,000.  Previously, the maximum amount of loan obtained in a Reverse Mortgage (hereinafter “claim amount”) was $417,000.  Recent stimulus legislation increased the maximum claim amount to $625,500.  There is talk this will return to $417,000 shortly.  Therefore if you have a house valued between $417,000 and $625,500, this may be a window of opportunity.  The title insurance and costs are also based on the maximum claim amount.  However, beware; a loan is only based on a sliding scale of the borrower’s age.  If the maximum amount to lend is $625,500, the borrower will only get that amount if she is 100 years old.  The borrower, or youngest spouse if borrowing jointly, must be at least 62 years of age.  One ordinary closing cost does not apply: this type of loan is not subject to New York State mortgage recording tax.

One reason the closing costs are high is that they include a type of PMI that in the event the value of the house is less than the amount of the mortgage at the time of loan repayment (i.e. death of the borrower), and there is no amount due by the heirs of the borrower.  It is a non recourse mortgage.

It is a requirement of the reverse mortgage that property taxes and insurance remain current on the property.   Unpaid property taxes and insurance are considered a default.  It makes the calculations simpler to have the borrower pay their own real estate taxes and homeowners insurance from funds other than the Reverse Mortgage proceeds.

There is no income tax deduction for the accrued mortgage interest during the reverse mortgage term because cash basis rules apply– no mortgage interest was actually paid.  However, by taking out the reverse mortgage, the borrower is reducing their estate taxes by having more debt.

The amount of time you anticipate spending in your home is another factor to consider when you are thinking about a Reverse Mortgage.  A reverse mortgage is not recommended if the borrower is leaving their home in 1-2 years, because of the closing cost hurdle.  It pays off after 3-5 years.

This is a brief overview of the Reverse Mortgage.  It is not for everyone.  However, it could be a good fit for certain situations.  It is best to consult a financial professional to discuss your particular facts and circumstances to see if it is a good fit for you.

The Economic Growth And Tax Relief Reconciliation Act

The Economic Growth And Tax Relief Reconciliation Act of 2001 (known as EGTRRA) provided for a number of significant changes to the Estate and Gift Tax laws over time, culminating with the elimination of the Estate and Generation Skipping Transfer Tax (GST) effective January 1, 2010, and freezing the Gift Tax lifetime exemption at $1,000,000 with a maximum marginal rate of 35 percent. This legislation has now effectively eliminated the Estate Tax and significantly reduced the Gift Tax. However, the euphoria of no estate tax is destined to be short-lived, as EGTRRA also provided a “sunset” provision that causes the legislation to expire on December 31, 2010. As a result, these sweeping tax reductions are all temporary for the year 2010. On January 1, 2011 the Estate and GST tax will be reinstated to pre-EGTRRA levels with a much lower exemption of $1,000,000 and much higher marginal rates. The Gift Tax will keep its $1,000,000 exemption, but the rates will increase and once again be unified with the Estate Tax rates.

This seemingly monumental, albeit temporary, change in the law has created much distress amongst many advisors. The temporary nature of these changes creates an environment of uncertainty for estate planners and their clients. During 2009, a number of bills were introduced in Congress to provide for either a temporary or permanent extension of the estate tax; however, none became law. As a result, we now have a number of significant changes to the law in 2010 including: the repeal of Estate and GST transfer taxes, the highest marginal gift tax rate equal to the top individual income tax rate (currently 35%) and a new Carryover Basis regime with a $1.3 million per person basis step-up and a $3 million marital step-up.

These sweeping changes can also create problems with the current clauses in many existing estate planning documents. Even if a client does no new planning this year, their documents may be effectively outdated. Practitioners are now faced with helping clients create or change estate planning documents to deal with the current tax free regime, the return of the Estate and GST tax in some form and, most likely, much higher Estate and Gift rates by January of 2011 at the latest. Additionally, the Carryover Basis rules will require reviewing asset purchase records that date back many years. In some cases these records may be non-existent, creating problems in determining basis.

