New York Estate Planning & Elder Law Blog

NEW IRS FORM TO REPORT BASIS

Published on: May 7, 2016 | by Ettinger Law Firm

FURTHER CHANGES MAY BE NEEDED

When a person receives an asset via the probate process, the transaction must be reported to the IRS, even if it does not trigger any tax liability as to the estate or the recipient. This is because the IRS needs to track the basis of the asset to determine any net capital gains or other calculations for tax liability purposes. Price minus basis equals profit is the rough calculation to determine how much a person realized in a sale, which in turn determines the capital gain on the sale of the asset.

There is a tension built into the system whereby the executor wants to assign the lowest possible value to the asset, so as to keep the value of the estate low, while the beneficiary wants to have the highest possible value assigned so when they dispose of the asset in the future it will incur less tax liability. The IRS sought to address this tension when they lobbied Congress create 26 U.S.C. § 6035, which in turn enabled them to create the new IRS form 8971. Form 8971 requires an executor to notify the IRS which beneficiary receives what and the value of the asset. Part of the same legislation also created 26 U.S.C. § 1014 which requires beneficiaries to use the value of the asset at the date of death for purposes of reporting basis. This value cannot be greater than the amount that the executor reported on the estate tax return.

DISABLED MILITARY CHILD PROTECTION ACT HELPS WITH SPECIAL NEEDS PLANNING

Published on: May 5, 2016 | by Ettinger Law Firm

SPECIAL NEEDS LAWS HELP PROTECT THOSE WHO PROTECT US

For those of us who come from families with many military members, we know the sacrifices and hard work that service members incur for their principles and belief that there are certain obligations in life that precede all else. Unfortunately, until recently, for a select few of those dedicated service members faced a choice between two equally important obligations, their obligations to their country and their obligations to their family. More specifically, service members with special needs children who received benefits publicly funded programs such as Medicaid or Supplemental Security Income knew that if something happened to them and their family received monies through the Military Survivor Benefits pension, their children would lose those vital benefits.

It should be noted that the protections contemplated by the law are even allowed for if a service member retires and collects a pension for retirement but also diverts some of that money for the benefit of their special needs child. This was a choice that was too high for some service members and helped them decide to not reenlist. The military spends a tremendous amount of money on training and maintaining our military. Any lost member is a lost investment to put it in economic terms. To help combat the lose of these soldiers, sailors and airmen Congress created the Disabled Military Child Protection Act (DMPA). The DMPA allows a service member to choose a special needs trusts as the beneficiary of any money given through a Military Survivor Benefits pension. This allows the service member to have peace of mind knowing that if they do pay the ultimate sacrifice, their children and loved ones will not suffer further.

CREDITORS OF AN ESTATE

Published on: May 5, 2016 | by Ettinger Law Firm

ORDER OF PAYMENT

It should not be a surprise to anyone that when someone passes away, their estate must pay for all legally binding outstanding debt owed by the decedent just prior to passing. New York as well as just about every other jurisdiction has laws that address how the estate puts creditors on notice that they must file a claim, but how the creditor must go about making a claim and getting paid from the estate. As in other areas of the law, there is an order and priority to the claims that can be paid. The administrator has a fiduciary obligation to the heirs to distribute the estate to the terms of the will. That fiduciary obligation also extends to creditors of the estate. The payment of expenses, ensuring that all disbursements are properly documented and all taxes and fees are paid are core responsibilities of the estate administrator.

To do this, the estate administrator must first understand what assets the deceased owned, the value of those assets, which in and of itself costs money. When an estate is insolvent, the creditors will surely examine every expenditure by the administrator to determine if they acted appropriately. On the other side of the ledger, the administrator must determine if the claims are valid or overpriced and inflated. The estate administrator has an obligation to dispute all claims, except properly owed, legally enforceable obligations. Since the final accounting by the estate administrator presupposes that all parties are already involved in litigation and there is a Court already scrutinizing all credits and debits, the likelihood that a party will enforce their rights, or, more specifically, object to the final accounting, is all the much greater. The balancing act that the estate administrator must engage in can be a complicated endeavor.

DEPENDENT CARE ASSISTANCE PROGRAM

Published on: May 3, 2016 | by Ettinger Law Firm

There is a relatively unknown or at least underutilized program in the law that can provide some important tax benefits for those who care for their elderly or special needs relatives. The Dependent Care Assistance Program (DCAP) is a tax benefit that is often offered by employers for expenses that a person incurs for any number of things for the care of others. It is a tax credit that can be claimed by the taxpayer for expenses related to the care for qualifying individuals so that the caretaker may work. The program is similar to a Health savings account insofar as a person can sock away a certain amount of money that can be used on certain delineated services or costs.

