In many cases, a person will provide in their estate planning documents for a testamentary trust to be established to provide a vehicle for the management and protection of the assets being left for children or grandchildren.  Such a trust has many advantages, including the ability through a spendthrift provision to protect the assets from the trust beneficiaries creditors, to provide for professional management of the assets in the trust, to provide for an independent trustee who can prevent the beneficiaries from squandering their inheritance.

However, it is not uncommon in those situations for the different beneficiaries to have different circumstances, and thus different needs.  In some situations the different beneficiaries will also be antagonistic towards each other, which might promote trust litigation between one or the other of them ...

Over the past couple of years, as the recession has taken hold, we have experienced a higher level of controversy in estate settlement matters, including more will contests than usual and more than the average amount of trust litigation.  Certainly, the economy has been a factor.  With will contests and trust challenges though, more often than not, it is the emotions surrounding the death of a loved one, and family dynamics, that more often lead families into the courthouse over the interpretation of a will passage, or the meaning of a trust clause.

Emotions can run high at the death of a family member. If a family member is unhappy with the amount they received (or didn't receive) under a will or trust, ...

    Many business owners are so wrapped up in the day to day survival activities of maintaining and growing their business, they often overlook some of the fundamental needs that every business owner must deal with, if the business is to have long term success.

     I will be presenting some important information, as a guest of my good friend and SCORE volunteer, Linda Nottingham, on February 25, 2010 at the SBA North Florida District Office at 7825 Baymeadows Way, Suite 100B, Jacksonville, FL 32256.

       The topic will be "Corporate Compliance . . What you need to know as a business owner." We'll help show you what you need ...

     Over the past couple of years, I've been involved with the Jacksonville Women's Business Center and the Jacksonville Chamber of Commerce Small Business Center as a sponsor, presenter and mentor.  I have found it to be a wonderfully satisfying experience and quite rewarding to help others grow their small businesses.

    Among the many things in which I participate, I often have questions and about which I provide information to small business owners involves business succession planning and buy-sell agreements.

     If you are a business owner you probably have experienced at least some, if not all of, the following:  Are you the first one to arrive in the morning, ...

Changes in federal tax law involving the Roth IRA now make this retirement savings plan available to wealthier individuals. There may be good reason for you to consider converting your traditional IRA to a Roth IRA.  We briefly discuss some of the factors to consider in determining whether to convert your existing traditional IRA to a Roth IRA so that you can discuss them further with your estate planning lawyer or attorney, or financial advisor.  Each individual's circumstances will determine whether converting a traditional IRA to a ROTH IRA is a good idea for you.

What are the benefits of a traditional IRA?A traditional IRA allows you to contribute pre-tax dollars to your account. You pay taxes when you take distributions from ...

From its inception, the 2001 tax act was scheduled to repeal the federal estate tax and generation skipping transfer tax (GSTT) for one year beginning January 1, 2010. This should come as no surprise. What is surprising, however, is the fact that the 2001 tax act has now played out and repeal, at least temporarily - and unless reinstated retroactively - is upon us. This post explores how we got here (which may be instructive as to what will happen in the future) as well as some of the planning implications of no federal estate tax or GSTT for at least some part of 2010. 

How Did We Get Here?
On June 7, 2001, President George W. Bush signed into law the much-heralded Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), designed to provide significant tax relief, including "permanent" relief from the federal estate tax (with its then $675,000 exemption and maximum 55% tax rate).

As we know, EGTRRA steadily lowered the maximum estate tax and GSTT rate to 45%, while increasing the exemption amounts to $3.5 million in 2009 and eliminating federal estate tax and GSTT altogether in 2010. However, as a result of a Senate rule that limits laws with a negative fiscal impact to 10 years (the so-called Byrd Rule), from inception EGTRRA contained a "sunset" provision. Under this provision, as of January 1, 2011, the law is scheduled to revert back to pre-EGTRRA law as if EGTRRA never existed. In other words, the federal estate tax and GSTT exemption will become $1 million (it was scheduled to increase under prior law) with a maximum rate of 55%.

