This blog is written by Brian E. Barreira, an estate planning, probate and elder law attorney with offices at 18 Samoset Street, Plymouth, Massachusetts, and 175 Derby Street, Unit 18, Hingham, Massachusetts. Brian was named a Massachusetts Super Lawyer® in Boston Magazine in 2009 and is listed in The Martindale-Hubbell Bar Register of Preeminent Lawyers in the fields of Elder Law and Trusts & Estates, Wills & Probate. Brian's biographical website can be found at www.elderlaw.info
Nothing on this blog should be considered to be legal advice or tax advice.
Is Your Massachusetts Durable Power of Attorney Still Valid?
A Durable Power of Attorney can be a good way to avoid conservatorship proceedings in Probate Court if you need somebody to handle financial matters for you, but it is only as good as the respect it receives. In the past, many financial institutions would refuse to honor Durable Powers of Attorney if they were too old. Their argument — not found anywhere in the law — was that old Durable Powers of Attorney became stale, and no longer effective.
On July 1, 2009, the Uniform Probate Code became effective in Massachusetts, and it specifically states that a Durable Power of Attorney does not become ineffective due to a lapse of time. That means that Durable Powers of Attorney executed on or after July 1, 2009 can remain in effect for as long as you want, including your entire life.
The legislation implementing the Uniform Probate Code in Massachusetts involved changing many different laws, and some were replaced or amended, and others were repealed. The Uniform Probate Code does not specifically protect Durable Powers of Attorney under the law in effect before July 1, 2009. After a careful review of the law, it is my belief that all Durable Powers of Attorney executed under previous Massachusetts law may be invalid. Where the previous Massachusetts durable power of attorney laws were repealed, not replaced, and where the state legislature had made choices in that legislation as to whether laws should be replaced or repealed, the effect is that the previous Massachusetts law, Chapter 201B, was eliminated as of July 1, 2009 as if the law had never existed. That means Durable Powers of Attorney which make reference to Massachusetts General Laws, Chapter 201B became invalid on July 1, 2009, and any persons who have such documents should arrange to re-execute new Durable Powers of Attorney effective under the Massachusetts Uniform Probate Code.
End-of-life Care: Nursing Home Residents Rights
Approximately 20% of all persons who die every year are residents of nursing homes. Since a nursing home is the last place of residence for such a large percentage of our population, it is very important that all of the rights of nursing home residents be upheld.
A person who lives is a nursing home is known as a “resident,” not a patient, and it is important to note that the resident is in a nursing “home,” not a nursing “institution.” Federal law requires that a nursing facility provide “services and activities to attain or maintain the highest practicable physical, mental, and psychosocial well-being of each resident.” Federal law also requires that a facility must ensure that a resident’s “abilities in activities of daily living do not diminish unless circumstances of the individual’s clinical condition demonstrate that diminution was unavoidable.” Thus, maintaining a condition, or moderating the rate of decline, should always be a goal of therapy services, even if the resident is not making progress.
Federal Medicaid law requires that a nursing facility “must establish and maintain identical policies and practices regarding transfer, discharge, and the provision of services required under the state plan for all individuals regardless of source of payment.” Thus, a resident should never be denied the continuation of physical therapy based on the excuse that Medicare will no longer cover it.
Nursing facility residents often are susceptible to transfer trauma in being moved from place to place. Federal law gives every resident the right to veto any intra-facility transfer. Medicare certification of a room does not prevent that room from being used for the care of a resident who pays privately or has payment through the MassHealth (i.e., Medicaid) program.
Immediate family or other relatives are not subject to visiting hour limitations or other restrictions unless imposed by the resident. Federal law requires that a resident’s “immediate family or other relatives” have the right to visit at any time if the resident consents to the visit. Under federal law, non-family visitors must also be granted “immediate access” to the resident.
Federal law requires that a nursing facility must care for its residents in such a manner and in such an environment as will promote maintenance or enhancement of the quality of life of each resident.” Federal law also requires that a resident has the right “to reside and receive services with reasonable accommodation of individual needs and preferences, except where the health or safety of the individual or other residents would be endangered.” A resident has the right to choose activities, schedules, and health care consistent with his or her interests, assessments, and plans of care.
Obtaining Free Banking Information for MassHealth Applications
When applying for MassHealth long-term care benefits to pay for nursing home care in Massachusetts, it can be expensive to obtain copies of up to 5 years of banking information. Under Massachusetts General Laws, Chapter 118E, Section 23A , banks are required to provide this information free of charge if the information has been requested by a representative of MassHealth. In order to comply with this law, the Executive Office of Health and Human Services of the Commonwealth of Massachusetts has prepared pre-signed letters that can be completed by or on behalf of the MassHealth applicant. There are four versions of the letter, and the one to be used would be based on which office that the application has been filed with: Revere, Springfield, Taunton or Tewksbury.
http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-revere.pdf
http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-springfield.pdf
http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-taunton.pdf
http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-tewksbury.pdf
Note that it appears to be a requirement of these letters that a MassHealth application be already filed. In that situation, time is usually very limited to comply with MassHealth’s written requests for verifications of banking transactions. Since you wouldn’t know whether the bank had complied with the request unless you received the bank records yourself, it is probably not a good move to request that the records be sent directly to the MassHealth Enrollment Center.
