Wills, Trusts & Estates Prof Blog

IRS Relaxes Requirements For Innocent Spouse Relief

If you file a joint income tax return with your spouse, even though the IRS can only collect the tax once, legally, each spouse can be held liable for the full amount of the tax. The Internal Revenue Code provides some relief for spouses where it would be inequitable to hold the spouse liable for the return. The IRS can grant relief in some circumstances and they consider the following 8 circumstances:

1. Marital status
2. Economic hardship
3. Knowledge or reason to know
4. Nonrequesting spouse’s legal obligation
5. Significant benefit
6. Compliance with income tax laws
7. Abuse
8. Mental or physical health.

Rev. Proc. 2003-61 says that these factors are nonexclusive and that other factors could be considered in deteriming applications for equitable relief. In practice however, the IRS and the U.S. Tax Court have only applied the 8 factors listed above. Economic hardship is the hardest factor to prove.

The IRS has recently revealed Notice 2012-8, which gives spouses ten years to file for innocent spouse relief. The spouse previously had to file the application within two years after the IRS first tried to collect the joint liability in question. The notice also relaxes the proof requirements for marital status, economic hardship, abuse, and significant benefit. With these new requirements, the IRS has lowered the bar to obtain a grant of innocent spouse relief, so spouses should apply again for relief if the ten-year collection statute has not expired on the taxes at issue.

See Stephen J. Dunn, IRS Lowers Bar, Forbes, Jan. 29, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing  (PLM, Inc.)) for bringing this article to my attention. 

Article About Adult Adoption

Russell E. Utter (2012 J.D. Candidate, UMKC School of Law) recently published his article entitled, The Benefits and Pitfalls of Adult Adoption in Estate Planning and Its Likely Future in Missouri, 80 UMKC L. Rev. 255 (2011). The introduction to the article is below:

Most laypersons and perhaps a majority of lawyers who never took advantage of the opportunity to take an Estates class are likely unfamiliar with the term “adult adoption.” The idea may appear ludicrous and outlandish to many, but to a knowledgeable estate planner the concept may have some practical values. Although in most instances an adoption will be intended more for family purposes such as formalizing an existing relationship between a step-parent and an adult step-child, many times adoptions are used to secure inheritance rights for the adoptee.¹ Adult adoption certainly brings a potentially valuable tool to an estate planner's toolbox, albeit one that should be used with care.²

Part II of this note examines the beginning stages of adult adoption and traces some of the major transformations of this device. Though centered on Missouri Law, this note examines leading cases from other jurisdictions. Part III addresses some of the benefits that can arise from adult adoption if used correctly and depending on the factual circumstances, focusing on the common types of adult adoption, as well as the common purposes for their use. Part IV discusses some of the pitfalls of adult adoption, including the finality of adoption, public policy limitations imposed by courts, and possible malpractice suits against ill-prepared attorneys. Part V addresses Missouri's current law on this issue and explores how Missouri courts might react to different adult adoption scenarios that have yet to come before them.

This paper concludes that adult adoptions work best and fulfill their intended goals when used for the traditional purposes that general adoption serves-to formalize a family relationship. It finds that adoptions with a primary purpose of formalizing an already existing parent-child relationship also have the most success when it comes to securing the inheritance rights intended. On the other hand, adoptions based solely on gaining inheritance rights can create significant obstacles in fulfilling their purposes. Although Missouri has no published opinion pertaining to the adoption of a lover, either homosexual or heterosexual, it appears unlikely that the state will allow one. Missouri law is clearly against sham adoptions set up merely to defeat others' expected inheritances. Finally, this paper suggests a way to circumvent some common problems that have arisen with adult adoptions, offering a safer, less risky alternative that may ensure inheritance rights.