As a result of the Byrd Rule, we should accept with caution any EGTRRA interpretations that suggest tax savings beyond 2010. 

For the year 2010, the estate tax and GSTT are replaced by a "modified carryover basis" system. The impact of modified carryover basis is discussed more fully below. 

What Will Congress Do Now?
No one knows with certainty what Congress will do to remedy this situation but several key Congressmen have stated publicly that they will attempt to pass estate tax legislation early in 2010. One of them, Senator Max Baucus, Chairman of the Senate Finance Committee, has said that swift action is necessary to prevent "massive, massive confusion." 

Furthermore, many in Congress have expressed the desire to make such legislation retroactive to January 1, 2010. If Congress purports to make these tax charges retroactive to January 1, there are sure to be numerous lawsuits over the constitutionality of such retroactivity and, in all likelihood, these challenges would not be resolved until after years of litigation culminating in a Supreme Court decision. Where would that leave someone who dies in the interim?

It is not a foregone conclusion that Congress can make the estate tax legislation retroactive to January 1, 2010. Chief Tax Counsel to the House Ways and Means Committee, John Buckley, has opined publicly that reinstituting the estate tax retroactive to January 1, 2010, would be unconstitutional.

Cynics, however, note that these same Congressmen were unable to pass a one-year patch that would have eliminated the confusion in the first place. They also suggest that it is in the best interest of both Democrats and Republicans to do nothing and let EGTRRA sunset - and their argument has gained traction recently. 

The argument is as follows: Democrats have incentive to do nothing because this law was passed by a Republican Congress and signed by a Republican President - they have no responsibility for the insanity caused by the sunset. Republicans, alternatively, are incentivized to do nothing because they have steadfastly argued for total repeal of the "death tax," and this cry - at least in 2001 - resonated with the American people. Their argument is that Democrats had the opportunity to permanently end the "death tax" and chose not to. In what potentially will be a significant mid-term election, many in Congress will likely use their position on the "death tax" in an attempt to ensure reelection.

Given the above factors, the most likely outcome for the estate tax will depend upon the other pressing priorities on Capitol Hill. 

Modified Carryover Basis
Under our current estate tax system, subject to some exceptions, assets owned at death receive a basis "step-up" to their fair market value at the time of death. Therefore, if someone dies owning Walmart stock that he or she bought for $10,000 many years ago, for example, the beneficiaries could sell the stock at its fair market value of, say, $10 million, and pay little or no income tax. The only tax the beneficiaries would have to pay would be on the difference between the sale price and the fair market value at death. (Of course, the stock would also be subject to estate tax at the decedent's death.)

Under EGTRRA, along with repeal of the estate tax and GSTT in 2010, a beneficiary receives property with an adjusted basis equal to the lesser of the decedent's basis or the asset's fair market value on the decedent's date of death. Thus, EGTRRA eliminates the automatic "step-up" to the date of death value but retains the "step-down" for depreciating assets. 

Modified carryover basis will impact far more decedents than those who would have been impacted by the estate tax, 70,000 versus 6,000 according to some estimates.

To offset this loss of the step-up in basis, EGTRRA provides that the executor (or other person responsible for the decedent's property) may allocate a $1.3 million "aggregate basis increase" on an asset-by-asset basis up to the particular asset's fair market value at the date of the decedent's death. Assets left to a spouse may receive an additional $3 million "spousal property basis increase," also asset-by-asset, up to the particular asset's fair market value at the date of the decedent's death. 

Unless one can affirmatively prove the basis of an asset, the IRS presumes that the asset has a basis of the property's approximate fair market value on the date it was acquired by its last owner. Therefore, it is absolutely critical that you keep adequate records for all assets. 