Revocable Trust Containing Minor Child’s Assets or Lawsuit Settlement Causes Loss of SSI When Child Becomes Adult
In the case of Hunt v. Astrue, the U.S. District Court for the District of Massachusetts reviewed a case where a revocable special needs trust had been established by parents of their injured child. The funds in the trust had been received in the settlement of a personal injury case filed on behalf of the child when he was a minor, and the child could revoke the trust. Because of the way the trust was established, the child ended up being disqualified from SSI when he became an adult.
If the special needs trust had originally been made irrevocable (not revocable) with explicit provisions to supplement but not supplant governmental benefits, the trust would likely have been of greater long-term benefit to the disabled child. To allow the child to be eligible for SSI, the trust would also have required restrictions on payments directly to the child and restrictions involving expenses for the child’s food and shelter.
When Is an Asset Considered “Acquired from the Decedent” under Internal Revenue Code Section 1022?
It seems that the more I look at Internal Revenue Code Section 1022, the more questions I have. Let’s look closely at the “acquired from the decedent” requirement in 1022(e), which I’ve posted below:
1022(e) Property acquired from the decedent
For purposes of this section, the following property shall be
considered to have been acquired from the decedent:
(1) Property acquired by bequest, devise, or inheritance, or by
the decedent’s estate from the decedent.
(2) Property transferred by the decedent during his lifetime–
(A) to a qualified revocable trust (as defined in section
645(b)(1)), or
(B) 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.
(3) Any other property passing from the decedent by reason of
death to the extent that such property passed without consideration.
At first blush, it may appear that Congress meant for (e)(1) to deal with all estate issues, for (e)(2) to deal with all trust issues, and for (e)(3) to deal with anything else, but why in (e)(1) did Congress specifically reference bequests, devises and inheritances when it would have sufficed to mention the decedent’s estate? The extra phrases must have been placed in the law for a reason, and the comma after the word inheritance is significant, in that it seems to separate (e)(1) into two sections: “bequest, devise, or inheritance” and “the decedent’s estate.” Further, the definition of “inheritance” found at law.com is “whatever one receives upon the death of a relative due to the laws of descent and distribution, when there is no will. However, inheritance has come to mean anything received from the estate of a person who has died, whether by the laws of descent or as a beneficiary of a will or trust.” Black’s Law Dictionary, Fifth Edition goes even further on the definition of inheritance and includes assets which pass “by operation of law.” Based on this way of reading (e)(1), I conclude that Congress probably intended that the phrase “acquired from the decedent” include inheritances from trusts.
On the other hand, (e)(2) seems to suggest limited step-up opportunities for assets in trusts. Under (e)(2)(B), the step-up would be limited to trusts established by the decedent with a reserved power to alter, amend or terminate, so many irrevocable trusts would not be eligible for a step-up in basis, but perhaps Congress, already having dealt with bequests, devises and inheritances in (e)(1), wanted to make sure that certain other grantor trusts not be eligible for a step-up in basis, and was expressing its intention to exclude powers that had been given to the decedent to attempt to obtain a step-up in basis.
If (e)(1) and (e)(2) were meant to cover estate and trust issues, then (e)(3) was meant to cover any other types of transfers, such as jointly-held assets and transfer-on-death, pay-on-death and beneficiary designations. It also seems that a so-called Ladybird deed, where the owner of real estate deeds it away but reserves the right to retrieve it, fits into the (e)(3) category, although it may be questioned whether the non-exercise of a reserved power could be considered passing “from” the decedent.
Two other common types of transfers, a reserved power of appointment and a reserved life estate, are more problematic, but may also fit under (e)(3). A reserved power of appointment in a deed is not a possessory interest but can also fit into the (e)(3) category because the real estate was a vested interest subject to divestment, and the real estate passes without consideration when the original owner dies and the divestment possibility is eliminated; until the power holder’s death, the person or entity to whom the real estate was deeded cannot sell or mortgage it, and is therefore not the owner in any significant economic sense.
A reserved life estate may fit under (e)(3) because the person or trust to which the real estate was deeded does not have possession during the life tenant’s lifetime, and, at the time of the life tenant’s death, the life tenant has an ownership interest to the exclusion of the holder of the remainder. Under this type of analysis, even though title passed when the deed was recorded and the remainder interest became vested at that time, the real estate could still be viewed as passing “from” the decedent.
Presentation on Modified Carryover Basis Rules
I’m speaking about modified carryover basis topics (Internal Revenue Code Section 1022) at 1:00 PM EDT today at a national conference call of the American Bar Association’s Real Property, Trust & Estate Law Section. If you’re a lawyer who is a member of the Section, you can join the Income and Transfer Tax Planning Group and listen in. Information about the Group can be found at http://www.abanet.org/dch/committee.cfm?com=RP509000
When Are Assets in an Irrevocable Trust Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?
As I have suggested in earlier blog posts about Internal Revenue Code Section 1022, it seems that the modified carryover basis rules were not well-written by the 2001 Republican Congress that passed them. It is possible that Congress may have wanted to allow a step-up in basis in very limited circumstances, but it appears to me that broad catch-all descriptions in Section 1022(e) such as “inheritance” and “[a]ny other property passing … by reason of death” were placed there to allow liberal interpretation of this tax law. From that standpoint, it appears that the assets in an irrevocable trust may often be eligible for a step-up in basis.