 

Problems with Medicare

SmartMoney reveals some of the problems with the Medicare system in America:

1. Medicare spends millions on unproven procedures: Medicare will spend a lot of money each year on treatments that are not even necessary according to many medical experts. Treatment that may be necessary to one person is not going to be necessary for others and critics say that many of these procedures Medicare is paying for could be eliminated. Examples of such services include digital mammograms and liquid-based cytology.
2. Medicare is more broke than Social Security. The amount an individual puts into social security and the amount that social security pays out for an individual are more closely balanced than the amount of Medicare paid in and then put out per individual. An average couple will have paid $119,000 in Medicare payroll taxes throughout their careers and then they will receive medical services worth $357, 000.  An average couple will have put $598,000 into social security and will receive about $556,000 in benefits.
3. Medicare  “pays for dead people”: In 2010, Medicare and Medicaid Services contributed more than $3.6 million for “Medicare Part D (the prescription drug benefit) to deceased beneficiaries.” Some of this can be attributed to fraud, mistake, and clerical error on part of Medicare.
4. Do not expect a five-star plan: It is hard to find a Medicare system ranked at five stars so do not be alarmed if you cannot find one in your area. The five star ranking is reserved for the highest quality care that is given to beneficiaries.
5. Many doctors do not want to take Medicare: Many doctors limit how many Medicare patients they will treat. They feel Medicare payment rates are too low and are at risk of getting lower.
6. Medicare gets ripped off a lot: Last year Medicare and Medicaid saw improper payments for Medicare for $47.9 billion. Fraud and clerical error are the main sources of these improper payments.
7. Medicare does not cover a lot of the care that seniors need most: Medicare does not cover nursing home care and getting reimbursement for home care is very difficult.
8. Settlements from something gone wrong go to Medicare: Since Medicare paid some of your doctor bills, it has a claim against any damages for expenses.
9. Complaints are not always heard: A report from the Office of the Inspector General reveals that the Center of Medicare and Medicaid Services is supposed to notify the Joint Commission of complaints they receive concerning hospitals, but often times they don’t notify the Commission.
10. If Medicare denies a claim, don’t pay out of pocket: It might be better to appeal. Out of the few people who do appeal, more than half either receive more care of get a higher payment. If you appeal, you have a good chance of getting your claim approved. 

Catey Hill, 10 Things Medicare Won’t Tell You, SmartMoney EG, Dec. 21, 2011.

Special thanks to Jim Hillhouse (Professional Legal Marketing  (PLM, Inc.)) for bringing this article to my attention. 

Etiquette When Paying Respects

When co-workers or casual acquaintances lose loved ones, you may not be sure about whether you should attend the gatherings surrounding the death and how you should conduct yourself when attending. One way to determine whether you should even go to the gathering is to ask yourself whether you would expect to see the co-worker or acquaintance who just lost someone at a service if you lost your mother. If you would, then you should go to the gathering celebrating his/her loved one’s life or mourning his/her loss.

If you do go to such a gathering, then you should put some effort into getting ready to show respect for the family. You should probably sign the guest book and wait in line to express your condolences. It is usually best to stick to sincere apologies for his/her loss or celebrations of things that the deceased was enjoyed. You should also avoid asking too many questions about the death. If you weren’t particularly close to the family, your appearance at the gathering should suffice in place of attending the funeral. One last suggestion is to be sure that your phone is turned off out of respect.

See Judy Hevrdejs, Funerals 101: How to Respectfully Pay Your Respects, Chicago Tribune, Jan. 31, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing  (PLM, Inc.)) for bringing this article to my attention. 

The Future of Estate Planning Practices

The ABA Section of Real Property, Trust and Estate Law is sponsoring a 90-minute teleconference and live audio webcast on February 21, 2012 entitled The Future of Estate Planning Practices: How Not to Get Behind the Change Curve. The description of the CLE is below:

On-line estate planning, software that can be purchased directly by the consumer, the growing reluctance of clients to pay for services they believe they can bypass the seasoned lawyer to obtain cheaper and faster, and the trend toward the virtual office and cloud computing. Righteous indignation or resignation: How much do you care? Is there enough work for everyone, or is this a threat to your practice?

This program will explore what you can do in your own practice to make estate planning services more affordable and how you can earn the position as trusted advisor to your clients so that they will turn to you before an on-line program or a lawyer operating from a virtual office?

Consider the following in deciding if you want to participate in this critical presentation: "Technology has eroded the monopoly of lawyers." (Jonathan Blattmachr) and "If you don't like change, you're going to like irrelevance even less." (General Eric Shinseki)

Case Study on How Real Estate Investors Can Utilize FLIP CRUTs

Gift Law Pro recently posted a case study entitled, Exit Strategies for Real Estate Investors, Part 1, Jan. 30, 2012. The case study details how real estate investors can utilize FLIP CRUTs during the property selling process. The case study is posted below, in full:

Case

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turn to gold. By far, Karl was most successful with real estate investments. It was definitely his passion.

