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.