State-by-State Estate Tax Survey

The American College of Trust and Estate Counsel has just released this comprehensive Death Tax Chart summarizing the estate and inheritance tax laws currently in effect in the 50 states and the District of Columbia.  Of the local jurisdictions, New York, New Jersey and Connecticut each have a state estate tax distinct from the federal estate tax, while Pennsylvania has a state inheritance tax.

Signing a Nursing Home Admissions Agreement may be Hazardous to Your Wealth

Admitting a parent into a nursing home is a traumatic experience on many levels. Not only do children often deal with guilty feelings when making at such a decision, the nursing home admissions process is replete with paperwork and bureaucratic jargon that only adds to the stress.

 

Sometimes nursing homes will “require” the child to guarantee payment for the cost of a parent’s care in the nursing home.  Under the Federal Nursing Home Reform Act, however, a nursing home is prohibited from requiring a third party to guarantee payment to the facility as a condition of admission of another party.  Any child who signs such a guarantee can later disavow the guarantee without consequence.  

But even though a child cannot be required to guarantee payment for a parent’s nursing home care with the backing of the child’s assets, a recent New York appellate court case makes clear that a child can be held responsible for reneging on a written promise to a nursing home to apply the parent’s own assets towards the cost of the parent’s nursing home care.

In Troy Nursing & Rehabilitation Ctr., LLC v. Naylor, (N.Y. App. Div., 3d Dept., No. 512311, March 20, 2012) Diana Gaetano signed an agreement with Troy Nursing & Rehabilitation Center in which Ms. Gaetano promised, as agent under her father’s power of attorney, to use her father’s assets to pay for her father’s care in the facility.  After Ms. Gaetano reneged on that promise, the nursing home filed suit against her, seeking damages of over $80,500 plus interest.

In March 2011, Judge Hummel of Rensselaer County Supreme Court granted summary judgment in favor of the nursing home.  Ms. Gaetano appealed.  In its opinion, the Third Judicial Department of the Appellate Division of the New York Supreme Court agreed with Judge Hummel that Ms. Gaetano was in fact liable for the cost of her father’s nursing home care. Specifically, the Court distinguished between a child’s guarantee to use her own assets to pay for care, which as noted above is prohibited under federal law, and a promise to use the nursing home resident’s own assets to pay for care, which the court held is an enforceable obligation.  The Appellate Court noted that federal law expressly authorizes a person “who has legal access to a resident’s income or resources available to pay for care in the facility, to sign a contract (without incurring personal financial liability) to provide payment from the resident’s income or resources for such care.” Ms. Gaetano’s agreement with the nursing home, said the Court, clearly met that definition. 

What’s the lesson to be learned from this case?  A child signing admission papers for a parent entering a nursing facility that participates in the Medicaid program (which the vast majority of nursing homes do) should avoid signing an agreement promising to use the resident’s assets to pay for the cost of care.  While a nursing home may refuse to accept a resident for failing to disclose assets, no facility that accepts Medicaid can prohibit a family from engaging in legitimate asset preservation techniques after the resident is admitted to the facility.  If the child signs an agreement like the one signed by Ms. Gaetano, however, the facility may subsequently assert a claim against the child that will be enforced by the courts, rendering ineffective any asset preservation planning that has been instituted.

Estate Disputes -- Are They Really About the Money?

In an excerpt from his new book Blood & Money: Why Families Fight over Inheritance and What to Do About it, attorney P. Mark Accettura argues that estate disputes are really less about "the money" than they are about psychological and physiological characteristics such as an innate disposition for conflict and the yearning for approval from a deceased parent that an inheritance is seen to represent.

When counseling clients regarding how to best pass their assets to their children or other loved ones, I spend considerable time delving into the background of the family and each individual member.  It is critical that as an estate planning attorney I learn everything I can about the relationships between and among family members so that I can help the client plan to minimize the possibility for conflicts among the family after the client is gone.  I don't take at face value any client's statement that "everyone gets along fine, and always will."  Instead I emphasize to them that, while it's certainly possible that family harmony will continue after the client's death, it is also as likely that the client has served as the "glue" who has helped smooth over simmering tensions among children or other family members. I emphasize that when the "glue" is gone, the tensions that have festered under the surface for years -- even decades --  may explode into a battle that may work it's way through court system for years, costing tens of thousands of dollars and leaving the family irrevocably broken.

Click here for the excerpt from Accettura's book.

New York's Expanded Estate Recovery Rules to be Repealed

Yesterday it was announced that Governor Cuomo and the New York Legislature had reached a deal on the 2012 New York State Budget.  Included in the new budget is a repeal of the expanded estate recovery rules that were enacted in last year's budget in an attempt to "recover" assets from the estates of Medicaid recipients.  As I explained in a previous post describing the estate recovery rules, the expanded estate recovery rules, among other things, would have unfairly penalized those thousands of New Yorkers who had years ago transferred title to their homes to their children while retaining a life estate in the home.

Prior to last year's enactment of the expanded estate recovery rules, a home transferred with a retained life estate would have been deemed an asset exempt from Medicaid recovery, so long as the Medicaid "look back period" (currently five years from the date of transfer) had elapsed.  Under the expanded estate recovery rules, the parent's life estate interest in the home was deemed an "asset" subject to recovery should the parent receive Medicaid benefits, even if the life estate transfer had been made years or even decades prior to the parent receiving Medicaid!  

The expanded estate recovery rules would have also played havoc with IRA's and similar retirement accounts, and would surely have led to expensive and protracted litigation.

Stay tuned, however, as New York will be looking for other means to raise revenue that will almost surely affect the elderly, the disabled and the poor.

