Valuation discounts (particularly of the minority and marketability type) can significantly reduce what might otherwise have been the estate and gift tax values of transferred property. In contrast, the IRS often takes the position, on audit and in litigation, that application of these discount reductions should not be available for estate and gift tax purposes. For example, the Revenue Service has argued that a taxpayer may make gifts to a child of minority interests in property and incorrectly (in the Service’s view) claim lack-of-control discounts under the gift tax even though the taxpayer or the taxpayer’s child controls the property being transferred. The Service has also contended that a taxpayer, who contributes marketable property (such as publicly-traded stock) to a partnership (such as a family limited partnership) or other entity that he or she controls, may (when interests in that entity are transferred through the estate) inappropriately claim marketability discounts even though the heirs may be able to liquidate the entity and recover the full value by accessing the underlying assets directly.
H.R. 436 presents a standard for gift and estate tax purposes, with respect to discounts, that is sympathetic to those IRS articulated positions. Under the bill, in the case of the transfer of any interest in an entity, other than an interest which is actively traded:
“(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and
(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity.”
The bill also contains a 10% “look-through” rule. Under this rule, if a nonbusiness asset of an entity consists of a 10% interest in any other entity, the bill would disregard the 10% interest and would treat the entity as holding directly its ratable share of the assets of the other entity. This rule would be applied successively to any 10% interest of the second entity in any other entity, thus seeking to prevent the circumvention of the “nonbusiness asset” discount disallowance through the use of a holding company structure.
Finally, the bill attacks “minority interest” discounts by providing that, in the case of the transfer of any interest in an entity other than an interest which is “actively traded,” no discount shall be allowed by the reason of the fact that the transferee does not have control of the entity if the transferee and members of the family of the transferee have control of the entity.
The Pomeroy bill’s proposed effective date is “date of enactment.”
The Association for Advanced Life Underwriting expects other proposals respecting the estate, gift and generation-skipping transfer taxes will follow this Pomeroy proposal. We will report promptly on them as they arise.
Source: AALU Bulletin No: 09-10, 1/23/09.
Friday, February 13, 2009
Friday, February 6, 2009
Bill Introduced to Freeze Estate Tax at 2009 Levels and to Eliminate Discounts on Nonbusiness Assets - Part I
House Ways and Means Committee member Pomeroy (D-ND) has introduced H.R. 436, “Certain Estate Tax Relief Act of 2008,” a bill that would freeze the lifetime estate tax exemption at $3.5 million per decedent (the 2009 level) and would retain the 2009 estate tax rate ceiling at 45%. The “carryover basis” rules that would have taken effect upon the repeal of the estate tax are themselves repealed under the bill. In addition, H.R. 436 would reduce the availability of valuation discounts for gift and estate tax purposes and, through a “clawback” provision, would effectively impose a higher rate on estates over $10 million. The Association for Advanced Life Underwriting strongly supports sustainable estate tax reform which can enable clients to plan with certainty; for example, reform with an exemption level of $2.5 to $3.5 million, a top rate of 45% and a reunification of gift and estate tax exemption levels. Some of the provisions have to be closely examined for potential negative impact on clients.
The bill contains a provision that would phase out the effect of the graduated estate tax rates and unified credit on estates over $10 million. Although the bill does not address directly the generation-skipping tax exemption (currently $3.5 million), the fact that the GST exemption is tied to the estate tax exemption would also raise the GST exemption under this bill. The bill would implement an idea that discounts to the value of an entity holding “nonbusiness” assets (including most assets not used in the active conduct of a trade or business) should be eliminated for transfer (estate, gift and GST) tax purposes.
Under current law, transfer taxes are imposed on the “fair market value” of the property transferred, which is generally defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” In the case of non-publicly traded interests, a hypothetical “willing buyer” would take into account numerous factors, including the degree of control of the business represented by the equity interest being acquired., as well as any limits on his or her ability to dispose of the interest in the future. Recognition of the existence of these factors by the courts has resulted in the allowance of often steep minority interest and marketability discounts to the value of such property. Other discounts include those applicable to transfers of partial interests in property and built-in capital gains. Next week, in Part II, we will go on to list some of the other provisions included such as Valuation Discounts.
