Archive for the ‘General’ Category

This from Ann:

Today is my TEN YEAR SURVIVOR ANNIVERSARY!! It is so incredible that in 2000, Bob and I were told that my colorectal cancer came with a 50% five year survival rate. Well we beat those odds – and then some.

So thank you – for everything you did. No matter how small it may have seemed to you at the time, it was important to us.

Some very special thanks. To the good Lord above who always, always provides for our needs. To Bob and Bobby who each and every day give me love and motivation. To Mom – as a mother I have tried to put myself in your shoes during those days – impossible. To my MDs and PA – for the expertise, absolutely – but also for the compassion. Finally – to my personal chemo chauffeur – your journey on this same path was short, but for you every day now is a celebration beyond anything we can imagine – miss you so much, Daddio*.

So raise a glass!! Slainte!

Ann

* Note from Bob: Colon cancer took Ann’s Dad, Harry Haslam, Sr., in August 2008.

Loss of Stepped-Up Basis Means Carry Over Basis

As things stand now (February 11, 2010) stepped-up basis in inherited assets has been drastically curtailed.  The estate tax went into automatic repeal on January 1, 2010, and with it went the stepped-up basis rules.  Whether those rules come back, and if so in what form and when, depends totally on Congress.

How Congress handles that could tremendously affect the country’s middle class elderly and their families who have counted on the ability to leave assets to younger generations at a tax basis calculated from the value of an asset on the date of death of a parent, rather than the basis of the asset in the hands of the parent.

Background

As a result of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, beginning January 1, 2010, the estate and generation-skipping transfer taxes have been repealed for one year while the gift tax remains in place with a $1 million exemption and 35% maximum rate.  This in itself does not raise too many immediate issues for elder law attorneys.

What does raise issues for elder law attorneys is the fact that the same “one year repeal scheme” contains a “modified carryover basis” that generally denies a step-up in the basis of appreciated assets at death through a repeal of IRC § 1014.  In its stead is new IRC § 1022 (discussed further below).

Unless Congress acts, the estate, gift, and GST taxes as they existed before 2002 will be reinstated on January 1, 2011, with a 55% rate and a $1 million exemption for lifetime and testamentary transfers (as well as a $1 million exemption from GST tax).  That may not have too much impact on the average elder law client.  Most important, perhaps for the elder law bar, will be the reinstatement of IRC § 1014.

Parliamentary Machinations

On December 2, 2009, the House of Representatives, along strictly partisan lines, passed H.R. 4154, making 2009 law (with its $3.5 million estate and GST tax exclusions, 45% rate, and IRC § 1014) permanent.

On December 24, 2009, Senator Max Baucus (D-MT) attempted through parliamentary maneuvering (which would require bipartisan support) to skip the first and second reading of the bill and extend the then current tax scheme for two months into 2010, which would give the senate time early in 2010 to take up the issue and avoid the confusion that currently confronts us.  In response, Senator Mitch McConnell (R-KY) attempted to introduce a bill that would permanently raise the exemption to $5 million, lower the top rate to 35%, and allow a surviving spouse to use unused exemption “left over” from a deceased spouse.

At this point, full of the Christmas spirit and anxious to get home through a blizzard raging in the middle of the country, H.R. 4154 was docketed for the usual second reading immediately upon the return of the Senate in 2010.  On January 20, 2010, the bill was read the second time and placed on the Senate Legislative Calendar where, as of today (February 11, 2010), it languishes.

So . . . What Now?

The Senate could act quickly . . . or not.  When and if it acts, the question remains with respect to the prospective versus retroactive application (and, in either event, it would likely go to conference or back to the House).  Given the current political climate, I will venture no predictions.  That being said, 41 Republicans in the Senate will find an automatic reinstatement of the 2002 tax with a 55% rate and a $1 million exclusion highly unpalatable, which may put them in more of a mood to “make a deal”.

BOTTOM LINE:

• If Congress reinstates the Estate Tax retroactively to January 1, 2010, IRC § 1022 and the carry-over basis scheme is irrelevant.

• If Congress does nothing, carry-over basis will be a concern for the estates of decedents dying in 2010 only.

• If Congress reinstates the Estate Tax prospectively from enactment, then the carry-over basis scheme is a concern for the estates of those dying during the “gap period” between January 1, 2010 and the effective date of any new enactment.

