North Carolina Estate Planning Blog

Caring for an Elderly Parent - Letting Go

Greg Herman-Giddens — Mon, 15 Mar 2010 20:29:35 -0500

For those who have been through a similar experience, this poignant article Letting Go of My Father, which details Jonathan Rauch's struggles in caring for his elderly father, will solicit empathy. For younger readers, it can provide a glimpse of things to come.

While the article does not cover the issue, the legal aspects of caring for an elderly relative can be greatly simplified by making sure a durable general power of attorney, health care power of attorney, living will and HIPAA authorization are in place early on. Once an elder becomes mentally incapacitated, it's too late.

Also, geriatric care managers can provide invaluable assistance, even when an elder is in facility, by monitoring health care, medications, etc.

Thanks to attorney Kathe Joyce for bringing the article to my attention.

Special Needs Trusts: Allowable Expenses

Greg Herman-Giddens — Fri, 12 Mar 2010 14:11:37 -0500

Special Needs Trusts (SNTs), also sometimes referred to as Supplemental Needs Trusts, are used to provide supplemental benefits to disabled or elderly persons receiving governmental benefits (such as Medicaid and SSI) while not disqualifying them for the benefits.

There is a distinction between "self-settled" or "first party" trusts, which are funded with the disabled persons own assets, and most often called special needs trusts, and "third party trusts", which are set up by another person and funded with that person's money. The latter are often referred to as supplemental needs trusts. The laws regarding SNTs are very complex, and such trusts should be drafted only by attorneys experienced in that area of the law.

The administration of SNTs is also complex. Only certain types of expenditures are allowed. The wrong type of payments from the trust can disqualify the beneficiary from receiving governmental benefits. I currently serve as trustee for several SNTs - given the many needs of a disabled beneficiary, it can be a demanding job.

For examples of what expenditures from an SNT are allowable, and those that aren't, click "Continue Reading."

Allowable Expenses from a Special Needs Trust
(also applies to Pooled or Supplemental Needs Trusts)

A Special Needs Trust (SNT) is set up to cover the expenses of goods and services that are supplemental to the beneficiary’s basic needs (food, shelter and clothing). Food, shelter and clothing expenses cannot be covered by the trust. The following is a list of examples of some common expenses that are allowable through a SNT. This list gives a good idea of how a SNT can be creatively utilized to help enhance the quality of a person’s life, and is by no means all-inclusive. Some examples of allowable expenses are:

· Medications (essential and non-essential) not covered by Medicaid

· Medical equipment not covered by Medicaid

· Medical, nursing and dental care, tests not covered by another source

· Independent evaluations

· Insurance premiums (health, dental, life, auto, and renter)

· Homeowner insurance premiums ONLY if the insurance is NOT a mortgage requirement

· Personal assistance

· Private counseling and/or case management

· Guardianship and advocacy services

· Any expenses related to owning and operating one car

· Computer hardware and software

· Private lessons and materials

· Testing for any purpose (vocational, medical, psychological, etc.)

· Job coaching

· School or camp tuition

· Entertainment/recreation tickets

· Travel expenses such as transportation or hotel (but not food)

· Travel expenses for a companion

· Equipment (electronic, entertainment, adaptive, special interest)

· Home appliances

· Furniture and household items

· Gardening and lawn care

· Cable television

· Telephone services (local and long distance)

· Internet access

· Curtains, towels, linens, decorative items

· Interior decorating

· Home renovations to improve accessibility (but not additions)

· Gifts for the beneficiary at holidays

· Veterinary services, pet care, supplies

· Office supplies

Expenses Not Allowable from a Special Needs Trust
(also applies to Pooled or Supplemental Needs Trusts)

An SNT is set up to cover the expenses of goods and services that are supplemental to the beneficiary’s basic needs (food, shelter and clothing). This means that the trust cannot be used for food, shelter or clothing costs on a regular basis or the trust will count as a resource to the beneficiary, which can affect eligibility for government benefits like Supplemental Security Income and Medicaid. The trustee must use discretion in making distributions, keeping the beneficiary’s government benefits in mind when doing so. The following is a list of basic need expenses that are not allowable through a supplemental needs trust.

· Cash given directly to the beneficiary for any purpose
(because the beneficiary can use it for basic need support)

· Food or groceries

· Restaurant meals (except if given as an occasional gift)

· Clothing (except if given as an occasional gift)

· Rent or mortgage payments

· Property taxes

· Homeowners or condo association dues

· Homeowners insurance if the insurance is a mortgage requirement

· Utilities such as electricity, gas and water

· Utilities hookup or connection charges

Source: Life Plan Trust, Inc. (a Pooled Trust Provider)

Inherited IRAs - the continuing saga in bankruptcy

Greg Herman-Giddens — Thu, 11 Mar 2010 10:43:00 -0500

I previously blogged about inherited IRAs being subject to the claims of creditors, both in (In Re: Jarboe) and outside of (Robertson v. Deeb) bankruptcy, and one case (In Re: Nessa) where an inherited IRA was determined to be protected under federal law.