Source: AALU Washington Report, 1/23/09
NEW POWER OF ATTORNEY LEGISLATION PASSED
On January 27th, Governor Paterson signed new power of attorney legislation as Chapter 644 of the Laws of 2008. This law makes dramatic changes, including a new statutory short form, to be notarized, and if a principal wants to authorize gifts, a new form that must be witnessed rather than notarized. As enacted, the law has a March 1, 2009 effective date, but we are hopeful that the date will be extended to at least September 1, 2009 by separate legislation, that is, by a chapter amendment. Look for subsequent newsletters as developments warrant.
The bill contains a provision that would phase out the effect of the graduated estate tax rates and unified credit on estates over $10 million. Although the bill does not address directly the generation-skipping tax exemption (currently $3.5 million), the fact that the GST exemption is tied to the estate tax exemption would also raise the GST exemption under this bill. The bill would implement an idea that discounts to the value of an entity holding “nonbusiness” assets (including most assets not used in the active conduct of a trade or business) should be eliminated for transfer (estate, gift and GST) tax purposes.
Under current law, transfer taxes are imposed on the “fair market value” of the property transferred, which is generally defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” In the case of non-publicly traded interests, a hypothetical “willing buyer” would take into account numerous factors, including the degree of control of the business represented by the equity interest being acquired., as well as any limits on his or her ability to dispose of the interest in the future. Recognition of the existence of these factors by the courts has resulted in the allowance of often steep minority interest and marketability discounts to the value of such property. Other discounts include those applicable to transfers of partial interests in property and built-in capital gains. Next week, in Part II, we will go on to list some of the other provisions included such as Valuation Discounts.
Source: AALU Washington Report, 1/23/09
NEW POWER OF ATTORNEY LEGISLATION PASSED
On January 27th, Governor Paterson signed new power of attorney legislation as Chapter 644 of the Laws of 2008. This law makes dramatic changes, including a new statutory short form, to be notarized, and if a principal wants to authorize gifts, a new form that must be witnessed rather than notarized. As enacted, the law has a March 1, 2009 effective date, but we are hopeful that the date will be extended to at least September 1, 2009 by separate legislation, that is, by a chapter amendment. Look for subsequent newsletters as developments warrant.
Friday, January 30, 2009
10 Reasons to Create an Estate Plan NOW
Many people think that estate plans are for someone else, not them. They may rationalize that they are too young or don't have enough money to reap the tax benefits of a plan. But as the following list makes clear, estate planning is for everyone, regardless of age or net worth.
1. Loss of capacity. What if you become incompetent and unable to manage your own affairs? Without a plan the courts will select the person to manage your affairs. With a plan, you pick that person (through a power of attorney).
2. Minor children. Who will raise your children if you die? Without a plan, a court will make that decision. With a plan, you are able to nominate the guardian of your choice.
3. Dying without a will. Who will inherit your assets? Without a plan, your assets pass to your heirs according to your state's laws of intestacy (dying without a will). Your family members (and perhaps not the ones you would choose) will receive your assets without benefit of your direction or of trust protection. With a plan, you decide who gets your assets, and when and how they receive them.
4. Blended families. What if your family is the result of multiple marriages? Without a plan, children from different marriages may not be treated as you would wish. With a plan, you determine what goes to your current spouse and to the children from a prior marriage or marriages.
5. Children with special needs. Without a plan, a child with special needs risks being disqualified from receiving Medicaid or SSI benefits, and may have to use his or her inheritance to pay for care. With a plan, you can set up a Supplemental Needs Trust that will allow the child to remain eligible for government benefits while using the trust assets to pay for non-covered expenses.
6. Keeping assets in the family. Would you prefer that your assets stay in your own family? Without a plan, your child's spouse may wind up with your money if your child passes away prematurely. If your child divorces his or her current spouse, half of your assets could go to the spouse. With a plan, you can set up a trust that ensures that your assets will stay in your family and, for example, pass to your grandchildren.
