Wills, Trusts & Estates Prof Blog

Keeping Some Assets and Qualifying for Medicaid

Medicare is not covering many long-term care costs, so Medicaid is what individuals have left to fill in the gap. Medicaid is responsible for 40% of the country’s long-term spending. To qualify for Medicaid, you generally can’t have more than $2,000 in cash and investments plus a house and a car.

States vary in their Medicaid qualification standards because they are only required to work within federal rules, and several different interpretations follow from those rules. Many states are cutting back on Medicaid funding or raising the requirements to qualify.

The Wall Street Journal provides several suggestions for how you can qualify for help while still maybe preserving some assets:

• Get a professional opinion to find out what the current laws are in your area and if they are changing.
• Give your house, but hold onto cash. If you make a gift within five years of applying to Medicaid, there is a waiting-period penalty. You could transfer your house to your children if you need to move into a nursing home, and then you can use your cash to pay for your care during the waiting period.
• Fill the five-year gap with insurance. You could buy long-term-care insurance to cover the waiting period.
• Create a trust. If properly drafted, you can set up an irrevocable trust effectively.

See Kelly Greene, Medicaid Gets Harder to Tap, The Wall Street Journal, Mar. 30, 2012. 

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

Resolving Insurance Claims from the Holocaust-era

In the aftermath of the Holocaust, many survivors have brought lawsuits and started international initiatives to reclaim property that the Nazis seized. In 2000, the U.S. and Germany agreed to resolve all holocaust-era claims with European insurers and created an international insurance commission.

Resolving these insurance claims is difficult because many survivors’ proof of ownership was destroyed or lost in the war. Even when the International Commission on Holocaust Era Insurance claims offered relaxed standards of proof, problems still arose in estimating how much total insurance was sold, and how to value it.

Despite these efforts, tens of thousands of people still haven’t received anything, so new campaigns are starting to try and get money to survivors before they pass away, or at least get the money to their survivors. Specifically, a group of survivors is pushing for congressional legislation that would allow survivors to file civil lawsuits against European insurance companies in the U.S. The proposed legislation has about 70 sponsors. On the other hand, the chief objection to this proposed legislation is that it could place a strain on foreign relations.

In the mean time, three places that can help you start a Holocaust-era insurance claim include: Project Heart, Holocaust Claims Processing Office, and Yad Vashem (a database).

See Leslie Scism, Collecting Unpaid Insurance, Wall Street Journal, Mar. 2, 2012.

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

Number of Charities and Foundations Drops

In 2011, the number of charities and foundations registered with the IRS dropped by 16% mostly as a result of over 272,000 organizations losing their tax exempt status. According to new figures, the number of organizations classified under Section 501(c)(3) of the Code totaled almost 1.1 million last year, down from close to 1.3 million in 2010. The decrease in the number of US charities will likely continue as only 55,319 groups applied for charity status last year, a 7.7% decrease from 2010 and a 35% decreased from 2007.

The decrease of tens of thousands of charities came after Congress passed a law in 2006 that required organizations with an annual revenue of $25,000 or less to file informational tax forms. In June, the IRS announced the names of the organizations that failed to file the mandatory documents—banning those organizations from claiming a charitable deduction for their gifts.

The IRS states that the new procedures make it easier for charities to provide required information to regulators. Ninety percent of the organizations that sought charity status in 2001 were approved and less than 1% were rejected. In 2010, only 82% of charities were approved.

The recession’s impact is another reason for the decreased number of charities because the number of wealthy individuals creating foundations has declined. Very few foundations have been created as of late. In 2009, only 950 new foundations were created, down from a peak of 6,400 in 2000.

See Noelle Barton, Number of Charities and Foundations in U.S. Drops Sharply as New Law Goes Into Effect, The Chronicle of Philanthropy, Mar. 29, 2012.

