Orlando Estate & Elder Law

COLA Is Increasing

Social Security recipients will get a cost-of-living adjustment of 3.6 percent in 2012, a welcome boost after two years of no increase.

Although it’s been two years since Social Security beneficiaries saw some additional respite from rising inflation, finally we’ll see a COLA increase for 2012 and an adjustment of 3.6%.

The COLA, or Cost Of Living Adjustment, has been a nearly annual increase in Social Security payments. Why? To keep benefits consistent with inflation. Otherwise, seniors would be at the mercy of rising prices on fixed incomes. Lean times in the economy, however, have meant cutting back COLA for the past two years, leaving many seniors with no choice but to further tighten their belts.

The 3.6% increase will be warmly received by many. For example, beneficiaries receiving $1,186 a month, the average for retired workers, will see monthly benefit increase of $43.

To be sure, it’s not a dramatic increase (and less than the last COLA of 5.8%), but it is better than no increase at all.

Post script:  After I wrote this blog post, it was announced that Medicare's Part B premium will increase next year, by an average $3.50 per month.  

Reference: AARP (October 19, 2011) “Social Security Beneficiaries Welcome 3.6 Percent COLA”

 

Life Insurance Deconstructed for the Wary

Life insurance really isn't as frightening or complex as it seems. It's actually a fantastically useful and flexible estate-planning tool that can provide income-tax-free security for your loved ones. It can also provide liquidity to pay estate taxes, especially if your estate largely consists of assets such as real estate or a closely held business that you may be reluctant to sell to raise cash. (If the policy is owned by an irrevocable trust, the insurance payout can avoid estate taxes too.) 

Most of us don’t much like insurance of any type. If nothing else, it means confronting and directly dealing with risk. And life insurance can be an especially touchy subject, since it means dealing with the topic of death (usually our own). Still, life insurance is neither as scary nor as difficult as we may think. Fortunately, the Wall Street Journal recently provided a basic rundown for the wary on how to go about life insurance.

Life insurance can be a powerful estate planning tool, because it is waiting to provide a potentially massive injection of liquidity into your estate at your time of death. It can mean the necessary income to provide support for your family, as well as pay off any debts, taxes and expenses you may leave behind. In addition, cash is king when it comes to paying estate taxes. This can be critical when your estate value is tilted toward illiquid assets like a family business interest.

Still, the type and amount of life insurance that is right for you will depend on your own unique circumstances and the purpose of the insurance.

Before you begin wading into the life insurance analysis process, take a look at the Journal’s rundown of the basics. Then, make sure you get the advice of an insurance professional to help you.

Reference: The Wall Street Journal (October 15, 2011) “Need to Know: Life Insurance 101”

 

QTIPs: May Cause Problems Unrelated To Your Ears

There may, in fact, be a free lunch somewhere, but a QTIP is not one.

Blended families are a fairly normal part of modern life, with both divorces and remarriages becoming quite common. That said, this fact of life accounts for a good portion of the family baggage of modern living and a lion’s share of the estate planning problems. Blended families have some extra concerns and extra problems, especially when each spouse hopes to take care of their own children from a previous marriage. A recent Forbes article explores a particularly strange probate case to prove the point.

Word to the wise: Watch out for QTIPs (and not just because your doctor is worried you will hurt your ear). A QTIP is shorthand for “Qualified Terminable Interest Property.” It is a way to hold property for the surviving spouse that qualifies for the unlimited marital deduction without being an outright bequest.

Of course, a spouse can always give his or her assets outright to their surviving spouse without incurring taxation. In the case of an outright bequest the surviving spouse gets to deal with the outright assets as his or her own property (because it is). But what if you ultimately wanted to give the property to your children from a previous marriage, but you wanted to allow your spouse to have it until their own death? That’s the planning strategy that lead to the contested probate court case of In the Matter of The Estate of Sydney Stark, as described by Forbes.

Sydney Stark used the QTIP to leave an apartment to his wife, Sylvia, and then ultimately to his children from a previous marriage. The problem with the QTIP is that the assets in the QTIP have to count as being owned within the surviving spouse’s estate to qualify for the marital deduction. As a result, it becomes more likely that the surviving spouse’s estate may incur the estate tax. Sylvia Stark’s estate did.