It is possible that Congress will enact a permanent extension of the Estate and GST tax in the early part of 2010 and make it retroactive to the beginning of this year. While a number of practitioners expect this, given the political implications of tax increases, there is always the possibility that Congress will do nothing in 2010, let the current law expire, and then have essentially increased taxes without having taken any action. With all the additional items on Congress’s agenda there seems to be a growing belief among some practitioners that this will be the case.

However, even if a retroactive law change is passed, the issues will not end there. In addition to the usual political implications associated with tax law changes, this case poses interesting constitutional arguments inherent with a retroactive law change which could be challenged in the courts.

Although practitioners may feel that a permanent extension is inevitable, the only certainty we currently have is the state of the law today. For now, there is no Estate and GST Transfer tax in 2010 and we find ourselves in the new Carryover Basis regime. While practitioners grapple with uncertainty, for many clients, this is an important time to revisit their overall estate and wealth transfer planning.

Eligibilty for Medicaid & Saving Your Home

When people contemplate retirement, and the possibility of being on Medicaid, a major concern is losing the asset that was so hard to purchase and maintain: the home. Medicaid planning, when transferring title to a home, sets out to achieve several objectives, including avoiding The Medicaid Lien and The Right of Recovery.

According to 42 USCA section 1396p(1)(A) and (B); Social Services Law section 369(2)(a)(i) and (ii), the New York State Department of Health may impose a lien on real property on Medicaid correctly paid. This lien occurs when a Medicaid recipient becomes permanently institutionalized and is not reasonably expected to be discharged from the medical institution and return home. This reasonable expectation is based on the Medicaid recipient’s subjective (not objective expectation) intent to return home.

A lien would be imposed on the amount of Medicaid paid after six months in the institution, after this reasonable expectation test is met, unless an exempt person still resides in the home. If the Medicaid recipient is discharged from the institution, and returns to the home, the Medicaid lien is dissolved.

One way for the Medicaid recipient to demonstrate intent to return to their home would be to submit an affidavit of this intention with their Medicaid application. This affidavit would express the temporary nature of their stay in the institution and their intent to return home. If the client lacks sufficient capacity, you may consider having the client’s attorney-in-fact submit an affidavit combined with ample medical evidence that the client is expected to return home.

There are ways for Medicaid recipients to avoid having this lien imposed. If an exempt person still maintains residence in the home while the client is in the institution, a Medicaid Lien cannot be imposed on that home. This exempt person would be:

1. The spouse of the client; or
2. A child of the client who is certified blind, disabled, or under the age of 21; or
3. A sibling of the client who owns an equity interest in the home and who was residing in the home for at least one year immediately before the client’s admission to the medical institution; or
4. A child of the client who resided in the home for at least two years immediately prior to the date the client became institutionalized and provided care to the client, which allowed the client to remain at home rather than in a medical facility.

The client may elect to transfer the home to one of these exempt individuals up to 90 days after admission to a medical institution and still escape the imposition of a Medicaid Lien. In addition, Medicaid cannot recover from the client’s estate if the client is survived by on of these exempt persons.

The issue arises: what if you don’t have an exempt person in your life. Is there still a way to avoid the Medicaid Lien? The answer is yes. One option is for the single client to transfer the real property from their ownership to another party, but retain a life estate in the real property, since it will be subject to the Medicaid transfer penalty rules before the need for Medicaid. Medicaid cannot file a lien against a life estate. A life estate is not a countable resource for Medicaid eligibility. This life estate vehicle applies for the family home or other realty. Medicaid cannot force a sale of the life estate. However, if the life estate is sold, then life estate proceeds are an available resource for Medicaid eligibility and subject to recovery. Along the same lines, Medicaid cannot force the client to rent out the life estate. However, if the realty is rented, then the rent is subject to recovery as an available resource of the client.