As I suggested in Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?, it appears that the assets in an irrevocable trust that contains a reserved special power of appointment can be eligible for a step-up in basis. A deeper reading of Section 1022, however, reveals other step-up opportunities as long as the assets are deemed owned by the decedent under Section 1022(d) and received from the decedent under Section 1022(e).
The grantor trust rules in Internal Revenue Code Sections 671-679 have long determined whether someone should be treated as the owner of an irrevocable trust for income tax and capital gains tax purposes. In particular, Internal Revenue Code Sections 673-678 all begin with the general rule that the “grantor shall be treated as the owner of any portion of a trust” described in that section. Since none of those sections are specifically negated in Section 1022, it appears that ownership under the grantor trust rules should suffice as the decedent’s ownership under Section 1022. While there are special rules about ownership under Section 1022(d), those rules do not appear to be an exhaustive list. Further, when Congress intended to negate certain planning maneuvers being treated as ownership in Section 1022, such as powers of appointment given to a decedent, it specifically did so.
Thus, it appears that grantor trusts meet the “owned by the decedent at the time of death” standard in Section 1022(d)(1). It is not much of a stretch to state that assets that were deemed “owned” by the decedent during lifetime were then at the time of death ”received” from the decedent. Assets in a grantor trust established and funded by the decedent would then fit into the category in Section 1022(e)(3) of “other property passing from the decedent by reason of death to the extent that such property passed without consideration.”
What Is the Adjusted Basis of Common Stock Received from Demutualized Life Insurance Companies?
Many people owned life insurance or other policies with life insurance companies and, when those companies became publicly-traded, received shares of common stock. In the 2008 case of Fisher v. U.S., the U.S. Court of Federal Claims held that the basis for capital gains tax purposes was the fair market value of the stock when it was received, not zero.
If you have already sold your stock from a demutualized life insurance company and your income tax returns showed the entire sale proceeds as taxable income, you should file amended returns and claim refunds as soon as possible.
Caregiver Authorization Affidavit Allows Appointment of Temporary Decision Maker for Minor Child
Parents who are going away for an extended period of time (such as on vacation, on a business trip or for hospitalization) are often concerned about what would happen if a minor child who was left behind needed immediate attention for a health care problem.
Under Massachusetts General Laws, Chapter 201F, parents can give written authorization to allow their minor child’s caregiver to make educational and/or health care decisions. The caregiver must certify that the child is living with the caregiver. The authority given in the affidavit to the caregiver does not eliminate the parent’s legal right to make all final decisions, and the parent can override the decisions of the caregiver.
Executing a Caregiver Authorization Affidavit appears to be an easy and effective way for a parent to give temporary decision-making authority to the person with whom their minor child will be staying during the parent’s absence.
The Massachusetts law regarding Declarations of Homestead has never been very clear. Having already answered some typical questions in http://elderlawblog.info/2010/04/20/questions-and-answers-about-declarations-of-homestead-in-massachusetts/, here are some other questions I’ve been asked by clients during our conferences.
Can I file more than one type of homestead?
Through a process known as stacking, it is possible to file more than one type of homestead. Under current law, each one would protect $500,000 of the value of the primary residence.
What happens to my Declaration of Homestead after I die?
What happens to your homestead when you die can vary based on the homestead type. The Elderly and Disabled types do not allow any protection to anyone after your death, so a creditor can sue your estate without concern for an Elderly or Disabled Declaration of Homestead. The regular type, however, continues after your death to protect your spouse and minor children. If you have minor children, the problem with the regular Declaration of Homestead (unless special language is added) is that their right to live there can complicate a sale or refinance.
My husband is in a nursing home, so should he file a Declaration of Homestead? As described in the previous answer, a regular Declaration of Homestead would protect your right to continue to live in the home after his death. The better move in many situations, however, may be for him to deed the home to your name, since transfers between spouses are allowed under Medicaid and MassHealth laws and regulations. If he keeps the home in his name but you die first, he’ll end up being the sole owner of the home, and after he dies MassHealth would have an estate recovery claim against his estate for repayment.
What’s better, a Declaration of Homestead or an umbrella policy?
I’d say an umbrella policy is more important to a typical person than a Declaration of Homestead. For a Declaration of Homestead to have any value for you, you’ve been sued and you’ve essentially lost everything else and have ended up in bankruptcy. An umbrella policy has the potential to protect all of your assets against major claims and to keep you away from bankruptcy.
Can a person whose home is in a trust file a Declaration of Homestead?
Ambiguities in Massachusetts law are supposed to be decided by Massachusetts courts, but no case regarding the homestead law has yet been decided by the top court, the Supreme Judicial Court of Massachusetts. Lower Massachusetts courts have held that a home in a trust is not protected by a Declaration of Homestead. A 2010 case in federal Bankruptcy Court, however, has interpreted Massachusetts homestead law as allowing a person whose home is in trust to file a Declaration of Homestead, so at this point it appears that a person whose home is in a trust can protect the home by filing a Declaration of Homestead.