It is worth noting that Congress instituted modified carryover basis one other time in history and repealed it retroactively because of the difficulty in administration. 

Lifetime Powers of Appointment
Under current law, for purposes of the basis step-up, a surviving spouse owns property in a marital trust over which that spouse has a lifetime or testamentary power of appointment. However, for purposes of the $3 million spousal property basis increase, only a QTIP trust is eligible and EGTRRA treats property in a QTIP trust over which the surviving spouse has a lifetime power of appointment as not owned by that spouse. Thus, if the surviving spouse has a lifetime power of appointment over the QTIP trust the executor (or other person responsible for the decedent's property) cannot allocate the spousal basis increase to marital trust property. Alternatively, the executor can allocate the spousal property basis increase to QTIP property over which the surviving spouse has only a testamentary power of appointment.

Each person should review their own estate planning documents, with their estate planning team, especially carefully for all marital trusts established by those documents, to ensure availability of the spousal property basis increase.

The Impact on Existing Estate Plans

Residuary Marital Trust Formula Funding Clauses
Under a typical living trust or will, the document creates at least two trusts, a credit shelter (aka bypass or Family) trust and a marital trust. Often, the living trust or will language divides the decedent's property into the two trusts through what is known as a residuary marital trust formula funding clause, as follows: the amount of the decedent's property that will pass to the credit shelter trust equals the "maximum amount that can pass free of federal estate tax;" the balance of the decedent's assets pass to the marital trust.

If the individual created this estate plan when the federal exemption was significantly lower, and in particular if the person dies in 2010, this common estate planning language will cause the unintentional over-funding of the family trust and under-funding of the marital trust. Where the family and marital trusts contain identical beneficiaries and dispositive provisions, this over-funding of the family trust and under-funding of the marital trust will have no significance. However, if the family and marital trusts contain different beneficiaries (which is often the case with blended families in second marriages) and/or different dispositive provisions, this may cause unintended and undesirable consequences for you and your family.

You and your estate planning team should review all estate plans created more than five or so years ago to ensure that each plan meets the your own current planning objectives. You and your estate planning team should also review every estate plan created before 2001 to review the formula-funding clause.

For example, with second or subsequent marriages, and in particular where there are children from a prior marriage, individuals often limit the surviving spouse's rights to the income from the marital trust, while the children from the prior marriage are often the beneficiaries of the credit shelter trust. If someone dies in 2010, all of that person's assets will pass to the credit-shelter trust, and the marital trust - i.e., the surviving spouse - will receive nothing! This is certainly not what was wanted and it will not provide the state's statutory minimum to the surviving spouse to avoid a potential elective share dispute. With few or no assets left to the surviving spouse, he or she may resort to a lawsuit against the trust or estate for the statutory minimum, thereby increasing legal fees and wreaking havoc with the estate plan. 

Your estate planning team can help you prevent this problem by modifying the will or trust language to ensure that assets are available for the surviving spouse. 

Conclusion
Since most estate planners did not anticipate EGTRRA playing out into 2010, many people's estate plans fail to take into consideration the lack of estate tax and its replacement, the modified carryover basis. As the above discussion demonstrates, the key is flexibility and ensuring that an individual's estate plan contains enough flexibility to accomplish their goals under changing circumstances. 

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this material was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer's particular circumstances.

A personal services contract, or a caregiver agreement, is an agreement between two persons, typically a parent and adult child, in which the adult child agrees to provide various personal services to the parent for a period of time typically measured (but not necessarily) by the parent's life expectancy pursuant to the applicable mortality tables.

The personal services contract allows the parent to appropriately spend down assets in a manner that does not create any penalty with respect to the parent ultimately qualifying for Medicaid benefits, usually for the institutional (nursing home) care program administered by Medicaid.

Whenever a personal services contract or a caregiver agreement is utilized in a Florida Medicaid or Veterns Administration ("VA") Planning case, there are always questions regarding income taxes.  When, and to what extent, does the care recipient get to deduct the payment or payments?  When, and to what extent, does the caregiver child have to recognize taxable compensation or income?