Medicaid may recover (The Right of Recovery mentioned above) from Medicaid recipients for benefits correctly paid from the following:

1. The sale of real property subject to a Medicaid lien of a Medicaid recipient who was permanently institutionalized during the Medicaid recipient’s lifetime or from the Medicaid recipient’s estate; or
2. The estate of the Medicaid recipient who was fifty-five (55) years of age or older when the Medicaid recipient received Medicaid; or
3. A legally responsible relative (typically the spouse) of sufficient ability to be responsible for the dependant’s care; or
4. Personal injury claims; or
5. A mandatory or discretionary beneficial income and/or principal interest in an Intervivos Trust or a Medicaid recipient or Medicaid recipient’s spouse.

A second option is the New York State Partnership Long Term Care Policy. If a client has purchased a New York State Long Term Care Partnership insurance policy, which provides the client with three (3) years of nursing home benefits, or its equivalent, Medicaid cannot impose a lien or seek recovery from the client’s assets, (e.g. the home).

A third option is a transfer of title of the real property through a deed (or trust) that enables the client to retain a special power of appointment. This allows the client to alter, amend or terminate beneficial interest in the property to a specific class of beneficiaries, other than the client, the client’s estate or creditor’s of the client’s estate. When making transfers, you must consider the Medicaid transfer penalties.

DSS will look back three (3) years from the first day of the month of application of the client to identify uncompensated direct transfers and five (5) years for uncompensated trust related transfers. The penalty period is the number of months which an institutionalized individual can not qualify for Medicaid benefits from the date of transfer. This results from dividing the fair market value of the transferred property by the average monthly costs of nursing home care in the client’s geographic region. In Nassau county, the 2005 cost is $9,612. Therefore, if a client were to transfer a home to a non-exempt person with a fair market value of $300,000, the penalty period would be $300,000/$9,612 or 31.21 months. The client would therefore not be permitted to apply for Medicaid for 31.21 months from the date of transfer.

You can see by this example how important it is to start planning well in advance of when you apply for Medicaid, as home values in Nassau county will likely exceed $300,000 in the near future, if they haven’t already.

There are other issues to consider, such as the capital gains exclusion, who is entitled to use it upon sale of a principal residence, stepped-up and carry-over basis, and gifting. These issues and other concerns should be discussed with your tax advisor.

Qualified Personal Residence Trust (QPRT)

A QPRT is an irrevocable trust holding a personal residence, where the grantor retains the right to use and occupy the residence for a fixed period of time, (income interest), and the principal remaining at the end of the trust term passes to the remainderman, (a non-charity beneficiary). QPRT may also hold cash for certain purposes. A taxpayer may create a QPRT for a primary and one other residence for a maximum of two.

The gift is calculated at the outset, when the trust is setup. The gift is the value of the future interest to the remainderman. There is potential for significant gift tax and estate tax savings because the taxable gift is calculated using the time value of money. The estate is effectively frozen, and the appreciation of the asset passes to the beneficiaries, escaping gift and estate tax.

The goal is for the trust term to be long enough to give a low gift tax value, and short enough that the grantor will outlive it. If the grantor dies before the trust term, then the assets are included in the grantor’s estate at their values as of her date of death.

EXAMPLE:
Facts:
7520 interest rate 6%, Grantor is age 75, 7 year trust term, 50% estate tax rate
Fair market value of residence at inception = $1,000,000
Present value of retained interest is .334943 * 1,000,000 = 334,943
Growth of value in residence is 4% per year, or $1,315,932 after 7 years

Value of property at gift $ 1,000,000
Less: Value of income interest retained (334,943)
Value of future interest gift (to remainderman) $ 665,057

FMV at end of year 7 $ 1,315,932
Less: Gift value at year 1 ( 665,057)
650,875
* Estate tax rate * 50%
Estate tax savings $ 325,438

AND probate costs are avoided because property passes outside of probate.