Here's a summary of the latest ruling, which contradicts the Nessa holding, courtesy of Robert Keebler, CPA:

In In Re: Chilton, the United States Bankruptcy Court for the Eastern District of Texas found that an inherited IRA is not equivalent to an IRA for purposes of determining whether the account contains “retirement funds” that may be exempted from the bankruptcy estate under U.S.C. § 522(d)(12). The Court also found that an inherited IRA is not a traditional IRA exempt from taxation under IRC § 408(e)(1). In Re: Chilton, 105 AFTR 2d 2010-XXX, 03/05/2010;

There is really no way to reconcile the holdings in Nessa and Chilton, but the Chilton decision is clearly the minority view. If you want to protect your IRA from your heirs creditors, it is vitally important to utilize a standalone IRA trust .

Battle to the Death (Tax)

Greg Herman-Giddens — Mon, 08 Mar 2010 09:56:52 -0500

Here's the latest on the fight over the future of the estate tax tax, from Bloomberg.com. In general, Republicans and business lobbyists are pushing for a $5 million exemption and a 35% rate, while the Obama administration is counting on a $3.5 million exemption and a 45% rate. If nothing is done, 2011 will bring a $1 million exemption and a 55% rate.

Does the IRS owe you money?

Greg Herman-Giddens — Sat, 06 Mar 2010 12:43:21 -0500

The IRS has announced that about 39,100 North Carolinians have unclaimed tax refunds, averaging $539 per person. The total due North Carolina residents is $32,919,000.

However, to collect the money, a return for 2006 must be filed with the IRS no later than Thursday, April 15, 2010.

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury.

For 2006 returns, the window closes on April 15, 2010. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2006 refund that their checks will be held if they have not filed tax returns for 2007 or 2008. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2006. For example, most telephone customers, including most cell-phone users, qualify for the one-time telephone excise tax refund. Available only on the 2006 return, this special payment applies to long-distance excise taxes paid on phone service billed from March 2003 through July 2006. The government offers a standard refund amount of $30 to $60, or taxpayers can base their refund request on the actual amount of tax paid. For details, see the Telephone Excise Tax Refund page on IRS.gov.

In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2006 were $38,348 for those with two or more children, $34,001 for people with one child and $14,120 for those with no children. For more information, visit the EITC Home Page.

Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 1-800-TAX-FORM (1-800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2006, 2007 or 2008 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by calling 1-800-829-1040, or by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS.

From IR-2010-24.

Asset Protection for the Rest of Us

Greg Herman-Giddens — Fri, 05 Mar 2010 13:42:36 -0500

Members of America's middle class should be a lot more concerned about protecting their assets from creditors than from the so called "death tax." While the very wealthy can use offshore trusts and other complex entities, such planning is cost prohibitive for most of us. However, there are many other things that can be done to protect one's assets. Check out this concise post by fellow attorney Ike Devji that reflects what I tell my own clients: Asset Protection for the Middle Class?

Washington State may double estate tax rate

Greg Herman-Giddens — Sat, 27 Feb 2010 13:58:56 -0500

Yes, I know this is the North Carolina Estate Planning Blog, but in these troubled economic times, with most states, including NC, desperate for cash, this could be a sign of things to come here and elsewhere.

Washington currently has a $2 million estate tax exemption, with rates ranging from 10% to 19%. A bill was introduced in the state legislature on February 13 to double the rates (20% to 28%).

North Carolina's estate tax is tied to the federal estate tax, so there is no tax this year. It will return next year, however, when the federal estate tax is back, with a scheduled $1 million exemption and 55% rate. North Carolina's top rate is 16%.

State Estate Taxes - No Worries in NC (yet)

Greg Herman-Giddens — Tue, 23 Feb 2010 10:04:02 -0500

There is no estate tax in North Carolina this year, but residents (and owners of real estate) in 19 other states do have a state estate tax, even in the absence of the federal estate tax. Take a look at this article on Forbes.com, Where Not to Die In 2010.

The North Carolina estate tax will return next year when the federal estate tax is reinstated.