7. Financial security. Will your spouse and children be able to survive financially? Without a plan and the income replacement provided by life insurance, your family may be unable to maintain its current living standard. With a plan, life insurance can mean that your family will enjoy financial security.
8. Retirement accounts. Do you have an IRA or similar retirement account? Without a plan, your designated beneficiary for the retirement account funds may not reflect your current wishes and may result in burdensome tax consequences for your heirs (although the rules regarding the designation of a beneficiary have been eased considerably). With a plan, you can choose the optimal beneficiary.
9. Business ownership. Do you own a business? Without a plan, you don't name a successor, thus risking that your family could lose control of the business. With a plan, you choose who will own and control the business after you are gone.
10. Avoiding probate. Without a plan, your estate may be subject to delays and excess fees (depending on the state), and your assets will be a matter of public record. With a plan, you can structure things so that probate can be avoided entirely.
Source: www.elderlawanswers.com
1. Loss of capacity. What if you become incompetent and unable to manage your own affairs? Without a plan the courts will select the person to manage your affairs. With a plan, you pick that person (through a power of attorney).
2. Minor children. Who will raise your children if you die? Without a plan, a court will make that decision. With a plan, you are able to nominate the guardian of your choice.
3. Dying without a will. Who will inherit your assets? Without a plan, your assets pass to your heirs according to your state's laws of intestacy (dying without a will). Your family members (and perhaps not the ones you would choose) will receive your assets without benefit of your direction or of trust protection. With a plan, you decide who gets your assets, and when and how they receive them.
4. Blended families. What if your family is the result of multiple marriages? Without a plan, children from different marriages may not be treated as you would wish. With a plan, you determine what goes to your current spouse and to the children from a prior marriage or marriages.
5. Children with special needs. Without a plan, a child with special needs risks being disqualified from receiving Medicaid or SSI benefits, and may have to use his or her inheritance to pay for care. With a plan, you can set up a Supplemental Needs Trust that will allow the child to remain eligible for government benefits while using the trust assets to pay for non-covered expenses.
6. Keeping assets in the family. Would you prefer that your assets stay in your own family? Without a plan, your child's spouse may wind up with your money if your child passes away prematurely. If your child divorces his or her current spouse, half of your assets could go to the spouse. With a plan, you can set up a trust that ensures that your assets will stay in your family and, for example, pass to your grandchildren.
7. Financial security. Will your spouse and children be able to survive financially? Without a plan and the income replacement provided by life insurance, your family may be unable to maintain its current living standard. With a plan, life insurance can mean that your family will enjoy financial security.
8. Retirement accounts. Do you have an IRA or similar retirement account? Without a plan, your designated beneficiary for the retirement account funds may not reflect your current wishes and may result in burdensome tax consequences for your heirs (although the rules regarding the designation of a beneficiary have been eased considerably). With a plan, you can choose the optimal beneficiary.
9. Business ownership. Do you own a business? Without a plan, you don't name a successor, thus risking that your family could lose control of the business. With a plan, you choose who will own and control the business after you are gone.
10. Avoiding probate. Without a plan, your estate may be subject to delays and excess fees (depending on the state), and your assets will be a matter of public record. With a plan, you can structure things so that probate can be avoided entirely.
Source: www.elderlawanswers.com
Friday, January 9, 2009
What does the Recession mean for Long-Term Care?
Certainly, the current economic downturn is not going to affect the needs of some seniors for help with activities of daily living. But it could affect where that help is provided -- at home, in assisted living or in a nursing home. And it could affect who provides the care -- a family member or someone who is hired.
Here are a few likely trends:
Most nursing home care and, increasingly, care at home as well, is covered by Medicaid. This is a joint state-federal health care program for people who are "poor" under its complicated rules. Even before the current recession, Medicaid was growing and straining the ability of states to pay the cost. This has caused states to restrict eligibility for benefits. Such restrictions are likely to tighten further.
With fewer people working, more will be available to care for family members at home, perhaps delaying or avoiding the move to assisted living or a nursing home.