Some important points in planning a QPRT:

• Get appraisal of residence placing in trust
• A written lease for term after lease if grantor will remain
• Lease at fair market value if grantor will remain
• Consider discussing wishes of remainderman in property – may desire side agreement to make clear intent
• Trustee should be other than grantor or grantor’s spouse
• Life insurance (received estate tax free) on grantor’s life to provide estate liquidity to pay estate tax

Considerations for property placing in QPRT:

• Mortgage on premises
• Improvements made to premises additional gifts (compliance returns required)
• Sale of residence before trust term expires

Tax considerations of QPRT:

• Grantor trust – income / expense items flow to grantor (property taxes)
• Exclusion on sale of home available if meet tests
• Gift, so carry over basis upon sale by remaindermen
• Gift splitting by non-grantor spouse lost if grantor does not survive trust term

QPRT after the trust term:

• Trust must state grantor (or spouse) may not repurchase residence
• Grantor may lease residence from remaindermen at fair market rent
• Want “arm’s length transaction”
• No string to pull back to grantor’s estate
• Letter from broker to support rent amount
• Local newpaper rental advertisements could support rent amount
• Rent adjusted downward if grantor pays property taxes, etc.
• Deed and transfer documents to transfer title to remaindermen
• Insurance in name of remaindermen

Disadvantages of QPRT:

• Transaction costs (appraiser, legal, title costs)
• Lost opportunity cost of large gifts during lifetime of grantor
• Consider state issue – Florida homestead exemption lost for out of state trusts as owner
• Causes considerable increase in property taxes
• Control / family issues
• Appreciation may be less than think, consider current market and length of trust term.

Social Security and Federal Deposit Insurance Corporation (FDIC) Increase

From time to time as development occur in the field of tax planning, asset protection and other related areas; we would like to bring these items to your attention.

1) Social Security Benefit Increase -

On Thursday October 16, 2008, the Social Security Administration announced monthly Social Security and Supplemental Security Income benefits for Americans would increase by 5.8% in 2009. This is reportedly the largest increase since 1982. This Cost-of-Living adjustment will begin in January 2009 for Social Security beneficiaries and on December 31, 2009 for Supplemental Security Income beneficiaries.

2)Internal Revenue Service Inflation Adjustment –

The annual gift exclusion increases to $13,000 per donee per recipient per year in 2009. Therefore, in 2009, a married couple could now gift up to $26,000 per recipient, and be under the threshold, not required to file a gift tax return.

3) Federal Deposit Insurance Corporation (FDIC) Increase –

The FDIC protects depositors against the loss of theirs insured deposits in an FDIC-insured bank or savings association if that entity fails. The accounts of a depositor at one FDIC-insured bank or savings association which total $250,000 or less (up from $100,000 or less) are insured. It is also possible for a depositor to have more than $250,000 at one insured bank or savings association and still be fully insured, provided certain requirements are met by the depositor.

This change is effective October 3, 2008 through December 31, 2013. On January 1, 2014, FDIC deposit insurance for all deposit accounts, except certain retirement accounts, will return to at least $100,000 per depositor. Insurance coverage for certain retirement accounts, which include all IRA deposit accounts, will remain at $250,000 per depositor.

Effective October 14, 2008, all non-interest bearing checking transaction deposit accounts at an FDIC-insured institution, including all personal and business checking deposit accounts that do not earn interest are fully insured for the entire amount in the deposit account. This unlimited insurance coverage is temporary and will remain in effect for participating institutions until December 31, 2013.

To check whether a bank or savings institution is insured by the FDIC, call toll-free at 1-877-275-3342.

FDIC insurance covers all types of deposits at an insured bank, including deposits in checking and savings accounts, money market deposit accounts and certificates of deposit (CD’s). FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these were purchased at a bank. In addition, US Treasury bills, bonds or notes are backed by the full faith and credit of the United States government, not the FDIC.