Minimum Monthly Maintenance Needs Allowance for Nursing Home Resident’s Spouse Stays Unchanged through June 30, 2011
When one spouse is living in a nursing home and the other spouse is living anywhere else, the spouse who is not living in the nursing home (known under Medicaid and MassHealth law as the “community spouse”) is allowed by Medicaid or MassHealth to keep some or all of the nursing home resident’s income through an income allowance known as the Minimum Monthly Maintenance Needs Allowance (MMMNA). Every July 1st, this figure is supposed to change based on federal poverty level guidelines, but the U.S. Department of Health and Human Services did not revise the guidelines this year, so the MMMNA will remain $1,821 through June 30, 2011.
If certain basic household expenses are more than 30% of the MMMNA, the community spouse is entitled to keep extra income, known as the Excess Shelter Amount (“ESA”). Between the MMMNA and the ESA, the community spouse can now be entitled to as keep as much as $2,739 of the married couple’s total income. If even more income is needed, such as where the community spouse is living in an assisted living facility, the community spouse can request a fair hearing and attempt to prove the need for more than $2,739 of the married couple’s total income. All of these figures remain unchanged through June 30, 2011.
Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support. Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer.
Utilizing the MMMNA provisions in Medicaid/MassHealth law is always better than purchasing an immediate annuity, since all payments from the annuity are treated as income, and taking that step ends up reducing the amount of the married couple’s retirement income that the community spouse could otherwise keep. Unfortunately, due to the asset rules under Medicaid/MassHealth, in many situations the community spouse has no choice but to purchase an immediate annuity with excess assets. See Preserving Assets and Maximum Income for the Healthier Spouse When the Other Spouse Enters a Nursing Home.
Challenging Wills, Trusts and Other Transactions Caused by Undue Influence of Other Persons
The 2008 Massachusetts case of Germain v. Girard has made it easier to challenge gifts, joint accounts, wills, trusts, beneficiary designations and other estate plan changes on the grounds of undue influence.
For undue influence to exist, a previous court had concluded in Heinrich v. Silvernail: “Four considerations are usually present in a case in which a supportable finding of undue influence has been made. These involve showings that an (1) unnatural disposition has been made (2) by a person susceptible to undue influence to the advantage of someone (3) with an opportunity to exercise undue influence and (4) who in fact has used that opportunity to procure the contested disposition through improper means.”
In Germain v. Girard, the person guilty of undue influence had received only an indirect benefit, as it was his wife who eventually received a larger inheritance. Since she had benefitted from his actions, and he would indirectly receive a financial benefit by being married to her, the court invalidated the trust amendment that the husband had directed a lawyer to prepare for his father-in-law shortly before death. That lawyer had represented the husband in prior cases and did not even meet his new “client” until he brought the trust amendment to the hospital to be signed.
Because of Germain and other recent Massachusetts case law developments, the burden of proof when arguing the existence of undue influence is no longer on the person challenging gifts, joint accounts and estate plan changes. If a person who was in a fiduciary role or other position of responsibility received a direct or indirect benefit from a transaction, that person will now be in the position of defending the transaction. If a person who relies on you for help in their everyday life is making any type of change that could possibly benefit you financially, that financial transaction or legal document can later be reversed or undone by the court if somebody else objects to it.
A large part of the court’s concern in Germain was that the lawyer drafting the new trust provisions was taking instructions from someone other than the person who was eventually going to sign the document. Therefore, lawyers who prepare documents are now being held to higher standards to make sure elderly and disabled persons are being protected. When an elderly or disabled person makes a gift, creates a joint account or makes changes to an estate plan (including wills, trusts, beneficiary designations and other probate-avoidance techniques), it is important that the elderly or disabled person receive independent legal advice, or else the transaction could later be declared null and void after an expensive legal battle.
Internal Revenue Code Section 2511(c) Affects Charitable Remainder Trusts Funded During 2010
Unfortunately, the tax law known as EGGSTRA passed by the Republican-controlled Congress in 2001 and signed into law by President George W. Bush has made intelligent estate planning difficult for quite some time, and the 2010 estate and gift tax law is a mess. Unintended consequences may have resulted, and Internal Revenue Code Section 2511(c), effective only for gifts made during 2010, may significantly affect charitable remainder trusts.
The Internal Revenue Service has already attempted to provide guidance about Internal Revenue Code Section 2511(c). IRS Notice 2010-19 states that “[C]ertain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would have been treated as transfers under the gift tax provisions in effect prior to 2010. … Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax. Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse … is considered to be a transfer by gift of the entire interest in the property under section 2511(c).”
Doesn’t this language mean that a transfer to a trust is either a completed gift or it is not, and that there’s nothing in between? If so, perhaps nobody should establish and fund a charitable remainder trust during 2010. First, one way of reading the current IRS interpretation of Internal Revenue Code Section 2511(c) is that the entire amount contributed to a charitable remainder trust is a completed gift, even the amount retained as the income interest. Under that interpretation, only part of the gift would be deemed to charity, and the remainder would utilize the grantor’s $1,000,000 lifetime gift tax exemption. Second, a trust that provides for a successive income interest would also be treated as a completed gift, because the retention of a power of appointment over that interest (as is usually done) would not cause it to be an incomplete gift during 2010.
For another opinion on this topic, see Section 2511(c) and Charitable Gift Planning.