With money becoming scarcer for just about everyone, families will be more reluctant to pay for nursing home, assisted living or home care. This may result in more beds and services being available and a decrease in costs. In fact, according to the 2008 MetLife Market Survey of Nursing Home & Assisted Living Costs, over the past year the cost of semi-private rooms in nursing homes increased just 1.1 percent and the cost of private rooms did not change, in contrast to increases that substantially exceeded the inflation rate in most recent years.
We are likely to see bankruptcies of nursing homes and assisted living facilities if they cannot fill their beds as anticipated and if Medicaid and Medicare reimbursement rates are insufficient to cover their expenses. Facility shut downs will be very disruptive to residents as well as to their families.
With alternative jobs less plentiful, the supply of qualified care providers should grow.
Planning ahead is even more important, whether purchasing long-term care insurance, protecting assets to qualify for Medicaid, or simply making one's wishes known ahead of time.
Even prior to the onset of the recession, many more alternatives to nursing home care were being developed, including assisted living, new home care models, community partnership programs, and increased Medicaid coverage of care provided in the community. Anyone providing care for a senior needs to do much more research about the alternatives available.
These changes are not all bad. Fewer Americans working quite as hard as most adults have in recent years should allow more time for us to care for our loved ones and to find the right solutions among the increasing number of care choices available.
A qualified elder law attorney can help your family explore care alternatives and how to pay for them.
Source: www.elderlawanswers.com
Here are a few likely trends:
Most nursing home care and, increasingly, care at home as well, is covered by Medicaid. This is a joint state-federal health care program for people who are "poor" under its complicated rules. Even before the current recession, Medicaid was growing and straining the ability of states to pay the cost. This has caused states to restrict eligibility for benefits. Such restrictions are likely to tighten further.
With fewer people working, more will be available to care for family members at home, perhaps delaying or avoiding the move to assisted living or a nursing home.
With money becoming scarcer for just about everyone, families will be more reluctant to pay for nursing home, assisted living or home care. This may result in more beds and services being available and a decrease in costs. In fact, according to the 2008 MetLife Market Survey of Nursing Home & Assisted Living Costs, over the past year the cost of semi-private rooms in nursing homes increased just 1.1 percent and the cost of private rooms did not change, in contrast to increases that substantially exceeded the inflation rate in most recent years.
We are likely to see bankruptcies of nursing homes and assisted living facilities if they cannot fill their beds as anticipated and if Medicaid and Medicare reimbursement rates are insufficient to cover their expenses. Facility shut downs will be very disruptive to residents as well as to their families.
With alternative jobs less plentiful, the supply of qualified care providers should grow.
Planning ahead is even more important, whether purchasing long-term care insurance, protecting assets to qualify for Medicaid, or simply making one's wishes known ahead of time.
Even prior to the onset of the recession, many more alternatives to nursing home care were being developed, including assisted living, new home care models, community partnership programs, and increased Medicaid coverage of care provided in the community. Anyone providing care for a senior needs to do much more research about the alternatives available.
These changes are not all bad. Fewer Americans working quite as hard as most adults have in recent years should allow more time for us to care for our loved ones and to find the right solutions among the increasing number of care choices available.
A qualified elder law attorney can help your family explore care alternatives and how to pay for them.
Source: www.elderlawanswers.com
Tuesday, December 23, 2008
A NEW TAX LAW CHANGE
A recent tax law change designed to help address the financial burden facing those who have seen their IRAs or 401(k)s shrink is expected to be signed by President Bush, officially making it law, shortly. Depending on your particular situation, you might want to consider taking action before January.
The new law suspends the Required Minimum Distribution (RMD) requirement for 2009. This waiver, which is available to everyone regardless of your total retirement account balances, applies to all so-called “defined-contribution plans,” which include 401(k) plans, 403(b) plans, 457 (b) plans, and IRA accounts. Suspending the RMD requirement allows you to keep the money in your retirement account if you choose, possibly recovering some of the loss.
This new law does not change the requirement for 2008. So, if you have an RMD that must be withdrawn for 2008, that must still be withdrawn. If you turned 70 ½ in 2008, you can elect to withdraw your 2008 RMD by April 1st of 2009. The new legislation does not change that because it is still a 2008 RMD, not a 2009 RMD; you would still have to withdraw that amount by April 1st of 2009.