Amazingly, Karl continued to buy and sell real estate at the age of 85. For instance, about three months ago, Karl discovered a great investment property. It was a "fixer-upper" commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.

The condition of the building turned many buyers away. It was being sold "as-is." But Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.

After three months of hard work refurbishing the building, the place looked like new. In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building - a $2 million interest! This was no surprise to Karl. He knew the building was another great buy.

There was one downside to the idea of selling, however. Karl held the property only 4 months which meant the gain from the sale would be short-term capital gain. In other words, the applicable tax rate would be 35%, not 15%. Karl cringed at the thought of paying a third of his gain to the government. At the same time, Karl knew the real estate market could change directions in the next year. So, although Karl wanted the 15% tax rate, Karl did not want to risk holding the property another 8 months.

Question

Can Karl sell the building and bypass the tax on the sale of the property? Karl wants to reinvest the full sale proceeds in an income-producing investment. Is this possible?

Solution

Based upon Karl's situation and goals, a FLIP CRUT is an excellent option. Prior to any binding sale agreement, Karl could transfer his property into the FLIP CRUT. In this case, the potential buyer merely expressed an interest in the property. Because there is no legally binding agreement between Karl and any buyer, there is no prearranged sale problem.

Once the property is transferred into the FLIP CRUT, the trust would list and sell the property. Even if the property sold for $2 million, the trust would owe no taxes on the sale because the trust would be exempt from income taxes. Therefore, the FLIP CRUT would meet Karl's first goal – avoiding an immediate one-third bite out of his short-term capital gain.

Next, the trust would reinvest the full sales proceeds of $2 million (minus selling costs). Pursuant to Karl's goals, the trust would likely invest for income. It could invest in bonds, dividend paying stocks or even rental property. This meets Karl's second goal.

So far, Karl is very pleased with the FLIP CRUT option. It looks like the perfect solution. However, there are two potential downsides to this plan. The two remaining issues are as follows: 1) What would be the charitable income tax deduction for gifts of short-term capital gain property? and 2) What would be the tax characteristics of the FLIP CRUT payouts to Karl?

Exit Strategies for Real Estate Investors, Part 1, Gift Law Pro, Jan. 30, 2012.

Insurer Not Required to Indemnify/Defend Firm in Malpractice Suit

Ella Mae Bates sought to qualify for Medicaid and hired the law firm of Davis & Associates to create a Medicaid qualifying trust for her.  The state denied Bates Medicaid benefits in 2007 because the trust was an available asset. The firm subsequently failed to timely file an appeal of denial. Bates sued the firm for malpractice in 2009.

Prior to the suit, the firm had purchased professional liability insurance form Westchester Fire Insurance Company. One of the firm’s policies covered April 1, 2007 to April 1, 2008 and another policy covered April 1, 2008 to April 1, 2009. The policy provided that the insured’s claims were covered as long as the firm had no reasonable basis for believing it breached a professional duty as of the inception date of the policy.

The insurer argued that the firm knew it breached its professional duty at the inception of the 2008-2009 policy and that the insurer was thus not obligated to indemnify and defend the firm. The law firm argued that the policy began in April 2007 and that the subsequent 2008-2009 policy was simply a renewal of the original policy.

In Davis & Associates v. Westchester Fire Insurance Co. (U.S. Dist. Ct., D. Colo. Jan. 24, 2011), the U.S. Court for the District of Colorado granted summary judgment for the insurer. The court held that the 2008-2009 policy was not a renewal of the 2007 policy and that the firm knew or had a reasonable basis to know that it had breached its duty to Bates in September 2007. As such, the court held that the insurer was not required to indemnify or defend the law firm during Bate’s malpractice suit.    

See Insurance Company Not Required to Indemnify Being Sued by Medicaid Applicant, ElderLawAnswers, Jan. 30, 2012.

Saving on Portability

Currently, individuals receive a $5.12 million gift exemption ($10.24 million for couples). Portability allows a surviving spouse to utilize any of the deceased spouse's unused exemption, giving the surviving spouse the potential of gifting up to $10.24 under his or her exemption. The surviving spouse must file form 706 within nine months after the deceased spouse's death to claim portability, but a six month extension is allowed if the surviving spouse makes a request within nine months of the deceased spouse’s death.