In the case of a blended family like this one, with Sylvia leaving her assets to her own child of a previous marriage, this strategy meant Sylvia left an estate tax bill to her own child without the additional assets to pay the IRS. Why? The QTIP assets passed fully to the children of Sydney Stark. Naturally, Sylvia’s own child cried foul.

You can read more about QTIPs and the unfortunate tale of this dystopian Brady Bunch in the original article. In the end, this case provides yet another lesson about matters for careful consideration when planning your estate, especially if you and your spouse have complex and potentially competing interests. 

Reference: Forbes (October 14, 2011) “Blended Family Not Like The Brady Bunch – At Least Not in Probate Court”

 

Charities Hoping for an Uptick in Giving

America’s big charities expect fund raising to rise in 2011, but the increase won’t come close to making up ground they lost in the downturn. 

Have we bounced back from the Great Recession or are we still languishing (and due for another fall backwards)? This is a hot topic in political and economic circles, let alone around kitchen tables. It’s also a question of importance in the world of philanthropy. As the Chronicle of Philanthropy reports, America’s biggest charities are expecting modest growth in 2011, but face challenges in rebounding from the 2008 tumble.

One way the Chronicle charts the world of charitable giving is through the Philanthropy 400, tracking the largest 400 charities. Think of it as the Forbes 400 of charities. Out of these 400, the expectation is that charities will see a modest median rise of 4.7% by the end of 2011.

That is good news because this will be a net rise over 2010 growth, when charities were able to gather up an additional median gain of 3.5%. Nevertheless, those charities are still below 2007 levels and much of the gains have been in the form of donated medicine, food, and services rather than funds.

The Chronicle counts the 400 as a barometer of the charitable world. As such, it is a reminder of the many needs out there. The article also charts some patterns in charities of interest to the savvy philanthropist.

There is a bit of promising news for the charitably inclined, too, as headway has been made on the worldwide malaria problem, with charitable organizations at the forefront of vaccine development. However, these charities need more funding to eradicate the disease.

Reference: The Chronicle of Philanthropy (October 16, 2011) “America’s Top Fund-Raising Groups Face Big Struggles”

 

No “CLASS” Today (Or Tomorrow)

There is still the problem to solve about how we’ll care for our frail elderly in the years ahead, and it’s unclear what the path to a solution will be. After the shouting subsides, we’re still left with an inadequate, patchwork system for funding long-term care in the U.S. 

After much speculation, the Department of Health and Human Services (HHS) has pulled the plug on the CLASS part of the health law. As a recent Reuters article points out, this brings to the fore the question of long-term care insurance, both as it impacts the United States in general and each of us in particular, as potential patients in need of such care.

The CLASS act was the first attempt at establishing a public option for long-term care insurance and that put it between the proverbial rock and a hard place. The late Senator Kennedy championed the cause. Politics aside, what torpedoed the CLASS act? Money.

According to HHS, the program would prove too costly to achieve its goal. Why? Too few healthy people would elect to pay the required premiums. But what now?

The Center for Retirement Research at Boston College notes that about one-third of the Americans turning 65 this year will need at least three months of nursing home care sometime during their lives. Presumably, however, many of these same Americans will need such care even longer (and future generations can’t be expected to fare much better).

So, how we deal with long-term care as a country is yet to be seen. Regardless, since you or a loved one will likely need long-term care, the question remains: How will you pay for it?

An increasing number of forward-thinking people are turning to private long-term care insurance, but as many as 59% have yet to get their own private long-term care insurance policy or plan to get it (according to a 2010 survey).

Is private long-term care insurance right for you or a loved one?

For many who wait too long pondering this question, their default option is the more complicated question of Medicare and Medicaid. Undoubtedly, Medicaid (the means-tested shared federal-state program) is the largest source of long-term care financing. However, last time I checked, the federal government was not exactly flush with cash and many states are operating in the red.

In the end, whatever you decide to do when it comes to paying for long-term care, the best time to make plans is yesterday. Whatever you do, be sure to seek appropriate legal counsel.

Reference: Reuters (October 17, 2011) “What’s next for long-term care after CLASS act folds?”