News and Notes

I apologize for my readers -- I'm a bit behind in posting to the blog.  To get you up to speed, here's a few recent developments in the world of estate planning, estate administration and elder law:

• An Executor is not absolved from liability for late filing of estate tax returns notwithstanding attorney's obvious malpractice (and even criminal conduct) -- In Thomas Friedman vs. U.S., 109 AFTR 2d 2012-723, the executor of an estate hired an attorney who claimed to be experienced in estate administration matters to file the federal estate tax return.  The attorney apparently suffered from a myriad of "physical and mental ailments" resulting in the attorney's neglect in properly handling the administration, including the filing of the estate tax return.  Only three years after the filing due date did the executor learn that the estate tax return had not in fact been filed.  The executor then paid the tax due, as well as interest and significant late filing penalties. The executor subsequently sought a refund of the penalties and interest, relying on the doctrine   that he reasonably relied upon the attorneys' assurances that the attorney was taking care of the filing.  The Federal District Court in Pennsylvania, citing the precedent of a 1985 Second Circuit  decision, held that a taxpayer's duty to file a timely tax return is nondelegable, and that misplaced reliance upon professional assistance will not fall within the safe harbor of reasonable cause.

•  Mere retention of a testamentary power of appointment in a irrevocable "Medicaid Trust" alone may not be sufficient to render the trust "incomplete" for gift tax purposes.  The IRS recently issued this memorandum, which provides that transfers of assets to an irrevocable trust in which the grantor retains a testamentary power of appointment, without more, constitutes a completed gift of the transferred assets and requires the filing of a federal gift tax return (assuming the value of the transferred assets exceeds $13,000).  Although when Medicaid planning for a modest estate there would be no payment of gift taxes, the troubling issue with such a determination is that if there is a completed gift during lifetime, the trust assets would not be included in the grantor's estate at their death, and thus the trust assets would not be eligible for "step up in basis" treatment.  So, in the common situation where a primary residence is transferred to such a trust, the heirs (typically the grantor's children) will inherit the home at the parent's death with the parent's "carryover" cost basis, not the (usually much higher) date of death cost basis.  If, for example, the parents have a cost basis in the home (e.g., purchase price plus capital improvements) of $50,000, and the children sell the home after the parent's death for $250,000, without the benefit of the step-up in basis, the children will pay capital gains tax on the full $200,000 gain.  One solution to this issue is to include in the trust that the grantor(s) will retain some lifetime rights over the transferred property.  Such control might include a right to trust income, or the retention of a lifetime (rather than after-death) power of appointment.  Fortunately, our firm already routinely includes such lifetime income and power of appointment powers in our "Medicaid" trusts, so I am confident that clients for whom we have created such trusts will gain the benefit of the step-up in cost basis for the trust assets upon the grantor's death.

• The options for purchasing long-term care insurance continues to shrink. Prudential recently announced that it is following other prominent companies (including MetLife and Travelers) in abandoning the individual long-term care insurance market (Prudential will still sell group long-term care policies).  This excellent Wall Street Journal article discusses the increasing difficulty consumers will have in purchasing affordable long-term care insurance, and includes tips on how to shop for those policies that remain available.

Estate Planning Comes to Hollywood

As discussed in this excellent article in Forbes, the Oscar-nominated film The Descendents, starring George Clooney, is replete with estate planning-related issues.  While I thought the movie was overrated, I did think the film makers did a good job in their handling of such concepts as the need for a living will to handle end-of-life care; the complexity of intra-family relations  as it pertains to real property held in a long-term trust; the common law requirement that requires termination of a trust under the Rule Against Perpetuities;  and how best to pass an inheritance to a child in a manner that will not impair his or her incentive to be a productive citizen (also known as the condition of "affluenza"). 

I am pleased that the producers consulted with a law professor who teaches estate planning to ensure that the estate planning issues were handled appropriately.

Obama's Budget Proposal and Estate Taxes -- Back to the Future

As has been widely reported, President Obama's proposed 2013 budget would eliminate the Bush-era income tax cuts for the "wealthy," and would require those earning more than $1 million per year to pay at least 30% of their earnings in Federal income taxes.  In addition, the capital gains rate for higher income earners would increase to 20%.

Less widely reported are some of the key estate and gift tax related proposals:

• a $3.5 million per person estate and gift tax exemption
• elimination or restriction of several advanced estate and gift tax reduction techniques, including the use of minority discounts and Grantor Retained Annuity Trusts ("GRATs").
• elimination of the "Intentionally Defective Grantor Trust" ("IDGT") technique that presently allows for the sale of assets to a trust in which the trust assets grow outside of the grantor's taxable estate, with the grantor paid by the trust for the assets sold to a trust via a promissory note.  Since under the current grantor trust rules the sale of the assets to the IDGT is considered for income tax purposes a sale to the grantor himself, there is no recognition of gain on the transfer.

Elimination of some or all of these advanced estate and gift tax planning techniques would certainly pose challenges to estate planners in helping their clients reduce exposure to estate and gift taxes.

Given that we are in an election year, and given the acrimony between the Republicans and the President, the chance of Obama's proposed budget passing largely intact is virtually nil.  That being said, Congress faces a December 31st deadline for the repeal of all the existing Bush tax cuts, so something will have to give between now and the end of the year.  We shouldn't be surprised, then, if the estate and gift tax exemption is reduced  to $3.5 million, and if some if not all of the advanced estate and gift tax planning techniques are eliminated.

With all the uncertainty, we are advising all of our high-net worth clients to plan now at a time when we can rely on some wonderful planning techniques to achieve significant estate and gift tax savings.

If you're a true policy wonk, an explanation of the proposed budget can be found here.