Archive for the ‘Trusts generally’ Category

Many people make big mistakes titling bank and investment accounts. Often advisors and bankers advise customers to “put your child’s name on the account” or to set the account up as a “pay on death” (or “POD”) account. However well-intentioned the advice, the results of either approach to titling an account can be surprising and unpleasant. Good intentions do not constitute good advice.

The Allure of Joint and POD Accounts

Often, the attraction is probate avoidance. Either a joint account with survivorship features or a POD account will pass as a nonprobate asset and avoid the state-mandated probate process.

With respect to joint accounts, the attraction is often convenience. Unlike a POD account, a joint account holder has immediate co-ownership rights, and, thus, immediate access to the account. An older person may feel better knowing that a trusted son or daughter has immediate access to an account “in case something happens.”

The Dangers of Joint and POD Accounts

If the POD or joint account payee is a child with disabilities, the result could be terrible for the child upon the parent’s death because the receipt of the account could jeopardize continuing qualification for public benefits such as Medicaid or SSI (to the extent those programs are relevant).

There are other compelling reasons why a “joint account” may not be the proper approach:

The co-owner child now owns the account as much as the parent. What if the child is sued? What if the child goes through a messy divorce? Or what if the IRS takes a keen interest in the child’s affairs? Those events happen to the best of children; nevertheless, in those cases the joint account will be deemed to be owned by the child.

Another problem is that the co-owner/child’s siblings may be “out of luck.” This happens all the time. For example, Mom wanted the kids to share equally, but after Mom is gone Sis suddenly “recalls” that Mom wanted her to have the accounts since she “was the one who always helped Mom.” Because Sis was a co-owner of Mom’s accounts and likely had “survivorship” rights, she owns the accounts now – and there is nothing an attorney can do about it.

A Better Way

If the goal is asset management in the event the owner becomes incapacitated, the best approach is a properly drafted power of attorney.

A “power of attorney” has nothing to do with appointing lawyers. The word “attorney” has its roots in an old French Norman word for “legal substitute”. A “power of attorney” is simply a document signed by someone called the “principal” appointing an “attorney-in-fact” or “agent” to manage some or all of the principal’s financial and business affairs.

The terms of the power of attorney control what the agent may, or may not, do. If the document covers a broad spectrum of duties, then it is a “general” power of attorney. An agent can be given very broad powers, and if that makes the principal nervous the instrument can require the agent to secure some other person’s permission.

It used to be that a power of attorney would lapse when the principal became incapacitated. That did not do any good if what was intended was to cover the situations when the principal did become incapacitated. The law stepped in and provided that a power of attorney could be “durable” (or be valid after the incapacity of the principal). Most powers of attorney now are “durable”.

If the goal is to avoid probate upon the death of the account owner, the likely better approach is a revocable (or living) trust. The assets in the trust will avoid probate. In fact, a revocable trust can also assist in post-incapacity management because a successor trustee named in the trust agreement can step in to handle continuing asset management. The assets in the trust are also protected from the trustee’s personal liabilities (in other words, the trust assets are not exposed to the trustee’s own problems with creditors).

Finally, all of the above considerations especially apply if there is a child with disabilities. There will rarely, if ever, be an appropriate time to name a child with disabilities as the co-owner of a joint account or the beneficiary of a POD account. Carefully consider a special needs trust, either under a will or as buy clomid online part of a revocable trust, to hold that child’s intended inheritance. Properly drafted, the special needs trust assets will not jeopardize the child’s continuing eligibility for various public benefits.

Here’s the point: Do not put the kids on the accounts as a joint owner. Instead, execute a power of attorney that grants the sorts of powers to the kids you are comfortable with to take over business affairs when, and if, they need to. Alternatively, consider a revocable trust. In the meantime, keep the accounts in your name.

The downside to the advice given here: Some fees to a lawyer. There is, however, an upside: You may avoid a train wreck.

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” buy acomplia online no prescription 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.

Here’s an issue we’re watching VERY carefully.  Congress sprung a surprise on most us by letting the estate tax go into “repeal mode” (which was set up back in 2001). We all assumed Congress would NEVER let that happen. Assuming can be dangerous, of course. Of particular concern to many is the possibility of a loss of “stepped up buy acomplia online without a prescription basis” on death. I will be following this very carefully and will post more later. Then again, Congress may try to “fix” this problem very soon.

Elder Law Prof Blog, one of my favorites, posted this from NAELA (of which I am a proud member):

NEW TAX BASIS RULES AND ESTATE TAX REPEAL HAVE COME JANUARY 1ST

NAELA’s Tax Section wishes to alert all NAELA members about two huge tax law changes effective on January 1st that will affect many estate plans.  These changes are the repeal of the federal estate and the cut back of the important stepped-up tax basis.

1. Derailed by more important matters in 2009, Congress failed to prevent the repeal of the estate tax for 2010 only.  Next year in 2011 the estate tax is reinstated with only a $1.0 million exemption, unless Congress acts in 2010.  There is talk that Congress may even retroactively reinstate the estate tax sometime in 2010.  Estate tax repeal could hurt the surviving spouse of someone dying in 2010 if the couple has a Marital Trust/Bypass Trust Plan (also known as an A/B plan), as the wording of the documents may leave all the assets to the bypass trust, cutting out the surviving spouse.

2. The second tax law change introduces new IRC Section 1022, which replaces former IRC Section 1014.  New Section 1022 curtails the stepped-up tax basis for capital assets acquired from a decedent.  Many read Section 1022 to only allow a step-up for property acquired from a decedent, for revocable trusts, jointly held property, and community property.   Some NAELA tax practitioners believe Section 1022 denies a step-up for life estates, all irrevocable trusts and all retained and granted powers of appointment.  On the other hand, other NAELA tax practitioners believe that certain irrevocable grantor trusts and life estates will still receive a stepped-up basis.  Clients need to be made aware of these issues.

The Tax Section, chaired by Robert C. Anderson,  CELA, will provide more details on these and other tax changes in the next NAELA News issue to help members get ready to help clients.

Source:  NAELA Tax Section Members Robert C. Anderson, CELA, Sharon Kovacs Gruer, CELA, and Bradley Frigon, CELA