Form 706, which is around twenty-pages long, is quite complicated, and taxpayers typically will benefit from seeking profession help in filling it out. However, because of the length and complex nature of the form, attorney fees can range from $3,000 to $10,000. Taxpayers may save money by downloading and filling out the form themselves, hiring a licensed CPA to fill out the form, or diversifying their investments within a few companies.

See Deborah L. Jacobs, Tax Break May be Boon to Lawyers, Forbes, Jan. 18, 2012; EJ Antezana, Right of Portability for Married Couples Who Suffer the Loss of a Spouse, Wealth Strategies Journal 2.0 (Beta), Jan. 28, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Lessons From Romney's Tax Return

I recently blogged about how Mitt Romney overpaid on his tax return.  As I mentioned though, he still managed to only pay 14% of his $21.6 million income. The Wall Street Journal explores some of the lessons that we can learn from Romney’s tax return:

• Capital gains can provide powerful tax benefits being taxed at a top rate of only 15%.
• Get good tax help.
• Avoid salary, wages and tips as much as you can. These categories are taxed up to 35% and are subject to payroll taxes.
• Muni-bond interest is not everything. Many wealthy individuals look to these for tax-free income, but how beneficial these investments are depends on what your state’s flat tax rate is.
• Go for qualified dividends because they can only be taxed up to 15%. A dividend is qualified if it is from a stock held at least two months and “paid by any domestic corporation or most corporations.”
• If you have a “Schedule C” business, it may not be the best to claim a home-office deduction. These can raise red flags to the IRS or come back to haunt taxpayers for later tax-exclusions.
• Long-term capital gains are the best way to generate income. Capital gains have a lower tax rate and they are malleable. You can choose when to take a gain or a loss and use the losses to offset gains so that a tax isn’t due.
• Know the score on itemized deductions. Tax-wise charitable contributions and noncash gifts are smart moves here.
• Capital gains and dividends can trigger the AMT. Long-term capital gains and qualified dividends are not subject to the alternative minimum tax.
• Think twice about small benefits requiring large tax-prep efforts. Sometimes the tax-prep fees will exceed the return.
• Offshore investments can save onshore taxes. Investments held offshore in “blocker corporations” can allow taxpayers to pay less tax than they would for the same investment onshore.

See Laura Saunders, What You Can Learn From Mitt’s Tax Return, The Wall Street Journal, Jan. 28, 2012. 

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.

Pension Plans Are A Good Option For Some

If you are self-employed and you are a high earner, a personal pension plan might be a good option for you. You can end up retaining up to $2.5 million for retirement while getting a tax break. These pension plans make the most sense for big earners who are near 50 years old, earning $250,000 or more annually. And want to put more than $50,000 away for retirement each year. If you plan to put less than that away, then you might be better off using a standard IRA. Pension plans require that you contribute annually, while contributions to a 401(k) are voluntary.

Actuaries, pension consultants, and other third-party administrators can set up these accounts for you because there are a lot of rules and filing requirements that you have to comply with. You first figure out how much you want to pull out each year in retirement and then your annual contributions are based on that figure. Thos who set up the plan eventually roll the full amount into an IRA at retirement so that they can have flexibility to make withdrawals.

See Karen Blumenthal, Taking Your Pension Private, The Wall Street Journal, Jan. 28, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing  (PLM, Inc.)) for bringing this article to my attention. 

Article on Intentional Interference With Inheritances

Rachel A. Orr (2012 J.D. Candidate, University of Arkansas School of Law) recently published her article entitled Intentional Interference With An Expected Inheritance: The Only Valid Expectancy For Arkansas Heirs is to Expect Nothing, 64 Ark. L. Rev. 747 (2011). The introduction to the article is below:

To date, the Arkansas legislature and Arkansas courts have not seen fit to recognize the tort of intentional interference with an expected inheritance.¹ This comment argues that the tort should be recognized at common law and suggests various strategies to aid practitioners in the persuasiveness of their pleadings. If the tort is not recognized by Arkansas courts, a potential for injustice exists for heirs and beneficiaries throughout the state.