The good thing for New Yorkers is that this tax credit is for both federal government income taxes as well as state taxes. Not all states have such a tax credit; residents of these states can only utilize the federal credit and still have to pay state taxes on the money earned and diverted into the DCAP account. Under federal tax law, the tax credit is limited by to the amount that the worker earns. New York’s tax credit calculated as a percentage of the Federal tax credit. In addition, there is a $5,250 ceiling per year on the amount that a person can put into the account. The benefit is allowed for families earning up to $120,000. If the employee utilizes a DCAP program through their work, the tax credit is reduced by the amount that use through their employer’s program.

The money can be used for practically anything for the elderly or special needs relative, including adult day care, transportation, (reasonable) entertainment costs, as long as they costs are related to your employment. In other words, if you do not need to incur the costs to be employed, you cannot claim these costs. Overnight camp or educational costs cannot be incurred, since they are not related to or required to your employment. Fellow relatives cannot be the service provider. While an employee can take advantage of an employer based program, most employers do not offer it as an additional benefit; rather most employers who have such a program allow the employee to earn their income tax free.

SELF CANCELLING INSTALLMENT NOTE

Published on: April 29, 2016 | by Ettinger Law Firm

CHANGE IN APPROACH BY IRS BUT STILL SOUND ESTATE PLANNING CONTINGENCY

It is obvious that no one knows when they will shake off their mortal coil and pass from this earthly realm. The IRS and the law in general consult their own mortality tables to guide certain decisions. These tables are based on probabilities and generalities, drawn up by bean counting actuarians. They are undoubtedly reliable enough to warrant an individual to make a decision that may take decades to play out or even by institutions to guide their decision making. Insurance companies calculate risk by consulting them and Courts sometimes use them to determine future damages. They can be used by those engaging in estate planning for many things, but, in particular to help calculate a risk premium in a limited set of circumstances. A self cancelling installment note can be a method and means to transmit wealth to the next generation if properly structured. A recent Chief Counsel Advisory (CCA) opinion by the IRS called into question one specific means to calculate risk for a self cancelling installment note but did not question the overall appropriateness of the use of a self cancelling installment note. The self cancelling installment note works by one person selling an asset or loaning a certain sum of money, pursuant to a promissory note, with at least a minimal amount of interest charged.

In addition, the promissory note acknowledges that in the event that the person who holds the promissory note (the lender) passes away while the note is still being repaid, the remaining balance of both principal and interest is considered paid in full. The note must incorporate a specific increased interest rate in light of the increased risk that the note holder/lender may not collect the entire amount. If unfortunately the note holder/lender passes away the money passes outside the estate, without incurring any estate or gift tax liability and without any additional legal obligations for the borrower.

MORE ON ESTATE PLANNING FOR THE FARMER

Published on: April 27, 2016 | by Ettinger Law Firm

PASSING THE FARM IS LIKE PASSING ON THE FAMILY CORPORATION

There is no doubt that some modern farmers run large multi-million dollar operations right in their backyard. Maintaining a herd of cows and other grazing stock costs potentially millions to buy or lease (or both) land for the animals to grow on. In addition, the processing equipment for milking cows, labor costs, insurance, veterinarian costs and any number of other costs can run into the millions each year. While most farmers are far from millionaires, most work much harder than many millionaires. Indeed there is more to farming than the land, buildings, equipment, animal stock or orchards and other tangible objects. Tending to corn fields, wheat, soy, orchards, vineyards, sod, tree farms, et cetera are all specific skill sets that require years of training and no small measure of technological investment. The same can be said of a family run saw mill or similar type of business. There is something unique about farmers, however.

Many families are tied to the land. John Mellencamp who was raised in farm country and one of the original founders of Farm Aid wrote about the life of the average farmer, growing up on the same farm that his own daddy did on land cleared by his grandpa, walking along the fence while holding his grandfather’s hand and of being tied to land that fed a nation and made him proud. It is this tie to the land, unique education and training that can start literally while the child is in diapers as well as the emotional bond with families that makes farmers different than most other family run small businesses. There are also unique legal protections found throughout the law for the benefit of family farmer. For all of these reasons transferring a family farm from one generation to the next requires special planning.

WILL DOES NOT REVOKE PREVIOUS TRANSFER OF PROPERTY TO TRUST

Published on: April 25, 2016 | by Ettinger Law Firm

BEST LAID PLANS DO NOT ALWAYS WORK OUT

A case with an interesting factual background came out of Texas recently. While it was based on Texas law and the case is binding in only Texas, the legal principles discussed by the Court are equally applicable to New York or any other jurisdiction for that matter. More importantly, the set of events that gave rise to the case could happen anywhere. It just so happened that it occured in Texas rather than New York or somewhere else. The Texas Court of Appeals case of Gordon v. Gordon revolved around a trust that took ownership of a specific peace of real estate property and how that transaction related to a will signed subsequent to the trust. More specifically, the Court determined that the act of creating and endorsing a will by the testator subsequent to the transfer of the real estate did not overturn or cancel the previous transfer of the real estate to the trust. The will, however, contained language that by endorsing the will, the testator supersedes all previous transactions indicated in the trust documents, such as annuities or certificates of deposit. It never mentioned the real estate.