Charitable Remainder Trust Allows Sale of Appreciated Assets Without Immediate Capital Gains Tax
Many older persons own appreciated assets that yield little or no income. These same clients eventually experience the need for an increase in their monthly cash flow as their deteriorating health prompts them to hire caregivers whose assistance will allow them to remain in their homes. Selling low yield but highly appreciated assets in order to reinvest the proceeds at a higher rate of return usually means that the seller will have to pay substantial capital gains taxes on the appreciation in the assets, thus reducing the amount of principal remaining available for reinvestment. The depletion of principal caused by the payment of income taxes may not leave the seller with much, if any, in the way of increased income.
If, however, instead of selling the assets the person were to donate them to a charitable remainder trust, the assets can then be sold by the trust. Because it is the charitable trust, and not the former individual owner, who is selling the property, no immediate capital gains tax is payable. The trust can reinvest all of the proceeds, with no reduction in principal for the payment of capital gains tax.
For example, an elderly person with highly appreciated but non-income-producing land might consider donating that land to a charitable remainder trust. The trust would then sell the land, invest all of the proceeds in incoming-producing investments, and pay to the elderly person whatever income stream he or she has selected.
A charitable remainder trust is an irrevocable trust established pursuant to Internal Revenue Code Section 664. The donor or other person can receive an income interest for life or for a period of up to 20 years. A charity described in IRC section 170(c) must receive whatever is left in the trust at the end of the period. It is not necessary for the donor to make an irrevocable decision as to the identity of the ultimate charitable beneficiaries at the time the trust is established. He or she can reserve a power to redesignate the charity or charities that will receive the remainder interest.
Many older persons may have charitable intentions and desire a higher level of income, but would reject a charitable remainder trust on the grounds that, since the trust remainder is distributed to charity at their death, they would be disinheriting their families. If the older person is insurable, there is a possible solution to this problem. With part of the increased income, the older person can purchase a life insurance policy and pay the premiums from the increased income. Alternatively, the client can establish an irrevocable life insurance trust and use part of the income from the charitable trust to make gifts to the insurance trust, which then would use the funds to purchase and maintain the policy. Upon the older person’s death, the assets in the charitable remainder trust are distributed to charity, and the life insurance proceeds provide an inheritance for the donor’s family.
The donor of a charitable remainder trust is entitled to an income, gift, or estate tax charitable deduction based on the present value of the charitable remainder interest. See Regs. 1.664-2(c), 1.664-(b)(5) and 20.2031-7. Thus, in addition to avoiding capital gains taxes, the donor receives the additional advantage of a charitable deduction on his or her income tax return. Further, since estate or inheritance taxes (which would reduce the ultimate amount inherited) may be eliminated by this planning, the face amount of a life insurance policy that is meant to “replace” the lost inheritance need not be for the full amount of the assets transferred to the trust.
Under very specific IRS rules, a charitable remainder trust must be established in the form of either an annuity trust or a unitrust.
Charitable Remainder Annuity Trust (CRAT)
An annuity trust is a charitable remainder trust that pays the income beneficiary a specified sum, which must be not less than five percent of the initial net fair-market value of all property placed in the trust. See Section 664(d). Under this type of trust, the beneficiary receives a specified amount each year, without regard to the actual income of the trust. After the annuity trust is established, no additional contributions may be made to it. Because the amount of annual income payable to the noncharitable beneficiary of an annuity trust is fixed, inflation inures to the benefit of the remainder beneficiary (i.e., the charity).
One important requirement for an annuity trust is that there must be at least a five percent (5%) likelihood that there will in fact be a charitable remainder – that is, that the annuity income beneficiary will not use up the entire trust corpus. This raises a concern in establishing the trust, since the Code and Regulations specify five percent as the noncharitable beneficiary’s minimum interest but do not specify any maximum percentage. Actuarial tables used by the Internal Revenue Service must therefore be reviewed while drafting an annuity trust in order to ensure that the percentage being used is low enough, when viewed against the expected rate of return or investments, so that a charitable remainder will theoretically exist.
Charitable Remainder Unitrust (CRUT)
A unitrust is a charitable remainder trust in which a fixed percentage of not less than five percent (5%) of the fair market of the trust assets valued annually is distributed to the noncharitable beneficiary. See Section 664(d)(2). A type of unitrust known as a NIMCRUT may provide that the trustee is to pay the income beneficiary only the amount of trust income, even if that is less than the amount required to be distributed. If the trustee paid less than that amount in earlier years, because, for example, real property had not yet been sold, the trustee can “make up” the difference by later paying a larger amount to the income beneficiary.
Unlike the annuity trust, additional contributions may be made to a unitrust either during the lifetime of the income beneficiary or by a testamentary addition by the donor. If the trust permits these additional contributions the trust document must provide that, for the taxable year of the trust in which an addition is made, the unitrust amount must be computed by a formula set out in Reg. 1.664-3(b). Because the annuity amount is not fixed, a unitrust protects the income beneficiary against the ravages of inflation.
Internal Revenue Code Section 2511(c)
Unfortunately, the 2010 estate and gift tax law is a mess, and Internal Revenue Code Section 2511(c), effective for gifts made during 2010, may significantly affect charitable remainder trusts.
The Internal Revenue Service has already attempted to provide guidance about Internal Revenue Code Section 2511(c). IRS Notice 2010-19 states that “[C]ertain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would have been treated as transfers under the gift tax provisions in effect prior to 2010. … Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax. Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse … is considered to be a transfer by gift of the entire interest in the property under section 2511(c).”