A common thread throughout any system of justice is the punishment of a wrongdoer for his misdeeds. In other words, one ought not to be allowed to profit by his own wrong.²Furthermore, it is an inherent right of every citizen to acquire, possess, and protect property, and it is the duty of the legal system to protect the weak against the strong.³ It would be difficult to imagine a group of individuals more deserving of protection than the elderly and infirm of mind. A key aspect of protecting this class of individuals is to ensure that they are able to freely dispose of their property without improper influence so that their wishes may be carried out after they are gone.⁴ Equity requires a system of deterrence for those who might wrongfully interfere with those wishes and a system of restitution for those who are hurt by deceitful conduct. On occasion, this may include providing protection to the heirs of the elderly during the vulnerable period after their loved ones have passed away.

*748 Imagine, for instance, a middle-aged woman with no children and a passionately charitable disposition.⁵ The woman drafts a will naming her parents as primary beneficiaries. She also names her descendents and a charitable organization as contingent beneficiaries. The woman is a dedicated volunteer and lifetime contributor to the charity. By her will's terms, if her family-member beneficiaries predecease her, her entire estate will pass through probate to the charity to which she has pledged both her personal time and assets during life.

Now imagine that forty years have gone by, and this same woman is now in her mid-seventies. Her parents and other named beneficiaries are deceased, but she is survived by other relatives (heirs-at-law). The same will she prepared decades earlier remains as her intended disposition in the event of her death. The woman casually meets a younger man one afternoon at a hotel swimming pool, and the two become acquainted. As this chance encounter develops, the woman learns that the man is a pastor at a local church. Though the woman has never previously been religious or sought membership with a religious group, the man convinces her to join his congregation. Later, by abusing his relationship of trust and confidence with the woman, the pastor discovers that the woman has personal assets in excess of $2 million. The pastor lavishes the woman with attention, drives her to and from church on Sunday, and lays his hands on her head to bless and heal her.

Over the course of the next few years, the pastor convinces the woman to transfer more than $1 million of her assets to him. The woman also purchases an automobile and other gifts for the pastor. After five years of membership in the new church, the pastor convinces the woman to execute a new will, naming him as the executor and primary beneficiary of her estate. The woman dies just a few years later, and the will influenced by the pastor is admitted to probate. The will bequeaths him an estate with a value of more than $2 million. The charity remains unaware of its interest in the woman's estate under her prior will.

*749 If this situation occurred in Arkansas, what legal remedies would exist for the beneficiaries to whom the woman originally intended to leave her property? What is the most equitable remedy that exists for the woman's heirs-at-law to contest any disinheritance that was prompted by an ill-willed third party? What remedy would the charity have to reclaim the property it stood to receive under the woman's prior will?

In Arkansas, the most appropriate and equitable cause of action does not yet exist.⁶ The charity may not learn of its interest in the woman's estate under the prior will in time to bring a will-contest action. The heirs-at-law would have standing to bring a will contest, but the decedent's estate would bear the litigation costs of defending the pastor's wrongful deeds.⁷ Additionally, both the charity and the woman's heirs would have an inadequate remedy in the probate court as a result of the substantial lifetime transfers that were made to the pastor. Those assets are outside of the woman's estate and, therefore, are outside of the jurisdiction of the probate court.⁸ By allowing all aggrieved parties the ability to bring the tort of intentional interference with an expected inheritance (the tort), the pastor will be held personally accountable for his wrongdoings, and both the heirs and the charity will be afforded an adequate remedy.

Although the decedent may not be concerned with seeking vengeance from the grave, it is the responsibility of the courts to ensure that justice remains for future generations. Though Arkansas courts have yet to recognize the tort as a cause of action,⁹ the following analysis will seek to promote and provide support for adoption of the tort. This analysis will *750 also hypothesize various factual scenarios that might result from the tort's recognition as a cause of action in Arkansas. These hypothetical scenarios will serve to guide practitioners in determining when the tort should be pled. This analysis will also discuss other suggestions for persuasive arguments an attorney might assert before the court when alleging the tort.

$7.5 Millon Lottery Claim Withdrawn

I recently blogged about the mysterious circumstances surrounding Crawford Shaw’s lottery ticket. Shaw previously submitted the ticket just two hours before it expired and identified the recipient as a corporation in Belize. The lottery was investigating how Shaw got the ticket to ensure that it was not stolen and that a valid player purchased it. Mr. Shaw had until Friday to explain how he obtained the winning ticket. Instead of offering officials an explanation though, Mr. Shaw withdrew his claim. The Iowa Lottery CEO Terry Rich has stated that the unclaimed money will go toward future prizes.