Some who withdraw RMDs annually have it set up to occur automatically in January. If that is the case for you, and if you want to take advantage of this new law, you should contact your IRA custodian immediately to take care of that before the RMD is automatically distributed.
The new law suspends the Required Minimum Distribution (RMD) requirement for 2009. This waiver, which is available to everyone regardless of your total retirement account balances, applies to all so-called “defined-contribution plans,” which include 401(k) plans, 403(b) plans, 457 (b) plans, and IRA accounts. Suspending the RMD requirement allows you to keep the money in your retirement account if you choose, possibly recovering some of the loss.
This new law does not change the requirement for 2008. So, if you have an RMD that must be withdrawn for 2008, that must still be withdrawn. If you turned 70 ½ in 2008, you can elect to withdraw your 2008 RMD by April 1st of 2009. The new legislation does not change that because it is still a 2008 RMD, not a 2009 RMD; you would still have to withdraw that amount by April 1st of 2009.
Some who withdraw RMDs annually have it set up to occur automatically in January. If that is the case for you, and if you want to take advantage of this new law, you should contact your IRA custodian immediately to take care of that before the RMD is automatically distributed.
Friday, December 5, 2008
WHAT A GOOD LONG-TERM CARE POLICY SHOULD INCLUDE - Part II
Daily benefit. The daily benefit is the amount the insurance pays per day toward long-term care expenses. If your daily benefit doesn’t cover your expenses, you will have to cover any additional costs. Purchasing the maximum daily benefit will assure you have the most coverage available. If you want to lower your premiums, you may consider covering a portion of the care yourself. You can then insure for the maximum daily benefit minus the amount you are covering. The lower daily benefit will mean a lower premium.
It is important to determine how the daily benefit is calculated. It can be each day’s actual charges (called daily reimbursement) or the daily average, calculated each month (called monthly reimbursement). The latter is better for home health care because a home care worker might come for a full day, one day, and then only part of the day, the next day.
Benefit period. When you purchase a policy, you need to choose how long you want your coverage to last. In general, you do not need to purchase a lifetime policy, three to five years worth of coverage should be enough. In fact a new study from the American Association of Long-term Care Insurance shows that a three-year benefit policy is sufficient for most people. According to the study of in-force long-term care policies, only 8 percent of people needed coverage for more than three years. So, unless you have a family history of a chronic illness, you aren’t likely to need more coverage. If you are buying insurance as part of a Medicaid planning strategy, however, you will need to purchase at least enough insurance to cover the five-year look-back period. That way you can transfer assets to your children or grandchildren before you enter the nursing home, use the long-term care coverage to wait out Medicaid’s new five-year look-back period, and after those five years have passed, apply for Medicaid to pay your nursing home costs (provided the assets remaining in your name do not exceed Medicaid’s limits).
If you do have a history of a chronic disease in your family, you may want to purchase more coverage. Coverage for 10 years may be enough and would still be less expensive than purchasing a lifetime policy.
Inflation protection. As nursing home costs continue to rise, your daily benefit will cover less and less of your expenses. Most insurance policies offer inflation protection of 5 percent a year, which is designed to increase your daily benefit along with the long-term care inflation rate of 5.6 percent a year. Although inflation protection can significantly increase your premium, it is strongly recommended. There are two main types of inflation protection: compound interest increases or simple interest increases. If you are purchasing a long-term care policy and are younger than age 62 or 63, you will need to purchase compound inflation protection. This can, however, more than double your premium. If you purchase a policy after age 62 or 63, some experts believe that simple inflation increases should be enough, and you will save on premium costs.
Source: www.elderlawanswers.com
It is important to determine how the daily benefit is calculated. It can be each day’s actual charges (called daily reimbursement) or the daily average, calculated each month (called monthly reimbursement). The latter is better for home health care because a home care worker might come for a full day, one day, and then only part of the day, the next day.
