Reviewing the Tax Relief Act of 2001 - Conclusion

In the previous issues of this newsletter we have taken a detailed look at some of the changes to the estate and gift tax laws made by the Tax Act of 2001. We have also taken note of the Tax Act's "sunset" rule, under which the new laws expire and the pre-2001 Act laws return. And, we observed that estate planning has been made more difficult due to (a) the uncertainty of whether the sunset rule will ever come into play, and (b) the uncertainty of whether an individual will die during aperiod of increasing Exemption Equivalents. The focus in this issue is on a topic that has been only touched upon in prior articles, namely: the 2001 Tax Act's switch from the "stepped-up" basis rule to the "carryover" basis rule.


"Stepped-up" Basis vs. "Carryover" Basis. When a person makes a gift, the donee generally gets the donor's basis (usually cost). That is, the donor's basis "carries over" to the donee. As a result, if there is a gift of appreciated stock, for example, the donee will have a taxable gain if he sells at the gift value. By contrast, under pre-2001 Act law, property acquired from a decedent generally got a basis equal to its value at his death - the heir's basis of the property was "stepped-up" to the date of death value. This meant that, on a later sale by the heir, he or she wouldn't have to pay capital gains tax on the appreciation in the property that occurred while it was owned by the decedent.

Changes to the Basis Rules. When the estate tax is repealed in 2010, the basis rules applicable to property acquired from a decedent will be changed to be similar to the gift tax rules noted above, subject to some exceptions. In other words, the heir will no longer receive a setpped-up basis; instead, the decedent's basis will carry over to the heir.

Certain exceptions to Carryover Basis. One important exception to the new carryover basis rule is that each estate will receive $1.3 million of basis to be added to the carryover basis of any one or more of the assets held at death. For example, if an individual dies owning stock worth $5 million for which he paid $3.7 million, the basis of the stock can be increased to $5 million under the Act. Another exception is that estates will be allowed an additional $3 million of basis, to be allocated among the assets passing to a surviving spouse. Under the "sunset" rule, the step-up in basis rules return for 2011.

Record Retention. With the change to carryover basis in 2010, clients must retain all records of cost or other basis. For purchases, this means receipts and statements showing the amounts paid for the items. For items inherited before 2010, basis ordinarily is the date of death value of the item. For property acquired by gift, the donee's basis usually is the same as the donor's.

What to do now. While the 2001 Act may well save estate tax, it has also added new planning complications. Clients should continue to have wills and estate plans prepared to ensure that their assets will pass as they desire, taking into account the spec ial needs of particular heirs. This is so even if there is a good chance of survival until a yar when estate tax won't be owed due to the increasing exemption or repeal. Clients who may have an estate larger than the increasing exemption amount will want to take steps to reduce estate tax, including setting up life insurance trusts, grantor retained annuity trusts, qualified personal residence trusts, and family limited partnerships. Many existing estate plans should be re-examined to keep estate taxes and income taxes to a minimum.

New York State Disability Law Passed

Recently, a law (Executive Law, Article 25) was passed in New York State which requires that persons with disabilities reside in the most integrated setting possible regardless of their age.

New York State must now develop and put into place a plan which allows persons of all ages to be appropriately placed in the most integrated setting possible and avoid institutionalization.

The term "most integrated setting" means a setting that is appropriate to the needs of the individual with the disability and enables that individual to interact with persons without disabilities to the fullest extent possible.

The "Most Integrated Setting Coordinating Council" has been created to develop and oversee the implementation of a statewide plan to provide services to disabled individuals of all ages in the most integrated setting. The plan is slated to be completed in the Spring of 2003. It will include the creation of a toll free hotline with information on community-based services for persons with disabilities of all ages.

Updating the Health Care Proxy

Last year legislation was enacted to allow for organ donation provisions to be included on Health Care Proxies. The Department of Health has now revised the standard Health Care Proxy form in order to accommodate for organ donation provisions. Furthermore, the standard form itself has been altered to allow for the primary agent to be selected and the alternate agent to be selected immediately thereafter (which is more logical).

The organ and/or tissue donation provision specifically states: "I hereby make an anatomical gift, to be effective upon my death, of: (check any that apply) Any needed organs and/or tissues _______ Limitations _________.