See Andrew Duffelmeyer, Lawyer Withdraws $7.5 Million Dollar Lottery Claim, Yahoo!News, Jan, 27, 2012. 

Special thanks to Professor Adam Hirsch (William & Catherine VanDercreek Professor of Law, Florida State University College of Law) for bringing the article to my attention.

Elder Law Colloquium: The Aging Population, Alzheimer’s, and Other Dementias: Law and Public Policy

An Elder Law Colloquium,The Aging Population, Alzheimer’s, and Other Dementias: Law and Public Policy is being held at the University of Iowa College of Law during the 2012 spring semester. The Colloquium is addressing important legal and public policy issues posed by the rapidly aging population and the dramatic rise in the prevalence of Alzheimer’s and other dementias, and it is featuring nationally recognized legal and public policy experts from around the country. The thirteen weekly Colloquium sessions are being live streamed via the internet and video and podcasts of Colloquium sessions are being made available online.

Among the legal and public policy issues that the Colloquium will address are issues related to substitute, or surrogate, decision making for older persons with diminished decision-making capacity due to dementia or other causes.  There will be sessions on clinical and legal approaches   to assessment of diminished capacity, adult guardianship, health care advance planning and advance directives and powers of attorney. There also will be sessions on the impact of dementia on ability to handle everyday financial affairs and financial exploitation of the elderly, particularly those with dementia. In addition there will be sessions on the financing, organization and provision of long term care.

The website of the National Health Law and Policy Resource Center at the College of Law http://www.uiowa.edu/~law-nhlp/ has more detailed information about the Colloquium. It contains instructions for live viewing of Colloquium sessions well as information about accessing videos and podcasts of sessions. You also may contact Professor Josephine Gittler (josephine-gittler@uiowa.edu) for further information about the Colloquium.

Estate Planning Trends

Clients’ top three reasons for seeking estate planning advice last year were (1) to avoid discord among beneficiaries, (2) to avoid probate, and (3) to protect children from mismanaging their inheritance. Clients also sought estate planning advice on asset protection for their children. In response, many firms set up safety net trusts to protect an heir’s inheritance and structured the trusts with the child’s future divorce or creditor problems in mind.

When creating estate plans, it is important to remember that nearly half the states impose separate estate or inheritance tax. The low interest rates right now make it an excellent time for clients to create a charitable-lead annuity trust to efficiently transfer wealth to younger generations. The trust provides assets to a charity for a designated period, and then the trust returns to the client or the client’s heirs. Any excess earnings of the trust pass to the beneficiaries tax-free.  

See Liz Skinner, Estate Tax Lull May Trap Wealthy, Investment News, Jan. 15, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Article on State Pension Plans

Debra Brubaker Burns (2012 J.D. Candidate, University of California, Hastings College of the Law) recently published her article entitled, Too Big to Fail and Too Big to Pay: States, Their Public-Pension Bills, and the Constitution, 39 Hastings Const. L.Q. 253 (2011). The Introduction to the article is below:

Faced with the most severe budget crises since the Great Depression, many state officials and lawmakers within the United States are desperately trying to pay their bills and balance their budgets. States are anticipating significant budget deficits for the next few years, while tax receipts are slowly recovering from the steep economic downturn in 2008, unemployment rates remain high, and federal stimulus money is running out. Among the states’ mounting stacks of unpaid bills are their aggregate unfunded pension liabilities totaling from an estimated $452 billion to over $2.54 trillion,depending on what accounting discount rate is used.

State pension plans cover twenty-four million active and retired workers, about eight percent of the United States population of 309 million in 2010. When financial markets plunged in 2008, so did the assets in states’ pension systems. Beyond the current pension funding gap, some financial analysts and state officials see pension bills increasing at a rate that is unsustainable in the long run. Assuming no significant changes to the already promised pension benefits to state workers, seven states would have insufficient funds to pay those obligations past the year 2020, even with an optimistic eight-percent return on the assets of state pension systems. According to Finance Professor Joshua D. Rauh, an additional twenty states would run out of funds to cover already accrued pension benefits past 2025.This suggests that substantial contributions will be needed over the next fifteen years to pay for legacy liabilities. Meanwhile, a number of governors are trying to curtail pension and other benefits for new state employees, while financial analysts are recommending increased taxes and more severe budget cutting as necessary to bring states’ long-term obligations such as pensions in line with revenue.