Benefit period. When you purchase a policy, you need to choose how long you want your coverage to last. In general, you do not need to purchase a lifetime policy, three to five years worth of coverage should be enough. In fact a new study from the American Association of Long-term Care Insurance shows that a three-year benefit policy is sufficient for most people. According to the study of in-force long-term care policies, only 8 percent of people needed coverage for more than three years. So, unless you have a family history of a chronic illness, you aren’t likely to need more coverage. If you are buying insurance as part of a Medicaid planning strategy, however, you will need to purchase at least enough insurance to cover the five-year look-back period. That way you can transfer assets to your children or grandchildren before you enter the nursing home, use the long-term care coverage to wait out Medicaid’s new five-year look-back period, and after those five years have passed, apply for Medicaid to pay your nursing home costs (provided the assets remaining in your name do not exceed Medicaid’s limits).
If you do have a history of a chronic disease in your family, you may want to purchase more coverage. Coverage for 10 years may be enough and would still be less expensive than purchasing a lifetime policy.
Inflation protection. As nursing home costs continue to rise, your daily benefit will cover less and less of your expenses. Most insurance policies offer inflation protection of 5 percent a year, which is designed to increase your daily benefit along with the long-term care inflation rate of 5.6 percent a year. Although inflation protection can significantly increase your premium, it is strongly recommended. There are two main types of inflation protection: compound interest increases or simple interest increases. If you are purchasing a long-term care policy and are younger than age 62 or 63, you will need to purchase compound inflation protection. This can, however, more than double your premium. If you purchase a policy after age 62 or 63, some experts believe that simple inflation increases should be enough, and you will save on premium costs.
Source: www.elderlawanswers.com
Tuesday, November 25, 2008
WHAT A GOOD LONG-TERM CARE POLICY SHOULD INCLUDE - Part I
As nursing home and long-term care costs continue to rise, the Deficit Reduction Act has made it more difficult to qualify for Medicaid to pay for nursing home costs. Long-term care insurance can help cover expenses, but long term care insurance contracts are notoriously confusing. How do you figure out what is right for you? The following are some tips to help you sort through all the different options.
Find a strong insurance company.
The first step is to choose a solid insurance company. Because it is likely you won’t be using the policy for many years, you want to make sure the company will still be around when you need it. Make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moodys, Standard & Poor or Weiss.
What is covered.
Policies may cover nursing home care, home health care, assisted living, hospice care or adult day care, or some combination of these. The more comprehensive the policy, the better. A policy that covers multiple types of care will give you more flexibility in choosing the care that is right for you.
Waiting period.
Most long-term care insurance policies have a waiting period before benefits begin to kick in. This waiting period can be between 0 and 90 days, or even longer. You will have to cover all expenses during the waiting period, so choose a time period that you think you can afford to cover. A longer waiting period can mean lower premiums, but you need to be careful if you are getting home care. Look for a policy that bases the waiting period on calendar days. For some insurance companies, the waiting period is not based on calendar days, but on days or reimbursable service, which can be very complicated. Some policies may have different waiting periods for home health care and nursing home care, and some companies waive the waiting period for home health care altogether.
In Part II, we will discuss Daily Benefits, Benefit Periods and Inflation Protection.
Source: www.elderlawanswers.com
Find a strong insurance company.
The first step is to choose a solid insurance company. Because it is likely you won’t be using the policy for many years, you want to make sure the company will still be around when you need it. Make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moodys, Standard & Poor or Weiss.
What is covered.
Policies may cover nursing home care, home health care, assisted living, hospice care or adult day care, or some combination of these. The more comprehensive the policy, the better. A policy that covers multiple types of care will give you more flexibility in choosing the care that is right for you.
Waiting period.
Most long-term care insurance policies have a waiting period before benefits begin to kick in. This waiting period can be between 0 and 90 days, or even longer. You will have to cover all expenses during the waiting period, so choose a time period that you think you can afford to cover. A longer waiting period can mean lower premiums, but you need to be careful if you are getting home care. Look for a policy that bases the waiting period on calendar days. For some insurance companies, the waiting period is not based on calendar days, but on days or reimbursable service, which can be very complicated. Some policies may have different waiting periods for home health care and nursing home care, and some companies waive the waiting period for home health care altogether.
In Part II, we will discuss Daily Benefits, Benefit Periods and Inflation Protection.
Source: www.elderlawanswers.com
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