In 2009 (Mother) Beverly Gordon and (Father) Patrick Gordon executed a trust document which they funded with personal property and real estate. The very terms of the trust indicated that the trust could only be revoked by either Father or Mother and only by following the specific set of instructions laid out in the trust document, namely by signing and delivering a letter to the trustee. The letter had to indicate that they individually or jointly are going to cancel or revoke the trust. The trust further provided that upon the death of either of them the trust become irrevocable. They funded the trust with personal property and real estate. Soon thereafter, their son John sought to reduce the risk of an estate battle by creating a will that specifically stated that the parties want to cancel the terms of the trust. Neither Mr. Gordon nor Mrs. Gordon did anything to transfer their personal property or real estate out of the trust. Moreover, John did not act to convince his parents to move the property out of the trust. Mr. Gordon passed away within a year of signing the new will.

WHAT IS TESTAMENTARY CAPACITY

Published on: April 23, 2016 | by Ettinger Law Firm

SUBSTANTIVE PROOF NEEDED

The issue of consent and state of mind touches upon perhaps some of the most personal and human issues imaginable. This blog explored issues related to the capacity necessary for a person to create a will. Passing on the bounty of your work to your loved ones or charity may be a specifically delineated right noted by Thomas Jefferson, James Madison or any other well known political philosopher, but it can only be denied, for all intents and purposes, if that person is legally or medically incapacitated or unable to make key decisions.

This is an extraordinary legal power that is only exercised after an exhaustive review of the facts. To legally deny someone the right to consent to decisions that directly impact them as a patient or client in a legal setting goes to the core of our humanity and, in some circumstances, requires Solomonic wisdom. As noted in different blog posting, Consent is situationally specific. Consent to intimate encounters with your spouse is different than consent to transfer money to a charity, of which little is known. As to the right to create a will and transfer your personal property, real estate and money to family members, what does New York law consider sufficient mental capacity to create a will? There is much case law on this topic as it is a topic that has to be resolved each generation in light of varying societal norms and advances in both psychiatric and general medicine.

ELDER PROTECTION AND ABUSE PREVENTION ACT

Published on: April 22, 2016 | by Ettinger Law Firm

FEDERAL DEFINITION OF ELDER ABUSE AND FEDERAL RESPONSE

In these United States it is often that many things are left up to the states for criminal and civil enforcement. While the federal government does have a statute for murder, it is generally only applied to events that occur on federal lands or of federal agents or employees or when the murderer is allegedly motivated by racial animus or something similar. As such, it is not surprising that there is no general federal legal definition of certain acts that are criminal in nature, such as robbery or extortion. On certain matters, which Congress declared of critical importance, the federal government created defitions that it expects states to follow in substantial regards. For example, foster care placement and adoption, is of such critical importance that Congress created a series of laws that defines a host of things, such as abuse and neglect, when foster care is needed, when the state is to move towards adoption and away from working with the parents.

It creates strong incentives for states to adopt these statutes by offering financial backing. In other words, it underwrites a certain program if the state adopts the law that is substantially in line with the federal government model. The same tactic is employed in the fight against elder abuse. Recently three Senators introduced the Elder Protection and Abuse Prevention Act (the Act), which, seeks, in part, to amend the definition of elder abuse found in the Older American’s Act. But this definition was not tied to block grants to states. The first time Congress authorized a block grant to the state for purposes of elder abuse was in 2010 with the Elder Justice Act. More importantly, Congress never appropriated money for the programs that it statutorily authorized and mandated with the Elder Justice Act.

SPLIT ANNUITY FOR ESTATE PLANNING

Published on: April 21, 2016 | by Ettinger Law Firm

HYBRID PLANNING TOOL – COMPOUND INTEREST AND IMMEDIATE PAYOUT

There are some retirement strategies that people engage in that have many benefits one the one hand with a similar amount of disadvantages on the other. Life is like that, it involves trade offs and often you get what you pay for. There are exceptions, however, especially in financial planning products. The only limits are the laws and the creativity of investment managers. With respect to the laws, the main concern that investors should consider is the tax liability, which can vary depending on what form of investment is generating income with the invested money.

Annuities are investment products that generally either guarantee a specific rate of return and start to pay immediately for a specified period of time, or, the funds are placed in an account where they accumulate tax deferred as an investment and then converted into an annuity and withdrawn in accordance with the annuity plan. The former type of annuity is called an immediate annuity, while the later is called the deferred annuity. An immediate annuity is generally taxed up prior to deposit of the funds, while the payout of the annuity is not considered a taxable event. With respect to the deferred annuity, the payout, minus the principal, is a taxable event. If the money is withdrawn from the annuity prior to the age 59 1/2, the amount is generally subject to a 10% tax penalty. A split annuity, however, is a financial product that couples these two types of annuities together.