Deposits in different branches of the same bank are aggregated and considered together in terms of the FDIC insurance limit. Deposits made in different categories of legal ownership at the same bank can be separately insured. In this way, it is possible to have more than $250,000 of deposits at one bank, and still be fully insured. There are eight (8) different categories of legal ownership recognized by the FDIC regulations:

a) Single Accounts;
b) Certain Retirement Accounts;
c) Joint Accounts;
d) Revocable Trust Accounts;
e) Irrevocable Trust Accounts;
f) Employee Benefit Plan Accounts;
g) Corporation/Partnership/Unincorporated Association Accounts; and
h) Government Accounts

The most common ownership categories are single accounts, certain retirement accounts, joint accounts and revocable trust accounts.

Single accounts are those owned, as the name implies, by one person. They include accounts created for one person by an agent, nominee, guardian, custodian or conservator, including Unified Transfers to Minors Act accounts, escrow accounts and brokered deposit accounts. Single accounts also include accounts held in the name of a sole proprietorship, accounts established for an estate, and any account that fails to qualify for coverage under another ownership category.

Single accounts also include convenience accounts or those where another signer is authorized to withdraw under a Power of Attorney. All single accounts owned by the same person at the same insured bank are added together and the total is insured up to $250,000, (up from $100,000).

Certain retirement accounts covered include deposit accounts owned by one person and titled in that person’s retirement account only. For example, Individual Retirement Accounts (IRA’s), Section 457 deferred compensation plan accounts, self-directed defined contribution plan accounts, and self-directed Keogh plan accounts. All deposits an individual has in any type of the retirement plans listed above up to $250,000 in total are FDIC insured. Naming additional beneficiaries for retirement accounts does not increase FDIC insurance. The account value is the dispositive item.

Joint accounts are deposit accounts owned by two or more persons. These deposit accounts are the same as single accounts: checking, savings, certificate of deposits (CD’s). Both owners have equal rights of withdrawal. In joint accounts, each co-owner contributes up to $250,000 insured deposits. This results in $500,000 of FDIC insurance coverage in total joint accounts between a husband and wife.

Revocable Trust accounts are deposits held in either living trusts or payable-on-death (POD) accounts. POD accounts, also known as totten trusts, are the most common type of revocable trust account. These are informal trust accounts created when the account owner signs an agreement, often the bank signature card, stating the deposits will pass to another stated person upon the owner’s death. Living trusts, also known as family trusts, are formal trusts created during a depositor’s lifetime that may be changed, and are usually created for estate planning reasons.

The owner of the trust controls the deposits during their lifetime. Effective September 26, 2008 (rules released September 30, 2008), the FDIC eliminates the rules of qualifying beneficiaries. Previously, deposit insurance for revocable trust accounts is based on each owner’s relationship with the beneficiaries of the trust.

The FDIC insures the interests of each beneficiary up to $250,000 (increased from $100,000) for each owner if all the following requirements are met: a) the beneficiary is a person, charity or other non-profit organization (as the Internal Revenue Service recognizes); b) the account title indicates a trust relationship exists by including language such as payable on death, or in trust for, trust, living trust, family trust or an acronym such as POD or ITF; c) for POD accounts, each beneficiary must be identified by name in the bank’s account records. The new interim rules now state that a trust account with up to five different beneficiaries named in all her/her revocable trust accounts at one FDIC-insured institution will be insured up to $100,000 per beneficiary.

Revocable trust account owners with more than $500,000 and more than 5 beneficiaries named in the trust(s) will be insured for the greater of either $500,000, or the aggregate amount of all the beneficiaries’ interests in the trust(s), limited to $100,000 per beneficiary.

In these times when laws seem to be changing each week, we will continue to update you as significant and relevant developments occur in these are other important subjects.

February, 2009 – Alert to our clients on recent Estate and Gift Tax Updates

With new Estate and Gift Tax Rules effective for 2009, we wanted to inform our clients of the new rules. We encourage you to revisit your current wills, trusts and other estate planning documents to ensure that the provisions in effect still have the impact you originally intended. In addition, there are opportunities to seize and possible problems to avoid in this low interest rate, declining asset value environment.