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

Book on Fiduciary Accounting

Mark R. Gillett (Arch B. and JoAnne Gilbert Professor of Law, University of Oklahoma, College of Law), Katheleen Guzman (Orpha & Maurice Merrill Professor of Law, University of Oklahoma College of Law), and Kelly Bruns (Attorney) recently published their book, Fiduciary Accounting: Principles, Modern Application, Illustrations (ALI-ABA 2012). An overview of the book is below:

Trustees and other fiduciaries who prepare accounts must understand basic accounting concepts. The authors clearly explain those fundamental concepts for purposes of demonstrating how an estate’s principal and income accounts—and assets and liabilities—are affected by typical post-mortem transactions.

 Fiduciary Accounting: Principles, Modern Applications, and Illustrations describes in detail the difference between income and principal, defines terminating income interests, explains how distributions are reflected on fiduciary accounting reports, and sets forth how to account for and explain gifts of specific assets. Most helpfully, the authors describe and illustrate how fiduciaries can account for both typical and more sophisticated investment options. The more than 150 illustrations show how to prepare specific fiduciary accounting entries. These illustrations are explained in full detail, giving fiduciary accountants a step-by-step instruction guide. Helpful forms and checklists are also included throughout the text.

 Get answers to your questions and easy to follow solutions to the typical (and not-so-typical) situations you or your client will face as a fiduciary, including:

• When a Trustee has the authority to make adjustments and discretionary allocations between income and principal, given that the Uniform Prudent Investor Act may trump certain trust provisions
• How to satisfy the duty of impartiality to different classes of Beneficiaries
• Whether and when to administer in reliance on the terms of the trust, or to administer in accordance with the UPIA or Statute despite the terms of the trust
• How to gather sufficient information to inform a discretionary decision and avoid court intervention
• How to avoid liability for predecessor fiduciaries’ (such as executors’) breaches of duty
• What to include in an initial inventory of trust (or estate) assets, how to determine fiduciary acquisition values (as opposed to tax basis), and whether to include assets in principal or in income
• How to avoid liability for events occurring before the receipt of assets which were not initially included in the inventory
• How to determine what is payable as income and what is principal
• How to calculate and report the Trustee’s basis, gain, and loss on assets bought and sold by and contributed to a trust
• How best to account for liabilities of an estate
• Which items that should be included in the estate’s income tax return and not in the decedent’s final income tax return, and vice versa
• How to account for various receipts to the trust (entity receipts, mutual fund capital gain distributions, dividends, property other than money, liquidating distributions, insurance policy proceeds, deferred compensation, IRAs, derivatives and options, securities, etc.), and whether to allocate them to principal or to income
• How to reinvest dividends without unfairly and unreasonably diminishing trust income
• What a trustee may account for as a separate business from the other trust assets, which gives greater flexibility in income/principal allocations
• How to meet the obligation to make trust assets productive
• How to account and adjust principal and income for property depreciation
• When to adjust from principal to income – and when not – in accounting for bonds bought, sold, and held by the Trustee
• How to account for and report disbursements for trust administration, and which expenses to charge against income versus against principal
• Why it might be unwise to use trust income to make principal payments on debt in excess of depreciation reserves
• How to properly allocate trust taxable income charges to principal and income accounts
• How post-mortem tax planning and tax elections can inadvertently cause adverse consequences to different classes of beneficiaries, and how to adjust (and when not to adjust) principal and income to compensate
• How to avoid marital deduction reductions from taxes, expenses, and fees, and the difference between administrative and transmission fees
• How to satisfy the prerequisites for a Trustee to exercise her discretionary adjustment power to adjust between income and principal, and other important factors to consider
• How to comply with the rules for successive income interest beneficiaries
• How to calculate, account for, and allocate the net income during the administration period on property of the estate to produce a fair result
• Where tax returns should mirror trust accounting, and where they should not
• How to account for distributions from principal and from income, and which gifts are chargeable to which accounts
• How to account for gain or loss upon distribution of gifts or other assets from an estate or trust, including fractional, disproportionate, and in-kind distributions
• How to use and account for different gift funding formulae
• How a fiduciary can avoid liability for damages for breach of trust for failure to expeditiously distribute trust property