High-income taxpayers to pay more in 2011

Greg Herman-Giddens — Tue, 16 Feb 2010 16:01:54 -0500

The Tax Policy Center of the Urban Institute and the Brookings Institution contains fascinating (to a tax geek) and detailed information about taxes. Particularly informative is the information on the Obama Administration's 2010 income tax increase proposal.

Here's a table showing the proposed increases for 2011 and the estimated increased revenue over a 10 year period:

Proposed Tax Increase	10 Year Tax Revenue
Income Tax Rates 33% and 35%	$364 Billion
To 36% and 39.6%
Itemized Deductions Capped at 28%	$291 Billion
Personal Exemption Phase-out and 3%	$208 Billion
Floor on Itemized Deductions
Capital Gains Tax Rate 15% to 20%	$105 Billion
Total	$968 Billion

The tax rate increases are bad enough, but I really hate not being able to take advantage of all of my itemized deductions! The IRS giveth, and then the IRS taketh away.

Inherited IRAs are protected in bankruptcy - sometimes

Greg Herman-Giddens — Mon, 15 Feb 2010 16:50:26 -0500

In a recent ruling, the U.S. Bankruptcy Court for Minnesota held that an inherited IRA was protected from the debtor's creditors under federal law. In re: Nessa, 105 AFTR 2d 2010-XXXX, 01/11/2010. The key difference between this decision and the earlier Texas and Florida decisions that held the inherited IRAs were not protected from creditors is that in Minnesota, bankruptcy debtors rely on federal property exemptions rather than state exemptions. In many states, including Texas, Florida and North Carolina, debtors must use state exemptions.

There has not yet been a ruling interpreting North Carolina statutory exemption for IRAs, but don't take a chance with your hard-earned retirement funds - leave them to your beneficiaries in an IRA Trust to ensure maximum protection from creditors.

North Carolina's Repeal of the Rule Against Perpetuities Upheld

Greg Herman-Giddens — Fri, 12 Feb 2010 15:37:14 -0500

In a decision dated February 2, 2010, the North Carolina Court of Appeals upheld the Superior Court Judge's 2009 decision in Brown Brothers Harriman Trust v. Anne P. Benson, et al. Click here for my previous post about this case.

The Court of Appeals ruled that North Carolina's constitution does not require application of the common law rule against perpetuities' restriction of the remote vesting of future interests in property. The court held that N.C.G.S. Section 41-23, which repealed the common law rule against perpetuities (in 2007), is a valid exercise of the General Assembly's authority. Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al, No. COA09-474.

The effect of this ruling is that dynasty trusts are clearly a valid planning tool in North Carolina. The only requirement is that the trustee be given the power to alienate (sell) the property in the trust.

Senate discussing possible agreement on Estate Tax

Greg Herman-Giddens — Thu, 11 Feb 2010 17:57:39 -0500

Nothing has been decided yet, but here's the scoop from TheHill.com as of February 9, 2010. At a minimum, the 2009 $3.5 million exemption and 45% rate would continue, effective January 1, 2010.

Stipulation Leads to Directed Verdict in Fraud Case

Greg Herman-Giddens — Tue, 09 Feb 2010 14:45:01 -0500

Here's a summary of Burton v. Williams, a recent North Carolina Court of Appeals case (adapted from today's NAELA eBulletin):

Plaintiff sued defendant as attorney-in-fact for decedent, alleging that an addendum and payment agreement release entered into between decedent and defendant regarding the sale of decedent’s property were void and unenforceable. The grounds were that (1) At the time the documents were signed, decedent lacked the mental capacity to assent to the addendum and release; (2) the agreements were obtained through undue influence and duress; (3) they were procured through fraud; and (4) they were not supported by consideration. After presenting his evidence, plaintiff moved for a directed verdict, and the court granted on grounds that the release was void and unenforceable for lack of consideration. Defendant claimed this violated his right to trial by jury. However, because plaintiff established his claim through documentary evidence, which both parties stipulated was authentic and correct, the Court of Appeals ruled that the trial court properly directed the verdict in favor of plaintiff despite plaintiff having the burden of proof at trial. No consideration for the payment agreement was specified, and the document which was the basis of the agreement, as a matter of law, was not a valid contact.

Burton v. Williams, 2010 N.C. App. LEXIS 93 (January 19, 2010)

Tax Court Rules Gender Reassignment Expenses Deductible

Greg Herman-Giddens — Wed, 03 Feb 2010 13:34:50 -0500

On February 2, 2010, in Ododonnabhain v. Commissioner of Internal Revenue, the U.S. Tax Court held that a transgender woman's expenses for hormone therapy and sex reassignment surgery were medically necessary and therefore deductible for federal income tax purposes. The court found that "gender identity disorder" is a disease, and ruled that gender transition-related healthcare is non-cosmetic, medically necessary healthcare. However, expenses for breast augmentation were found to be cosmetic as the surgery did not treat the disease or improve bodily function, and therefore were non-deductible.