The subject of a state defaulting or repudiating any type of debt has received relatively little attention in the legal literature because until recently, the legal issues concerning state defaults on debt, or in particular defaults on state pension funds, were considered too remote to attract the attention of legal scholars. Yet in recent months, more than a few economists, reporters, academicians,lawyers, and politicians are arguing about legal solutions for pension liabilities that are too big to pay, including possible federal bailouts for states that are deemed “too big to fail.”

This note presents the legal limitations that many states face if they were to default on or repudiate any of their pension obligations, and analyzes two proposed solutions to the states’ expanding pension liabilities. Section I provides general background on state pension programs and their current financial condition. Section II analyze show courts within the last few decades have interpreted states’pension obligations, paying particular attention to legal requirements under the Contract Clauses of the federal and state constitutions. Section III describes a modest proposal for a federal government bailout of state pensions through federally subsidized debt obligation bonds conditioned upon states moving from defined-benefit to defined-contribution pensions. Section IV analyzes the more radical and controversial proposal that Congress institute bankruptcy for states, using similar procedures and restrictions found in the bankruptcy code for municipalities. The conclusion suggests that courts would likely find constitutional the two proposed solutions—conditional pension obligations bonds and bankruptcy for states—although each has legal as well as practical and political issues.

State Estate Tax Changes

The federal estate tax exemption was indexed for 2012, increasing the $5 million exemption to $5.12 million. Many of the twenty-three states, including Washington, D.C., that impose state estate taxes have also made changes for 2012. A list of state specific changes to estate taxes for 2012 and beyond is below:

• To keep up with inflation, North Carolina and Rhode Island increased their exemptions to $5.12 million and $892,865, respectively.
• Illinois increased its exemption from $2 million in 2011 to $3.5 million beginning January 1, 2012. Illinois will increase the exemption to $4 million beginning January 1, 2013.
• Connecticut retroactively decreased its exemption from $3.5 million to $2 million. The exemption is retroactive to January 1, 2011.
• Vermont increased its $2 million exemption in 2011 to $2.75 million for 2012 and beyond.
• Oregon now applies its tax to any estate amount over $1 million as opposed to applying the tax to the full estate amount.
• Ohio’s republican Governor, John Kasich, abolished Ohio’s estate tax, effective January 2, 2013.
• New Jersey will have the lowest estate exemption once Ohio’s exemption is removed. New Jersey’s exemption is currently $675,000.
• Maine will increase its exemption from $1 million per person to $2 million beginning on January 1, 2013.
• Indiana, Nebraska, Oregon, and Tennessee are all undergoing efforts to repeal state levies.
• Pennsylvania recently passed an inheritance tax exemption for farmers.

See Ashlea Ebeling, Where Not to Die in 2012, MSN Money, Jan. 23, 2012.

Special thanks to Kerry Griffin (Attorney at Law, Dallas, TX) for bringing this article to my attention. 

Top SSRN Downloads

Here are the top downloads from November 29, 2011 to January 28, 2012 from the SSRN Journal of Wills, Trusts, & Estates Law for all papers announced in the last 60 days:

Rank	Downloads	Paper Title
1	208	2011 Texas Estate Planning Legislative Update Gerry W. Beyer, Texas Tech University School of Law, Date posted to database: November 25, 2011 Last Revised: November 25, 2011
2	202	FLP Loss, but Crummey Win Wendy C. Gerzog, University of Baltimore - School of Law, Date posted to database: November 29, 2011 Last Revised: November 29, 2011
3	144	Social Security Benefits: Windfall Elimination Provision Francine J. Lipman, James E. Williamson, University of Nevada, Las Vegas - William S. Boyd School of Law, San Diego State University - College of Business Administration, Date posted to database: December 1, 2011 Last Revised: December 4, 2011
4	142	From Here to Eternity: The Folly of Perpetual Trusts Lawrence W. Waggoner, University of Michigan at Ann Arbor - Law School - Faculty, Date posted to database: December 22, 2011 Last Revised: January 21, 2012
5	123	Wills for Everyone: Helping Individuals Opt Out of Intestacy Reid K. Weisbord, Rutgers University School of Law - Newark, Date posted to database: January 2, 2012 Last Revised: January 16, 2012
6	106	Two Cheers for the Bundle-of-Sticks Metaphor, Three Cheers for Merrill and Smith Robert C. Ellickson, Yale Law School, Date posted to database: December 28, 2011 Last Revised: December 28, 2011
7	96	Trust Law as Fiduciary Governance Plus Asset Partitioning Robert H. Sitkoff, Harvard Law School, Date posted to database: November 22, 2011 Last Revised: November 24, 2011
8	86	The Contribution of Fiduciary Law Thomas P. Gallanis, University of Iowa - College of Law, Date posted to database: December 11, 2011 Last Revised: January 25, 2012
9	81	When You Pass on, Don't Leave the Passwords Behind: Planning for Digital Assets Gerry W. Beyer, Naomi Cahn, Texas Tech University School of Law, George Washington University - Law School, Date posted to database: January 7, 2012 Last Revised: January 7, 2012
10	74	McLaughlin on Kaufman: Tax Court Protects Public Investment in Conservation Easements Nancy A. McLaughlin, University of Utah S.J. Quinney College of Law, Date posted to database: November 26, 2011 Last Revised: November 26, 2011