Seven Characteristics of Financially Intelligent Parents

A financially intelligent parent is more than just one who knows how to balance a checkbook and make good investments. Seven important characteristics of financially intelligent parents include:

• Being optimistic about changing money behaviors
• Valuing financial savvy and financial intelligence
• Thinking about the meaning of money in their lives
• Educating their children financially.
• Recognizing that their money deeds have a strong impact on their kids.
• Feeling that children should hear “no” and “enough” in terms of money education
• Wanting children to work for a sense of satisfaction as opposed to money.  

One sociologist points out that that money is more present in our lives than we acknowledge – it is more than just a medium of exchange. Prioritizing a child’s financial education means discussing responsibility with them even when the conversations may be difficult.  

See Jon & Eileen, The Seven Beliefs of Financially Intelligent Parents – Part 1, Gallo Consulting LLC, June 21, 2011

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

Advice for Forming Private Foundations

Advisers who are working with hedge fund principals to form a private foundation have several issues to consider. Private foundations are superior to other donor-advised funds and other charitable structures because they offer a broader range of investments.

One of the major issues is whether fund principals invest in their own funds. A principal is considered a disqualified person with respect to his foundation and this may indicate that the fund itself is a disqualified person. Self-dealing is an issue that comes up often and it is broadly defined in the code, so an investment by the foundation into the principal’s fund would be considered self-dealing. You can avoid self-dealing by waiving fees for charitable organizations and being aware of the rules that govern ownership and suitable investments.

Before forming a fund, fund principals should be advised of the restrictions that the IRS imposes on the operation of the foundation. The foundation has to make “qualifying distributions” of at least 5% of its worth every year. Notably, a donation from one private foundation to another is not a qualifying distribution.

Principals also have to decide whether to provide publicity or privacy. If the foundation favors privacy, then principals can form around that desire and remain more anonymous.

Private foundations can be a great way to integrate family members into charity, but be sure that if you’re compensating them, the compensation is reasonable to avoid any self-dealing claims.

See Stephen Liss and Evan Jehle, Foundations for Fund Principals, Financial Advisor, Mar. 2012. 

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

Article on 2010-2011 Legislation Pertaining to Wills, Trusts, Guardianships, and Fiduciaries

Mary F. Radford (Professor of Law, Georgia State University College of Law) has recently published her article entitled Wills, Trusts, Guardianships, and Fiduciary Administration, 63 Mercer L. Rev. 385 (2011). A brief summary of what the article contains is below: 

This Article describes selected cases and significant legislation from the period of June 1, 2010 through May 31, 2011 that pertain to Georgia fiduciary law and estate planning.

An Overview of Current Taxation and Possibilities for the Future

What is known about 2012:

• Ordinary income tax rates are at 10%, 15%, 25%, 28%, 33%, and 35%.
• Capital gains apply to taxpayers in the 25% bracket and above – the dividend rate is 15%.
• Gains on artworks held for more than a year are taxable at 28%.
• There are no tax incentives for charitable IRAs.
• There is no itemized deduction limitation or personal exemption phase-outs.
• The gift and estate tax exemption is $5,120,000 per person and the tax rate is 35%. The exemption can be used during life and/or at death. Portability of unused exemption is possible.

What is known about 2013:

• Ordinary income tax rates are at 15%, 25%, 28%, 31%, 36%, and 39.6%.
• Capital gains and qualified dividends are taxed at 20%.
• Gains on artworks held for more than a year are still taxable at 28%.
• No tax incentives for charitable IRAs
• There are limitations on itemized deductions for upper-income taxpayers. Charitable and other itemized deductions will be reduced by 3% of the amount by which AGI is greater than statutory limits, but not by more than 80% of the otherwise allowable deductions
• There is a personal exemption phase-out for upper income taxpayers.
• If Congress takes no action before 2013, then the gift and estate tax exemption will be $1 million and the rate will be 55%. The generation skipping transfer tax will also be $1 million. Portability will not apply.