IRS Issues Guidance for 2010 Gifts to Trusts

Greg Herman-Giddens — Wed, 03 Feb 2010 12:18:25 -0500

Based on what appeared to be a giant "loophole" in the gift tax law applying to gifts made in 2010, taxpayers could arguably make gifts to a wholly-owned grantor trust free from gift tax. Last week at the Heckerling Estate Planning Institute, commentators said this was too good to be true, and opined that the IRS would soon close the loophole. No sooner said than done:

Yesterday the IRS published Notice 2010-19, which applies to taxpayers making gifts in trust during 2010. Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property. To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.

Income Taxation of Estates - a Brief Overview

Greg Herman-Giddens — Sat, 30 Jan 2010 14:47:57 -0500

In North Carolina it is not uncommon for persons to handle administration of a decedent's estate without hiring a lawyer or an accountant. Because of the complexity of the law and the likelihood that certain requirements or opportunities will be overlooked, I certainly don't recommend going it alone. This post is not intended to be a do-it-yourself guide, but simply an overview of the basic process. Complying with income tax requirements is the most complex part of the majority of estates.

A deceased individual's tax year ends as of the date of death. Thus, all of the items of income and deduction prior to that date are reported on Form 1040. The tax year for the estate begins on the date of death, and generally ends on the last day of the month 11 months later. A separate tax id number for the estate is necessary and must be obtained from the IRS. The tax id number is provided to all financial institutions in which the decedent owned an account for income reporting purposes, and is used for the estate checking account.

Estates report interest, dividends and capital gains just as individuals do, but IRS Form 1041, the tax return for estates and trusts, is significantly different form Form 1040. The top federal rate of 35% (for 2010) is reached at just $11,200 of taxable income, versus about $373,000 for individuals. However, to the extent there are distributions to the beneficiaries in a taxable year of the estate (except for distributions of specific amount or assets per the terms of the will), net income is "carried out" and is reported as income to the beneficiaries on Schedule K-1. Capital gain is generally taxed to the estate.

Certain expenses can be deducted on the 1041, such as attorneys and accountants fees, executor's commissions, court fees, appraisals and bank charges. Funeral expenses and debts of the decedent are not deductible.

On the final return, if there is a net loss, the loss can be carried out to the beneficiaries. On all but the final return, a $600 exemption is allowed.

The North Carolina income tax return for estates, D-407, uses information from the federal return in the manner of the NC individual return, D-400, does.

Taxation of trusts is similar, but there are a few differences. The returns for estates and a decedent's living trust can be combined by filing a special election form.

Finally, the federal and North Carolina estate taxes are a completely different topic. This year there is no estate tax, but it will return in 2011.

Haiti Donations Qualify for 2009 Tax Deduction

Greg Herman-Giddens — Tue, 26 Jan 2010 10:25:57 -0500

IR 2010-012:

WASHINGTON — People who give to charities providing earthquake relief in Haiti can claim these donations on the tax return they are completing this season, according to the Internal Revenue Service.

Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card. [Emphasis added.]

"Americans have opened their hearts to help those affected by the Haiti earthquake," said IRS Commissioner Doug Shulman." This new law provides an immediate tax benefit for the many taxpayers who have made generous donations."

Taxpayers can benefit from their donations, almost immediately, by filing their 2009 returns early, filing electronically and choosing direct deposit. Refunds take as few as ten days and can be directly deposited into a savings, checking or brokerage account, or used to purchase Series I U.S. savings bonds.

The new law only applies to cash (as opposed to property) contributions. The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti. Taxpayers have the option of deducting these contributions on either their 2009 or 2010 returns, but not both.

To get a tax benefit, taxpayers must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible.

Taxpayers should be sure their contributions go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Search for Charities. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov. Donors can find out more about organizations helping Haitian earthquake victims from agencies such as USAID.

The IRS reminds donors that contributions to foreign organizations generally are not deductible. IRS Publication 526, Charitable Contributions, provides information on making contributions to charities.

Federal law requires that taxpayers keep a record of any deductible donations they make. For donations by text message, a telephone bill will meet the recordkeeping requirement if it shows the name of the donee organization, the date of the contribution and the amount of the contribution. For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution. Publication 526 has further details on the recordkeeping rules for cash contributions.

This year’s special Haiti relief provision is modeled on a 2005 law that, in the wake of the Dec. 26, 2004, Indian Ocean tsunami, allowed taxpayers to deduct donations they made during January 2005 as if they made the donations in 2004.