IRC § 1022 Impact On Grantor and Testamentary Trusts – It Ain’t Pretty

Generally, IRC § 1022 provides that basis of “property acquired from a decedent” is the lesser of the decedent’s basis or the fair market value on the date of the decedent’s death.  IRC § 1022(a)(2).  Two modifications alleviate much of the pain.

First, a “general basis increase” in the amount of $1.3 million is available to be allocated to property, IRC § 1022(b), in a manner to be determined by “the executor” and as elected on a return, IRC § 1022(d)(3)(A).

Second, a “spousal basis increase” in the amount of an additional $3 million is available with respect to “qualified spousal property”.  IRC § 1022(c).  The definition of “qualified spousal property” should be of significant interest to the elder law attorney.

• Of course, it includes outright transfers, id. (c)(3)(A), but often planning strategies avoid such testamentary transfers.  The other troubling aspect is that “outright transfers” arguably do not include a life estate to the spouse (and for that matter other terminable interests).  Id. (c)(4)(B).

• The definition also includes “qualified terminable interest property”.  Id. (c)(3)(B).  “Qualified terminable interest property” mirrors much of the definition under IRC § 2056 (which, by the way, has now been temporarily repealed).  Id. (c)(5).  The property must pass to the spouse from the decedent and must provide a qualifying income interest for life, which is defined as either all the income at least annually or a “usufruct interest for life” (query: would this resurrect a life estate?).  Id. (c)(5)(B).  The question is to what extent regulations under IRC § 2056 might flesh out these concepts that would apply under IRC § 1022.Here is the real catch: Property passing to a marital SNT will not eligible for the spousal basis increase, although it should be eligible for the general basis increase.Suffice it to say, also, that allocation of a “spousal basis increase” will not be available to an irrevocable grantor trust . . . but in the elder law context spouses are not usually the beneficiaries of irrevocable grantor trusts.

With respect to other beneficiaries interested in the general basis increase, the single biggest question in the context of irrevocable grantor trusts is to what extent the property passing to remainder beneficiaries would be considered “property acquired from a decedent”. There has been debate on the topic between those who might be considered as taking an expansive outlook on what trusts that would qualify for an allocation of basis increase and those who take a narrower view.

The Debate

I take the narrow or “conservative” view. But in fairness to those who take a more “expansive view” (especially because many of them are exceptional lawyers) I’ll summarize.

For any property to be eligible under IRC § 1022, it must be “treated as owned” by the decedent and “acquired from the decedent”.

The thinking of the “expansive” view commentators is that any grantor trust (under the rules of IRC §§ 671-678) that was treated as wholly owned by the grantor (who is now deceased) should qualify for a basis increase. The thinking is that because the trust had been “treated as owned” by the decedent under IRC §§ 671-678, it ought to be treated as owned under IRC § 1022.

Under the “expansive view”, for example, a grantor trust treated as owned by the grantor because she retained a right to substitute assets under IRC § 675(4) ought to qualify for a basis increase under IRC § 1022.

The problem with that line of reasoning, as I see it, is that IRC § 1022 provides specific instruction as to what is treated as owned or not owned by the decedent and transferred by the decedent for purposes of basis allocation. There is no statutory cross reference to the grantor trust rules.

I believe the grantor trust rules and the carry-over basis rules of IRC § 1022 are about different tasks. The grantor trust rules determine deemed ownership (“treated as owned” if you will) for purposes of determining whether items of income, deductions and credits are going to flow through to the grantor.  The carry-over basis rules under IRC § 1022 determine whether an asset is “treated as owned” by a decedent in such a manner that the property can be said to have been acquired from the decedent in order to determine whether a beneficiary is going to be entitled to a basis increase.

Further Analysis Under the “Conservative” View

• IRC § 1022 applies generally to “property acquired from a decedent”. IRC § 1022(d)(1)(A) provides that the general basis increase ($1.3 million) and the spousal basis increase ($3 million) are available “only if the property was owned by the decedent at death”.

• Subparagraph B, clauses (i) and (ii), clarify that a portion of jointly held property and property in a revocable trust are treated as owned by the decedent. Also, IRC § 1022(d)(1)(B)(iii) says that the decedent is not treated as owning property by virtue of a power of appointment with respect to the property.