Doesn’t this language mean that a transfer to a trust is either a completed gift or it is not? If so, perhaps nobody should establish and fund a charitable remainder trust during 2010. First, one way of reading the current IRS interpretation of Internal Revenue Code Section 2511(c) is that the entire amount contributed to a charitable remainder trust is a completed gift, even the amount retained as the income interest. Under that interpretation, only part of the gift would be deemed to charity, and the remainder would utilize the grantor’s lifetime gift tax exemption. Second, a trust that provides for a successive income interest would also be treated as a completed gift, because the retention of a power of appointment over that interest (as is usually done) would not cause it to be an incomplete gift during 2010.
Appealing Medicare Denials Caused by “Plateauing”
Under Medicare law, a person is entitled to continue to receive physical therapy or other medical rehabilitative care even after reaching a so-called “plateau.” Many rehabilitation centers and nursing homes refuse to continue to give physical therapy or other medical rehabilitative care unless the patient shows the ability to continue to improve, but what is routinely going on is a denial of the patient’s rights under Medicare law. Medicare regulations at 42 CFR 409.32(c) specifically state: “The restoration potential of a patient is not the deciding factor in determining whether skilled services are needed. Even if full recovery or medical improvement is not possible, a patient may need skilled services to prevent further deterioration or preserve current capabilities.” http://edocket.access.gpo.gov/cfr_2002/octqtr/pdf/42cfr409.33.pdf
The need for continued therapy is especially important for those persons whose quality of life would decline without it, especially those with degenerative diseases. See How the “Improvement Standard” Improperly Denies Coverage to Medicare Patients with Chronic Conditions.
Fortunately, the Center for Medicare Advocacy, Inc., of Willimantic, Connecticut, has initiated a national campaign to change this mentality that is so engrained in the health care system. http://www.medicareadvocacy.org/Projects/Improvement/ImprovementMain.htm
What Are the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal Revenue Code Section 1022?
No bill to reform the federal estate tax has gathered political steam. No federal estate tax compromise appears imminent. When a Republican Senator, commenting on the status of federal estate tax reform, pulls out the “small business and farmer” violin, we have to wonder whether anything will get done before this year’s November elections. Republican Senator Grassley forgets it was the 2001 Republican Congress that caused this tax mess. It appears that we’re stuck with the modified carryover basis rules for a while, so I’m continuing to analyze Internal Revenue Code Section 1022. (My earlier blog posts regarding the capital gains taxation of life estates, powers of appointment and revocable trusts can be found at http://elderlawblog.info/category/internal-revenue-code-section-1022-2/)
To obtain a step-up in basis for appreciated assets, it appears that a Federal Estate Tax Return must be filed for any decedent who dies during 2010. Internal Revenue Code Section 1022(d)(3) states that basis increases must be allocated “on the return required by Section 6018.” Internal Revenue Code Section 6018 pertains to the filing of Federal Estate Tax Returns, but, unfortunately, no such return is actually required for anybody who dies during 2010.
A Federal Estate Tax Return is due 9 months after a decedent’s death, and can normally be placed on extension for no more than 6 months, but a temporary amendment to Internal Revenue Code Section 6075 provides that the Federal Estate Tax Return will normally be due (unless Internal Revenue regulations provide otherwise) when the decedent’s final federal income tax return is due. The requirement in Internal Revenue Code Section 1022 that basis increases be allocated on a Federal Estate Tax Return poses a potentially huge tax trap for the unwary, as Section 1022 does not state whether a basis increase can be allocated on a late-filed return. Unfortunately, many persons may not even become aware of this basis issue until they have sold appreciated assets that they inherited and are preparing to file their income tax returns, and, if assets had been inherited in any year before the sale, the deadline for the executor of the decedent’s estate to allocate the basis increase may well have passed by then.
Reportedly, the Internal Revenue Service is working on a new version of the Federal Estate Tax Return. Estate planning professionals should soon begin the process of informing the executors of the estates of all 2010 decedents about the need to file this return, and accountants should revise their annual questionnaires to ask about assets that were inherited during 2010.
Only an “executor” can allocate the basis increase, and that term is not defined within Section 1022, but under Treasury Regulation 20.2203-1, the term “executor” includes an executor or administrator, but if there is no executor or administrator, the term means “any person in actual or constructive possession of any property of the decedent, ” and the term can actually include “the decedent’s agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding, as collateral, securities belonging to the decedent; and debtors of the decedent in this country.” Thus, the lack of an executor or administrator being appointed for a decedent’s estate can mean the possibility exists for different persons or entities to file competing Federal Estate Tax Returns with different basis adjustments.
Internal Revenue Code Section 1022 causes a giant paperwork headache. For example, my experience has been that many persons who sell their homes or vacation homes later find themselves searching their records for proof of their expenditures on capital improvements that add to the basis for capital gains tax purposes, and now the executor of a person’s estate is placed in the difficult position of attempting to locate all of those records. The 2001 Republican Congress that passed this law may have created a perverse incentive for everybody to become paper hoarders, and the executor of a decedent’s estate will now have potential liability for getting rid of any of the decedent’s paperwork without having reviewed it thoroughly.
Are All Revocable Trusts Eligible for a Step-up in Basis under the Modified Carryover Basis Rules?