State of the North Carolina Estate Tax

Greg Herman-Giddens — Mon, 25 Jan 2010 15:26:20 -0500

For years, there has only been North Carolina estate tax due if federal estate tax was due. Now, however, that the federal estate tax is gone (for now, anyway), what's the status of the NC estate tax?

N.C.G.S. Section 105-32.2 provides, in pertinent part, as follows:

"The amount of the estate tax imposed by this section is the amount of the state death tax credit that, as of December 31, 2001, would have been allowed under section 2011 of the Code against the federal taxable estate. The tax may not exceed the amount of federal estate tax due under the Code." [Emphasis added.]

Regardless of how the first sentence above is interpreted, since zero federal estate tax is due for individuals dying in 2010, the second sentence clearly mandates a zero NC estate tax as well.

GRATs and FLPs okay this year?

Greg Herman-Giddens — Mon, 25 Jan 2010 09:48:59 -0500

I'm at the University of Miami School of Law's Heckerling Institute on Estate Planning this week. Our first speaker, Lou Mezzullo, stated that he thinks Congress will not act this year on restricting planning with Grantor Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs). Too many other things of importance to tackle.

Tax Free Planning Opportunity for Long Term Care Expenses

Greg Herman-Giddens — Sat, 16 Jan 2010 10:17:37 -0500

This posting is courtesy of attorney Marc Soss of Florida:

The aging demographics of the United States coupled with the Pension and Recovery Act of 2006 (the "PPA”) and Deficit Reduction Act of 2007 (“DRA”) have provided an excellent planning opportunity to create tax efficient vehicles to solve a clients’ long-term care planning needs. Beginning on January 1, 2010, a tax-free planning option will become available for individuals who desire to provide for long-term medical care by utilizing an existing annuity or life insurance contract purchased after 1996. While not a new concept (it dates back to 1997), the 2010 tax-free planning opportunity may be beneficial to an individual with a larger than needed life insurance policy death benefit, unaffordable monthly or annual premiums, an under-performing or matured deferred annuity contract, or the desire to incorporate long-term medical care into his or her estate plan.

Under the PPA provisions, annuity funds may be withdrawn completely tax-free on a FIFO (First-in, First-out) basis for long-term care benefits (amending Section 72(e) of the Internal Revenue Code). The PPA also includes a “1035 exchange” option which allows for the tax-free and penalty free basis withdrawal of the entire annuity value for qualified long term care expenses. However, no income tax deduction will be allowed for any payment made from the cash surrender value of a life insurance contract or the cash value of an annuity contract for coverage under a qualified long-term care insurance contract (Section 213(a) of the Code).

This benefit is further enhanced by the modification of the Medicaid “look back” period from thirty-two (32) months to sixty (60) months for transferred assets, and the authority for all states to adopt “partnership long term care insurance plans” under the DRA. The qualified partnership plans allow an insured to “exclude an amount of assets equal to the value of the benefits purchased in a long-term care partnership policy from Medicaid qualification.”

Implications:

The benefits of converting an existing annuity or life insurance contract include (i) no surrender charge will apply to account withdrawals for qualifying long-term care expenses; (ii) withdrawals for qualifying long-term care expenses will be categorized as a tax-free reduction of basis; (iii) a spouse can be added to a policy for long-term care purposes; (iv) ten (10%) percent free withdrawal provision for non-long term contract withdrawals; (v) the ability to purchase an optional lifetime long-term care provision with guaranteed premiums; and (vi) the annuity’s cash will remain available if the long-term care portion of the policy is never utilized. However, the conversion will also result in (i) the commencement of a new surrender charge period for the contract; (ii) medical underwriting (at a time when the individuals health may be declining); (iii) health care benefits that are limited in scope and to a specified number of years; and (iv) the cost of the long-term care rider reducing the annuity’s tax-deferred income stream. In addition, the typically policy will contain a two-year waiting period from the time the annuity is purchased before benefits can be activated and a 90-day “elimination period” once a claim is filed.

Conclusion:

A hybrid policy of this nature should not be used as a substitute for comprehensive long-term care insurance. It is recommended that these policies only be utilized when an individual can’t afford or is uninterested in comprehensive long-term care insurance.

Marc J. Soss, Esquire practices in the areas of estate and tax planning; probate, trust and guardianship administration and litigation; and corporate law in Southwest Florida. Marc has published numerous articles and been quoted in the Forbes.Com, Fox Business, Naval Reserve Association Magazine, Rhode Island Bar magazine, Bradenton Herald, Lawyers USA, and Military.com.