• IRC § 1022(e) defines “property acquired from the decedent”. Subparagraph (2) again clarifies that property passing from a revocable trust is eligible. Property transferred by the decedent during his life “to any other trust with respect to which the decedent reserved the right to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust” is also eligible. In the context of an irrevocable grantor trust, according to the “conservative” view, the only way to secure the general basis increase is through IRC § 1022(e)(2)(B). In view of the language concerning powers of appointment in IRC § 1022(d)(1)(B)(iii), the practitioner may want to consider some limited right to amend in the grantor, perhaps to remove a remainder beneficiary or class of beneficiaries in favor of some other beneficiary or beneficiaries. Of course, this must be viewed in light of the possibility that a state agency would attempt to use this power to classify the trust as an available resource for Medicaid purposes (which is why it may be wise to specify the alternate beneficiary in the document which would drastically limit the scope of the amendment the grantor could make).

Well . . .

Uncertainty certainly reigns. With respect to carry over basis, and unless Congress becomes any more unhinged than it is, it seems that the difficulties discussed here will remain through, at most, 2010.

Coastal Senior is a monthly periodical published in Savannah, Georgia and circulated throughout the Georgia and South Carolina low country. Bob Mason is its legal columnist.

Big Veterans Benefit Often MIA

Time for a riddle. What do less than 25% of eligible people ever receive, can be worth up to $1,842 a month, and can provide an incredible benefit for a veteran (or a widow of one) who is homebound, in an assisted living facility or in a nursing home?

Answer: Aid and Attendance through the VA. Very few people know about this program, and those who do know about it often do not understand it. Improved Pension or “Aid & Attendance” might be available to boost monthly income by as much as another $1,842 for a veteran or $998 for the widow of a veteran.

Better known VA cash benefit programs are restricted to vets who were wounded or injured while serving in the armed forces. But Aid & Attendance benefits might be available to any veteran 65 years or older or his or her widow if the veteran served at least 90 days active duty, with 1 day of that 90 days during a VA defined period of hostilities.

There are financial qualification rules, and there also are physical qualification rules. To qualify physically, the veteran (or widow) must be physically homebound (not able to get out under her own power), or confined to a nursing home or assisted living facility.

The exact amount of the benefit depends upon monthly adjusted income. The benefit can never be more than the difference between $1,842 (or $998) and adjusted income. If monthly adjusted income is more than $1,842 (or $998) then there can be no benefit.

If you haven’t caught it already, the most important word in the preceding paragraph is this: ADJUSTED.

The income cap is properly calculated by adjusting monthly income downward for a variety of medical, insurance and long term care expenses, before determining the amount of benefit available.

For example, Kenny Kilroy entered the Army in 1945. He spent a few months in a replacement pool at Ft. Benning before the end of WWII. Discharged from the Army in 1946, Kenny returned to Savannah, and went to work as a realtor. During the early part of 2008 Kenny’s health declined some and he now lives in an assisted living facility in Savannah.

Kenny’s Social Security benefit pays $1,500 monthly, and he has a small qualified annuity that pays $300 month. $1,800 monthly will not cover the $3,000 monthly assisted living facility bill.

Time to panic? Not at all.

Kenny’s ADJUSTED income will be at least a negative $1,200 (and maybe more if he has other medical or health-related expenses). Under that scenario Kenny Kilroy should qualify for $1,842 in Aid & Attendance and he will have more than enough to cover the assisted living facility bill.

There are asset restrictions. As with Medicaid, some assets count, some assets don’t (the lists aren’t the same for Medicaid and Aid & Attendance). Generally speaking the applicant can’t have more than $80,000 in countable assets. It could well be less . . . the VA uses no “bright line” amount.

Unlike Medicaid, it is fairly easy to “reconfigure” assets to qualify.

By law, the only people that can help compile an application for a veteran or a widow are:

A licensed attorney

A veterans service organization (such as the VFW, AmVets, American Legion), or

A state Department of Veterans Affairs office.

By law, it is illegal to charge a veteran for compiling and submitting an application.

On the other hand, it is not illegal to charge a veteran for the planning involved in qualifying for the benefit and implementing that plan.

Further, veterans, or the widows of veterans, do not live in a vacuum. They likely have other concerns. That is why it is important to seek the help of an advisor who understands this important benefit.

An advisor who may not know what he or she is doing may succeed in qualifying someone for VA benefits and hopelessly disqualify the veteran for Medicaid or other needed benefits in the process of qualifying for Aid & Attendance. This is tricky business.

Correctly approached, however, and correctly integrated as part of an overall plan, this particular VA benefit can be Heavy Artillery.