President Obama’s Tax Proposals:

• Reinstate 36% and 39.6% tax rates for upper income taxpayers.
• Qualified dividends would be taxed as ordinary income for upper income taxpayers and allow the current 15% reduced tax rates to expire at the end of 2012.
• Tax net long-term capital gains at 20% for upper income taxpayers.
• Tax a partner’s share of income on an investment services partnership interest as ordinary income
• Reduce the value of some tax expenditures.
• Limit tax value of specified deductions from AGI.
• Reinstate limitation on itemized deductions and the personal exemption phase-out for upper income taxpayers.
• Make the estate, gift, and GST tax laws that were in effect in 2009 the permanent rules. The exclusion amount for estate and GST taxes would be $3.5 million and the gift tax exclusion would be $1 million. The tax rate would be 45%. Also make portability permanent.

Republican Candidate Tax Proposals:

• Newt Gingrich: Stop 2013 tax increases to create economic stability and move towards an optional 15% flat tax.
• Ron Paul: Lower taxes, abolish income and estate taxes, immediately repeal capital against taxes, let Americans claim more tax credits and deductions, restrain federal spending.
• Mitt Romney: Reduce income tax rates for Americans by 20%, eliminate the estate tax, aim for a conservative overhaul of the tax system to create lower, flatter rates on a broader base.
• Rick Santorum: Only have two tax rates – 10% and 28%, eliminate the estate tax, lower capital gains and divident tax rates to 12%, retain deductions for charitable giving, home mortgage interest, healthcare, retirement savings, and children.

See Conrad Teitell, Washington Legislative Climate for Charitable and Estate Planning, Trusts and Estates Newsletter, Mar. 26, 2012.

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

 

States Hoping for a Mega Millions Winner

Mega Millions is played in 42 states and currently has the largest jackpot in U.S. lottery history at $540 million. Those buying the lottery tickets are not the only ones hoping for a winning ticket; state governments are just as interested in finding a winner because the jackpot will bring a tax bonanza to the state where the winner resides. A single winner, choosing a lump-sum payment option, could bring in over tens of millions of tax dollars to the state—money that could help restore social service-programs, hire more state troopers, forestall new tax laws, or pay for low-income housing units.

Each state sets its own tax rate on lottery winnings for an in-state Mega Millions win. For example, New York charges 8.82 percent, Rhode Island charges 5.99 percent, and California charges nothing at all. If an Ohio resident were to win the jackpot, the state would receive an estimated $23 million in a single payment. If a Rhode Island resident were to win, the state would receive $23.3 million in taxes. At around $50 million, Montana would witness one of the largest tax cuts if one its residents were to win the jackpot.

See Eric Niedowski, Mega Million Win Could be Tax Windfall for State, The Columbus Dispatch, Mar. 30, 2012. 

Baby Boomers Struggle to Get Long-Term Care Insurance

Many Baby Boomers are beginning to realize they may need long-term care insurance to cover expenses typically  not covered by health insurance, such as in-home care, assisted living, and nursing home costs. However, many insurance companies are altering the long-term care policies they provide and have increased premiums because the claims on these policies have exceeded their predictions due to the fact that people are living longer and developing long-term illnesses.

One of the top five carriers of individual long-term care insurance, Prudential Financial, stated it will exist the market this month—it is one of 10 of the top 20 carriers to have exited the market in the last five years. While some carriers are bailing, others are raising their premiums. The price of long-term care insurance has increased by 6% to 17% since 2011. The industry has created hybrid products that combine long-term care with annuities or life insurance to help address consumer complaints.   

See Christine Dugas, Long-Term Care Insurance Policy Costs Rising, USA Today, Mar. 28, 2012.

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