If you do not state your wishes or instructions about organ and/or tissue donations on this form, it will not be taken to mean that you do not wish to make a donation or prevent a person, who is otherwise authorized by law, to consent to a donation on your behalf."

The Health Care Proxy must now be signed twice. The second signature is required immediately after the organ donation provision. The Health Care Proxy must still be signed in front of two disinterested witnesses over the age of eighteen (18) and cannot be one of the selected agents.

Even if a Health Care Proxy is completed and a person has selected to donate his or her organs and/or tissues, it is still recommended that a person complete the back of his or her New York State Driver's License to accommodate for the same permission of organ and/or tissue donation.

For more information or for a copy of the Department of Health form, please contact Davidow, Davidow, Siegel & Stern or you can access this directly on the Department of Health website.

Medicaid and Joint Accounts

Often seniors who may be potential Medicaid applicants are under the mistaken impression that if they add their children's names on the title to their financial accounts (banking or brokerage) that this is considered giving up control of some or all of their money and that at some point, it would be protected if they needed Medicaid. This is not necessarily so. If the money in the account actually belongs to the client, making that account joint with a child or even adding that child as the primary account holder joint with the client using the child's social security number will still not be considered a relinquishment of control by the client for Medicaid purposes. There are certain ways to effectively move these assets out of the senior's name: 1. If, by chance, some or all the money in the joint account actually does belong to the child instead of the seniors and proof of this is available for offer to the Dept. of Social Services, and the senior's name is removed from the account prior to the month the senior needs Medicaid, the portion belonging to the child will not be counted as a resource belonging to the senior. This involves careful record keeping over the years. 2. If all of the money belongs to the senior, to remove the account from the senior's name, the account should be retitled in the children's name only with their social security numbers. The senior's name should not appear on th title of the account, and the account should not be held in trust for the senior or be payable on death to the senior. This is considered an uncompensated transfer and will incur a period of Medicaid eligibility for the senior based on the size of the account starting the month following the date of the transfer. 3. Where the senior has ccreated a joint account with a child already, a transfer to that child occurs when the senior removes his or her name from the account. Again, a period of Medicaid ineligibility will start running in the month following the date the senior's name is fully removed from such account. 4. If the senior has a disabled child who is not on SSI, all of the senior's resources can be transferred to that child alone without incurring a period of Medicaid ineligibility for the senior and without jeopardizing the child's SSI. It is highly recommended that any of the above transfers be made under the supervision and upon the recommendation of an Elder Law attorney as part of an overall estate plan, especially if any of the financial accounts contain highly appreciated assets.

"After-Born" Children and their Parents' Estate

A recent case, Estate of Magrow, NYLJ, May 16, 2001 at 20, Col. 4 (Surr. Ct. Kings Co.), addressed the question of whether "after-born children" have a right to a portion of their parent's estate.

"After-born children" are children born after the creation of their parent's Will. New York Law allows after-born children the right to share in their parent's estate if the parent did not provide for them in the Will and the child is not otherwise provided for by the parent's assets. In this NY case, a parent created a Will providing for his 3 children. Later, he had 2 additional chidren. He designated all 5 children beneficiaries of a life insurance policy purchased after the Will execution (and after the birth of all of his children). The court held that the beneficiary designation of the insurance shows that the parent sufficiently provided for the after born children. As a result, the court did not permit the children's claim to a portion of the parent's estate.

It is important to realize that the value of the insurance in relation to the parent's entire estate is irrelevant. The court did not determine whether the insurance policy is equitable or just. The court looks to determine whether the parent made financial provisions for the after-born children which would show the parent intended to provide for the after-born children.

In arriving at a decision, the court looks to the facts and circumstances of each case. As a suggestion, in order to avoid litigation in this area, the attorney should draft documents which provide for all of the client's children as a class, (without naming them) or to have the Will read: 'to all of my children born to my marriage to 'X' ". As estate planning attorneys, our firm advises our clients to review their estate planning documents such as their Will, Trusts, Health Care Proxies, Living Wills and Powers of Attorney, after changes in the client's family situation (i.e., births, deaths, separation, divorce and adoption) and, at least every 3 years. This recent court decision dealing with after-born children is a good example of how estate plans may not fulfill the client's actual expectation and intention if the estate planning document doesn't provide for after-born children and/or the client does not review their estate planning on a regular basis.