• The federal estate tax exemption has increased to $3,500,000 per decedent in 2009 from $2,000,000 in 2008. In 2010 there is no federal estate tax.

• After 2010, the federal estate tax exemption will revert to $1,000,000.

• The highest federal estate tax rate in 2009 is 45%, as it was in 2008.

• After 2010, the highest federal estate tax rate will be increased to 55%.

• There is no change in the generation skipping transfer exemption amount in 2009.

• The annual gift tax exclusion has increased to $13,000 per person per donee for gifts of a present interest. This is up from $12,000 in 2008.

• Contributions to 529 plans may be made in one year, and be treated as if they were made over five years, taking the immediate exclusion of $13,000 * 5 or $65,000 in 2009.

• Gifts to noncitizen spouses are limited to $133,000 in 2009, up from $128,000 in 2008.

• The lifetime gift tax exclusion continues to be $1,000,000 per person in 2009 and 2010.

• In 2010, the maximum gift tax rate is 35%. After 2010, the maximum gift tax rate increases to 55%.

• In 2010, a modified carryover basis rule for inherited property will commence: the heir’s basis is the lower of the adjusted basis in the property in the hands of the decedent, or the fair market value of the property on the date of the decedent’s death. However, an important part of this rule is that the executor can step up the basis of estate property by $1,300,000 and by $3,000,000 for a marital property.

• There are new reporting requirements for the executors to implement this new carryover basis rule. An executor will make the informational filing and then give statements within 30 days of the date the return filed to the heirs, providing particulars of the basis.

• The use of Grantor Retained Annuity Trusts (GRATs) in this historically low interest rate environment could prove to be very beneficial, and save substantial estate taxes.

• The use of Qualified Personal Residence Trusts (QPRTs) in this environment of declining residence values could prove to be very beneficial, and save substantial estate taxes.

• The Credit Shelter Trust terms may need to be revisited. If there is not an option for a disclaimer, the results may differ from your original intentions.

• Specific bequests of specifically named stocks or residences may need to be reviewed. If the bequeathed asset has substantially declined in value, you may have intended to bequeath that party more than it is currently worth.

• Charitable bequests may need to be reexamined in light of the possibility that your total assets have decreased. Perhaps you may not want to, or you may not have as much available to make charitable bequests as you had when your current documents were created.

• Consideration should be given to existing life insurance policies. If existing policies were intended to pay estate taxes, in light of reduced asset values and increasing estate tax exemptions, there may not be a need for this policy/ these policies. However, as things may change, careful thought should be given before cancellation of any policy.

• As values of assets have declined, this could present an opportunity to make gifts at no gift tax cost, by utilizing annual exclusions and lifetime exclusions. In addition, for transferring interests in businesses, the use of discounts could prove to be a tool in reducing gift taxes.

• Assets of a decedent may be valued at either the date of death or six months thereafter. In this environment of declining values, alternate valuation dates could prove to be effective in reducing estate taxes.

In these times when laws seem to be changing each week, we will continue to update you as significant and relevant developments occur in these and other important subjects. With changes in laws coming down the pike, we invite you to contact us to discuss your estate plan.

Power of Attorney Law Update

Governor Patterson signed major amendments to the New York State General Obligations Law, of Title 15 of Article 5, governing powers of attorney (POA) on January 27, 2009. The effective date was initially March 1, 2009, and was delayed until September 1, 2009. However, some provisions apply to current POAs. Chapter 644 of the Laws of 2008 introduces the Statutory Major Gifts Rider (SMGR).

The amendments are a result of concern over abuses by Attorneys-in-Fact and concern for oversight and additional controls to implement over the Attorney-in-Fact, especially for when the Principal becomes incapacitated. In addition, the current form lacked clarity on how a Power of Attorney could be revoked, and did not fully address issues relating to HIPAA releases.