It looks like the political tax games in the Senate aren’t going to end soon, and we’ll be stuck with Internal Revenue Code Section 1022 and the modified carryover basis rules for most if not all of 2010. Senate Continues to Procrastinate Under Section 1022, which is effective only during 2010, the Executor or Personal Representative of an estate may increase the basis of certain assets up to $60,000 for nonresident aliens, and up to $1,300,000 for unmarried decedents who are not nonresident aliens.
Having already looked at Section 1022 and dealt with life estates ( Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022? and More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010) and powers of appointment (Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?), I figured revocable trusts would be an easy topic, but it isn’t, and the more I look at this statute the more illogical it appears.
To qualify for the step-up in basis under 2010 tax law, an asset must be considered to be owned by the decedent under Section 1022(d) and considered to be acquired from the decedent under Section 1022(e). Anything owned by a revocable trust established by the decedent would seem to be acquired from the decedent as a result of the decedent’s death, but are those assets considered “owned” by the decedent? For some reason, Congress took pains to include “qualified revocable trusts” in Section 1022(d)(1)(B)(i) in the list of assets deemed owned by the decedent, and also in Section 1022(e)(2)(A) in the list of assets passing from the decedent. (A qualified revocable trust is simply a revocable trust that is elected to be treated as part of the decedent’s estate for income tax purposes under Section 645(b)(1).) It seems that assets in all revocable trusts would qualify as an “inheritance” under Section 1022(e)(1), and also under Section 1022(e)(2)(B) where the decedent had reserved rights to “alter or amend,” so why would Congress have specifically mentioned qualified revocable trusts? Would that be because only an executor can allocate the basis increase? Is it possible that the specific inclusion of qualified revocable trusts in Section 1022(e)(2)(A) means that Congress didn’t want other revocable trusts to be eligible for a step-up in basis?
The more logical conclusion is that Congress wanted Section 1022(e)(2)(B) to be a catch-all provision for trusts for purposes of the step-up, and that all revocable trusts are eligible for a step-up in basis. That conclusion leads to the further conclusion that Congress meant Section 1022(d)(1)(A) to be broadly interpreted, as qualified revocable trusts are mentioned in both Section 1022(d) and Secton 1022(e), and if Congress had meant the special rules in Section 1022(d) to be an exhaustive list, then there would have been no reason for Congress to have included other trusts in Section 1022(e)(2)(B).
To be conservative and assure the possibility of a step-up in basis for assets held in a revocable trust for someone who dies during 2010, it seems that the Executor or Personal Representative of the decedent’s probate estate and the Trustee of the decedent’s revocable trust should make the election under Section 645(b)(1) to treat the trust as a qualified revocable trust for income tax purposes. There is the possible risk that a failure to do so would result in no step-up, and the election provides a safe harbor for the step-up.
The same sloppy “thinking” in 2001 that caused this one-year tax law to take effect in 2010 is evident throughout Internal Revenue Code Section 1022. Who knows what other ideas Congress is working on that would affect estate planning; maybe we would all be better off if the Senate continues to procrastinate.
Taking Control of the Hospital Discharge Process
It’s stressful enough to have a family member hospitalized, but hospitals seem to move patients out so quickly that the stress is intensified.
A hospital discharge does not mean that the patient has recovered fully. Rather, it means that a physician has decided that the patient has reached a stable condition and doesn’t need to be hospitalized any longer. Discharge planning is defined by Medicare as a “process used to decide what a patient needs for a smooth move from one level of care to another.” Medicare requires that the discharge plan be “safe and adequate,” and if you don’t agree with the plan, you can appeal it. Until the appeal is decided, your family member can remain in the hospital.
Make sure there aren’t any inaccurate assumptions in the discharge plan, especially about what family caregivers are expected to do. If the discharge is to home, make sure the home care services have actually been set up before the discharge (not just a phone call made by the discharge planner), as any gaps in coverage will immediately fall on family caregivers once your family member has left the hospital. In a difficult situation involving a senior citizen, getting a geriatric care manager involved can often remove a great deal of stress from you. (If you’re in need of one, a Certified Elder law Attorney (www.nelf.org) can provide you with a referral.)
If the discharge is to a nursing home, make sure that you feel that the nursing home is located in an appropriate place for visits from family and friends, as a lack of visits may result in corners getting cut and less than adequate care. While the hospital discharge planner may be able to locate a nursing home that has an available bed, there may be a good reason that beds are available at that nursing home, so you should make your own decision about whether the nursing home is appropriate. You should personally visit the nursing home. Print out the Nursing Home Facility Checklist at http://nursinghomeadmission.com/findahome.php, and through the same page on that website you can check out the Massachusetts and federal ratings of any nursing homes that you are considering. Don’t feel pressured to make a too-quick decision; again, getting a geriatric care manager involved can reduce your stress level.
Above all else, trust your common sense and don’t let the hospital discharge planner steamroll over you. If you feel your family member is being pushed out of the hospital too soon, you may be right: based on the way health insurance works, hospitals make money by refilling beds, not by having existing patients linger in the hospital.
What’s So Bad about Probate?