Increasing Number of Elderly Inmates Causes Budgeting Problems

The rising number of elderly inmates has forced many corrections systems across the nation to give serious thought to incorporating geriatric units, hospices, and medical parole. Complicating matters is the fact that state budgets are already tight, and providing medical costs for older inmates will only further tighten those budgets. Under a Supreme Court ruling, prisoners are guaranteed decent medical care. However, if the inmate lacks insurance, the state must pay the full cost.

The trend of giving long sentences without the option of parole is one of the main reasons the number of elderly inmates is increasing. In 2001, 8% of inmates (124,400 inmates) were age fifty-five or older. In 1995, the number was only 3%. Between 1995 and 2010, the oldest portion of the prison population increased at six times the rate of the overall prison population.

Prisons must now decide whether to install grab bars and handicap toilets in cells, how to best accommodate prisoners in wheelchairs, and what to do when an inmate can no longer understand instructions. Some states have begun addressing these needs. Washington state opened an assisted living facility in 2010 at one of its prison complexes. Louisiana State Penitentiary has incorporated a hospice program for over a decade.  

Corrections systems that have yet to implement special accommodations for aging prisoners face the problem that their health care staff lack expertise in elder care. Many states have implemented early release programs aimed at elderly inmates who are believed to pose little threat to public safety.

See David Crary, Prison Dilemma: Surging Numbers of Older Inmates, The Associated Press, Jan. 27, 2012. 

Romney's Tax Return -- Paid More Than He Owed But Still Paid Minimal Taxes

The New York Times sees Romney’s tax return as a sign of how dysfunctional our tax system has become with all of the loopholes. Romney paid a smaller percentage of his income than most Americans pay in taxes, but it still appears he overpaid taxes on capital gains.

Despite this overcalculation, Romney’s tax team managed to keep his taxes abnormally low. Tax strategists used grantor trusts, foreign tax credits, and carried interests. One fortunate connection with Goldman Sachs produced a large amount of gains for Romney trusts. When Goldman Sachs went public in 1999, because Romney knew him, he was privy to information that allowed him to buy stocks at a low offering price early. Ultimately, Romney’s investment has led to $750,000 in capital gains.

See Floyed Norris, Romney Paid More Than He Owed, The New York Times, Jan. 26, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Tax on Shipwreck

The Costa unit of Carnival Cruises has offered uninjured passengers the equivalent of $14,460 each to compensate for lost baggage and the trauma from the incident. Even though the accident happened in Italy, every U.S. citizen and permanent resident has to report worldwide income. Any gains from the settlement will likely be considered income because the definition of "income" is very broad. If a passenger's belongings were worth more than the $14,000 compensation, then the passenger should be able to cover his/her basis and then claim a casualty loss for whatever the diffrence is between the value of his/her belongings and the settlement. There are potential problems with proving the value of items, but it is possible to claim a loss. Damages for physical injuries are tax-free, but emotional injuries are not clearly tax-free. Since this settlement only addresses lost baggage and trauma from the accident, it will likely be taxable. 

See Robert W. Wood, IRS To Collect on Italian Cruise Ship Settlements, Forbes, Jan. 28, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing  (PLM, Inc.)) for bringing this article to my attention.