It should be noted that validly executed Durable Powers of Attorney (on or before August 31, 2009), are still effective and remain effective after September 1, 2009. However, the new forms are not effective, and should not be used or signed prior to September 1, 2009. This statute has a prospective effect.

The new Statutory Short Form is a Durable Power of Attorney. The default is a Durable power. If this form is used, you must indicate whether it is anything other than Durable, such as a Springing power.

The new form requires the signature and acknowledgement of the Principal and Agent, and will not be effective until ALL co-Agents, (if there are multiple Agents), sign and have their signature acknowledged.

Another important change is that the fiduciary’s (Agent/Attorney-in-Fact’s) obligations are spelled out on the form. Therefore, the Agent will know from the outset what their responsibilities are.

One critical change is that when you sign, unless the Power of Attorney says to the contrary, it invalidates ALL other Power of Attorneys. This could have devastating results. For example, consider if you spent substantial time with your attorney, drafting a new and very comprehensive Statutory Short Form Durable Power of Attorney in September 2009. Then in November 2009, you go to XYZ Bank and sign a Power of Attorney there. That November 2009 would technically override the September 2009 Power of Attorney you worked so hard to craft. Technical corrections have been submitted to Albany, so that prior Power of Attorneys are not revoked UNLESS you provide that they should be revoked.

There is a new power, enumerated (I), entitled “personal family maintenance”. It provides that an Agent/Attorney-in-Fact can make gifts the person traditionally made to any beneficiary up to five hundred dollars ($500) per beneficiary. There is also a current Technical Correction submitted to make it gifts up to five hundred dollars ($500) in the aggregate. This emphasized the utilization of the Statutory Major Gift Rider (SMGR).

There will now be two forms to comprise the POA. The first is the Statutory Short Form Durable Power of Attorney. The second document is known as the Statutory Major Gift Rider (SMGR). The SMGR will go into great detail regarding assets, authority to gift and related maters. Many of the powers in the current durable power of attorney concerning creating joint bank accounts and trusts were stripped out of the current Power of Attorney and put into the SMGR. Any powers beyond making annual exclusion gifts will be considered additional powers, and will be a modification to the new Form. Some examples include modifying a trust, creating joint bank accounts, setting up trusts, giving gifts to self (Agent). The critical change is that this is not a form that an average person can go out and get. Rather they must sign with the FORMALITY OF A WILL. Ostensibly this brings attention to the Principal of the gravity of the situation and the powers being granted to the Agent/Attorney-in-Fact. It emphasizes that the powers given are much more than merely bill paying abilities.

Another key innovation under the Statutory Short Form is that it can provide a Monitor. In the event of the incapacity of the Principal, the Monitor can force the Agent to accumulate all records since they became Agent within FIFTEEN (15) days to the Monitor. Recordkeeping has always been an obligation of the Agent. However, now the responsibility has become more pronounced and enforced. On day sixteen (16), if the Agent has not provided the records to the Monitor, the Monitor can commence a Special Proceeding to force an Accounting by the Agent. In addition, the Principal can implement this procedure. Formerly it was unclear what to do when a Principal wanted to revoke an Agent’s power. Now, with this mechanism, it has become much clearer. Revocation is also more explicit under the new law. Revocations must be sent by Agents to any third party involved. There is currently a technical correction in review that notice is not required to financial institutions.

Third parties will be forced to honor this form. Financial institutions, which may have previously required you to complete their form, rather than honoring your Power of Attorney now, could be subject to a Special Proceeding if they refuse to honor the form. There are exceptions, such as if the institution is acting in good faith, or has actual or reasonable belief of undue influence or duress. However, the financial institution CANNOT refuse to honor your Power of Attorney merely because you have an old form.

These are the highlights of the new legislation as it relates to the new forms. There are several other details that cannot be covered in an article of this depth. I suggest you consult an estate planning profession to help guide you through this process so that you would fully understand the full impact of these new legislative changes.