A company named Schumacher Publishing owns and runs www.estateplanning.com and licenses articles on various estate planning topics; lawyers and financial planners can pay to use some of Schumacher’s articles on their websites. The company recently contacted me to try to get me to purchase one of their packages, and earlier today I looked at some of their articles, which are generally accurate and very well-written. (No, I won’t be buying, because I like writing my own articles and blog posts.) One of Schumacher’s articles, “Understanding Living Trusts,” asks the question “What’s so bad about probate?” I don’t quite agree with Schumacher’s 4-part answer. In fairness to Schumacher, I point out that every state has its own probate and trust laws, so it is difficult to write a short summary that applies accurately to all 50 states,but here are Schumacher’s points about what’s so bad about probate and my rebuttal about Massachusetts probate.
Schumacher’s point: “It can be expensive. Legal fees, executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. These costs can vary widely; it would be a good idea to find out what they are now.”
Brian’s response: I agree with the point about the multi-state estate being complicated, and it is often a good idea to use a trust to avoid probate if you own real estate in other states. Schumacher’s point about probate being expensive, however, is twisted to make a trust sound like it is always preferable; a trust can also be expensive for the same reasons listed above, as legal fees, Trustee’s fees and other costs must be paid before the assets can be fully distributed to your heirs.
Schumacher’s point: “It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.”
Brian’s response: It’s not so much the probate process itself that takes time, but rather the processes of selling or otherwise dealing with real estate and other assets, and filing income tax returns and estate tax returns, that take time. Those are all matters that would have to get done even if you had a trust. The issue that probably is the main reason for any estate to be held open for over 18 months is final clearance from estate tax authorities, and that delay has nothing at all to do with the probate process; a trust would also have to be held open while waiting to receive written approval of estate tax returns from the Internal Revenue Service or the Massachusetts Department of Revenue. Schumacher’s other points about probate are also invalid and are twisted to make a trust sound like it is always preferable. Assets are not frozen in Massachusetts, and, similar to probate, with a trust nothing can be distributed or sold without the Trustee’s approval. Similar to probate, if the family needs money to live on, they can make a request to the Trustee, and the Trustee can deny it.
Schumacher’s point: “Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned, whom you owed, who will receive your assets and when they will receive them. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.”
Brian’s response: I agree that a disgruntled heir can contest your will, and in Massachusetts that person may even be given basic instructions early in the probate process on how to do it, so I often suggest a trust to avoid probate if a will contest is thought to be a real possibility. I generally disagree, however, about how public the Massachusetts probate process is, since the only way for anybody, including an unscrupulous solicitor, to learn what you owned or owed, or who received what from your estate, is to go to the Probate Court during its business hours and to ask to see the probate file; the information being sought may not even be in the file yet, so return trips to the Probate Court could well be needed to get to see that information. It therefore can take a lot of time and effort on somebody’s part to get to see details in the probate file, even though it can technically be categorized as public.
Schumacher’s point: “Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.”
Brian’s response: Your family also has no control over the Trustee, and the Trustee’s processes will determine how much the trust administration will cost and how long it will take. The probate process in Massachusetts is fairly simple, and will become simpler on July 1, 2011, when the Massachusetts Uniform Probate Code is scheduled to be fully implemented. With proper guidance, the executor or personal representative of an estate can handle many tasks without incurring large costs, having lengthy delays, or needing to rely much on a lawyer. In fact, many of the probate estates I’ve handled have cost less than the cost of a living trust.
Brian’s conclusion: As you can see, a writer who is looking to promote trusts can twist everything to make probate sound bad, and to make trusts seem like magic. As I’ve pointed out in an earlier blog post, a choice sometimes has to be made in Massachusetts between avoiding probate and protecting your home from creditors. http://elderlawblog.info/2010/04/02/protecting-your-home-from-creditors-in-massachusetts There is no significant reason to fear probate in Massachusetts, and there are far more costly estate planning issues to deal with, such as (1) On a Massachusetts estate of $1,000,000+, the minimum Massachusetts estate tax is $33,200. (2) An elderly person has a roughly 10% chance of spending 5 years in a nursing home, at an average total cost in Massachusetts of over $580,000. (3) A disabled person on SSI who inherits assets directly, instead of through a special needs trust, loses SSI benefits and is required to spend everything all the way down to $2,000 before getting back on SSI.
When an ambulance is called for, the crew must often make split-second decisions about treatment, especially when a patient is not breathing or has no pulse. In Massachusetts, ambulance services, EMTs and paramedics are required to resuscitate a person who has undergone cardiac or respiratory arrest unless they are immediately made aware that the person does not want to be resuscitated. Because of the urgent nature of their tasks, they are not permitted to receive verbal information, and they need to see a specific form. A validly-completed Comfort Care/Do Not Resuscitate (CC/DNR) form is the only way that ambulance services, EMTs and paramedics are allowed to verify that a patient has a valid DNR. The form is available at http://www.mass.gov/Eeohhs2/docs/dph/emergency_services/comfort_care_form.pdf. If a properly executed CC/DNR Order Verification Form is not seen by the responding ambulance services, EMTs and paramedics, they are required to resuscitate the patient, even if the patient’s wishes are in some other written form or told to them. If ambulance services, EMTs and paramedics are shown a properly executed CC/DNR form for the patient, they will provide only palliative care (oxygen and medication to relieve pain) to the patient during transportation to the hospital.
The form must be completed in its entirety and signed by an attending physician, authorized physician’s assistant or authorized nurse practitioner, in accordance with the instructions on the form. If a physician’s assistant or nurse practitioner signs the form, the name of the supervising physician must be on the form for it to be validly executed.