 

Gift Tax Return Gotcha

A new IRS gift tax compliance initiative responds to suspicions of widespread failure to file gift tax returns.

Surprise. It’s a big year for the IRS and they’ve been opening many new fronts in the drive to assert tax law compliance. One of the largest and most unique fronts the IRS has opened has been a far-reaching gift tax audit on real estate transfers. As a recent Forbes article reports, the battle is tough going for the IRS, too.

The IRS estimates that somewhere between 60% and 90% of taxpayers will fail to file a gift tax return, despite having engaged in activity that requires a filing. As a result, it’s clear this is neither a petty problem in the Service’s eyes nor is it merely chump change waiting to be claimed. The problem with enforcing the gift tax has been the inability to catch someone in the act.

Never fear, the IRS has found just the right tool in the form of land records maintained at the state and local levels. Why? These public records allow the IRS to independently track the movement of properties between persons that haven’t shown up in gift tax returns. Family homes are just the sort of thing to pass easily between family members. However, things are rarely that easy when the IRS gets involved and that is just what’s happening now.

The lesson to be learned, regardless whether you have transferred any land in the past, is to be aware and diligent. While there are many ways and means to accomplishing your wealth transfer goals, you have to use the right tools.

Alternatively, those taxpayers who have transferred property without due diligence to the IRS’s gift taxes (and anyone following this story) have a grand development to watch. The IRS needs the states’ compliance to make their plan work and, while this has meant a great deal of cooperation in much of the country, it has met with resistance in California. There the courts have bristled at the IRS’s attempts to demand records. Forbes has a story to tell in the original article and the question remains: Will State courts further mire the IRS’s great gift tax audit effort?

Reference:  Forbes (October 19, 2011) “The New Gift Tax Audits: IRS Identifies Non-Filers Using State Property Records”

 

Valuation Discount Strategies

Across the board, valuation matters. Contemporaneous appraisals can be worth a lot. Retrospective appraisals — done after the fact and purporting to express value as of a date in the past — are never as persuasive as appraisals done contemporaneously.

Oftentimes, proper planning is about the ability to offer proper proof. That’s my primary take-away lesson from the Ninth Circuit Court of Appeals and the case of Estate of Petter v. Commissioner, as assessed in a recent Forbes article.

As many of you appreciate, when giving away assets it is important to get the most bang for your buck and that can be achieved by generating “discounts.” This was the plan of Ms. Petter when she transferred $22 million of UPS stock to a limited liability company (LLC) and then gave or sold units of the LLC to her heirs. Note: An LLC can help diffuse ownership and effectively transform the taxable value of the underlying assets.

This transformation of value hinges on the “marketability” of the interests held by the LLC members and their degree of “control” over the assets. As a result, the lack of marketability and control makes the interests held by the LLC members less valuable. Accordingly, such interests are worth less than the face value of the underlying assets and their value inside the LLC may be “discounted.” Such was the case with the LLC established by Ms. Petter.

Ms. Petter claimed a whopping 51% discount on the underlying assets of the LLC. Unfortunately, she was unable to support this discounted value and the IRS rejected that figure and approved a far more conservative discount of 36%.

Not to be defeated, Ms. Petter tried another approach. She built a provision into her planning that were there a valuation dispute with the IRS, then any discounted percentage denied would automatically go to her chosen charity… instead of to her estate or an heir. Why? She wanted to avoid any gift or estate taxes. Naturally, the IRS challenged this fall back position, but the Ninth Circuit upheld it. 

Reference: Forbes (September 30, 2011) “Fancy Appraisals Can Defeat IRS”

 

Bankruptcy Business Blues

Whether your company is large or small, sooner or later you will experience the pain and apprehension that come from receiving notice that one of your customers has filed bankruptcy. 

Bankruptcy can be a tough issue, especially to the small business owner whose customer has fallen on hard times. Problem #1: You’ve likely lost a customer for your products or services. Problem #2: You’ve likely lost the ability to collect the money the customer still owes you. Problem #3: The future potential bankruptcy “preference” may pull even more money from your coffers, as a Smart Business article points out.