Section 61(a) of the Internal Revenue Code ("IRC") defines "gross income" as compensation for services... .  Thus, it is clear that when a caregiver child is paid on a monthly basis, with the actual compensation following the dates of service, the caregiver child will have to recognize taxable compensation to the extent of what he or she receives in a calendar year.

How do the income tax consequences change when the parent care recipient wants to pre-pay for all future services?  The Florida Medicaid Program and the VA Program allow an applicant for Medicaid Institution Care Benefits to reduce his or her spend-down amount by a lump sum payment for future care services - accelerating the time that an individual can qualify for Florida Medicaid or VA benefits institutional care benefits, and preserving assets for the family's use in providing continuing care for the care recipient.  But what if the caregiver child does not have a good history of managing money, and the parent care recipient wants to protect the compensation plan from advance spending by the caregiver child by utilizing an immediate annuity as part of the payment structure; does the immediate annuity provide an effective solution?  It is my opinion that it does!

To illustrate, assume that Mary Contrary is age 77, and resides in an assisted living facility.  Her daughter, Emily Dogood, assists her twice a week by providing three hours of personal care needs per visit.  The personal care needs include bathing assistance, laundry services, medication management, and transportation to doctor's appointments.  Based on comparable services in the community, Emily's services are reasonably priced at $16.00 per hour.  Over her Medicaid life expectancy, 10.96 years or 131.52 months, Mary expects to receive $54,496.00 worth of personal care services from her daughter, which equals $416.00 per month.

With Emily not having a good money management history, Mary was concerned that Emily would pre-spend the compensation if she received a $54,496.00 lump sum payment.  After receiving some advice from her Jacksonville Florida Elder Law attorney, Mary decides to purchase an immediate annuity for $49,250.00, which provides 131 guaranteed monthly payments of $416.00.  Mary is the owner, annuitant, and payee of the annuity.  After the caregiver agreement is executed, Mary transfers the ownership of the immediate annuity to The Coleman Law Firm, as escrow agent, pursuant to the terms of the personal services contract, or caregiver agreement, and the accompanying escrow agreement.  For convenience purposes, The Coleman Law Firm would immediately change the monthly payee from Mary to Emily.

What are the income tax ramifications of the proposed transaction?  Is Emily required to recognize taxable income/compensation to the extent of the value of the immediate annuity?  We believe the answer is "no."  Emily will only need to recognize taxable income/compensation to the extent that she receives payments in a given calendar year.  Mary has "spent down" the cost of the annuity (i.e., $49,250.00) and is positioned to qualify for Medicaid or VA benefits at a much earlier time than she othewise would be.

Our opinion is supported by the following Tax Court and Federal Circuit Court cases of Sproull v. Commissioner, 16 T.C. 244 (1951), affd. 194 F.2d; Centre v. Commissioner, 55 T.C. 16 (1970); Minor v. United States, 772 F.2d 1472 (9th Cir. 1985); and Childs v. Commissioner, 103 T.C. 634 (1994).  See IRC Section 83.  Taken together, these cases stand for the proposition that the person who performs personal services is not required to include in his or her gross income the fair market value of any property, until he or she has an actual beneficial interest in such property, to the extent that he or she can transfer the property without a substantial risk or forfeiture.  In Emily's case, she has no beneficial interest in the immediate annuity, except to the extent that she receives actual monthly payments.

If you may have a parent who is facing the prospect of a skilled nursing home confinement, you may want to explore whether a personal services contract may be appropriate for your family's circumstances.  If this or other Medicaid planning is of interest to you or your family members, please contact the Coleman Law Firm, a Jacksonville Florida Elder Law Firm, to schedule a consultation to discuss how your family member may benefit from Medicaid qualification, or the use of a personal care contract.