The bankruptcy of another means their ability to pay you is severely compromised, unless you’re “secured.” However, what if you were paid and the payment is deemed to have been a “preference” by the bankruptcy trustee? If the bankrupt company made a payment to you on or before the 90 days prior to filing for bankruptcy, then such payment becomes recoverable as a means of squaring away obligations. Bottom line: The trustee can take the payment back from you.

If this happens to you, then you aren’t without options. Nevertheless, it does demand your full attention and cannot be ignored. The original article goes into considerable depth, but here is my take-away for you: find competent legal counsel to plead your case and run through the numbers.  

Reference: SmartBusiness (July 1, 2011) “What to do when faced with a bankruptcy preference demand”

 

DEMENTIA IN THE WORKPLACE

As baby boomers age — and economic upheaval keeps people in the workforce longer — the issue of how to deal with employees with dementia and cognitive impairment will continue to be kicked around the nation’s courtrooms and boardrooms.

Do you have a loved one with dementia? If the statistics hold, many more of us will have loved ones with dementia in the future. Unfortunately, with workers (who still have jobs) staying on the job well into retirement, that means we will have many co-workers with dementia, too. A recent story out of DeKalb County (i.e., Atlanta) illustrates this coming trend.

Meet Linda Carter, the Superior Court clerk of DeKalb County. At age 59, Linda suffers from early onset Alzheimer’s. Her condition was a secret held between Linda and a helpful confidant in the court office. This confidant helped Linda perform her duties and remain employed. Obviously, such an effort is not sustainable. Recently, their secret was revealed when Linda was offered a routine form to sign. In reality, the form was a letter of resignation prepared for her. She signed it.

Linda wants her job back. She sued the court to reinstate her post, once it became clear what had transpired. Now, a quagmire has developed as other employees have deemed her mentally unfit to return to her post.  

While this is a rather novel case (especially arising in the context of a courthouse), it is illustrative of a growing problem in the workplace – employees who have Alzheimer’s or dementia. Alzheimer’s patients oftentimes will go to great lengths to hide their condition. This, in turn, puts an undue burden on others to recognize and properly deal with the situation. After all, those afflicted with the impairment aren’t without rights and “reasonable accommodations” ought to be made.

As an employee, it’s important to know your abilities and how you are performing. Similarly, as a fellow employee it’s important to understand your co-workers and deal with the situation honestly. Regardless, these types of cases will only increase as statistics rarely lie.  

Reference: The Atlanta Journal-Constitution (October 1, 2011) “Challenges of an aging workforce”

 

Why Have A “Crummey” Trust?

To follow in [Reverend Crummey’s] footsteps, set up a trust and have it buy a life insurance policy on your life. Someday when you die, the trust will receive the insurance proceeds and pay them out to the beneficiaries listed in your trust. 

When you’re looking to pass on significant assets, a trust is a powerful tool. Quality is important. While a “crummy” trust won’t cut it, a “Crummey” trust just might do the trick. Poor puns like this and more abound in a recent Forbes article about “Crummey trusts” I thought you might enjoy.

A “Crummey trust” – so named for the case of Crummey v. Commissioner and the good Reverend Crummey himself – is a way of legally avoiding estate taxes while passing on wealth to heirs by combining an irrevocable trust and a life insurance policy. To create a Crummey Trust, you first create the trust and then have it buy a life insurance policy on your life. In the end, when you pass away, the beneficiaries of the trust inherit the proceeds from the life insurance policy without that money ever “coming in contact” with your taxable estate.

This strategy isn’t without its challenges, however. One challenge is the risk of incurring gift taxes. However, as long as annual premiums are below the gift tax threshold of $13,000 per person (and you don’t gift them anything else during the year in excess of that amount in combined gifts) you can stay in the clear.

The biggest problem usually tends to lie in the practice of sending out annual letters – “Crummey letters’ – since the beneficiaries must be notified within very specific windows during which they may elect to withdraw the gifted funds. Failure on the part of the trustee to send out the letters can raise questions with the IRS and may upset the apple cart, so to speak, when seeking to qualify the annual gifts as falling within the annual gift exclusion. For this reason, many families find the safest approach is to engage a professional trustee to handle these notice letters and other administrative duties to ensure compliance.

Reference: Forbes (October 9, 2011) “With Trusts, ‘Crummey’ Is Good”