Florida Estate Planning and Probate Law Blog focused on recent case law and planning ideas.

THE IRS ISSUES MORE ESTATE TAX PORTABILITY RELIEF

In 2011, Congress raised the estate tax exclusion amount to $5 million per person (indexed for inflation) and added portability to the estate tax laws. The portability provision is an election that allows a surviving spouse to carry over any unused portion of their deceased spouse’s estate tax exclusion and shield an increased amount of assets from the estate tax. Under the portability provision a surviving spouse had nine (9) months to make the election or it was lost. In 2014, the IRS issued Revenue Procedure 2014-18 that provided a simplified method for obtaining an extension of time to make a portability election for estates of decedents dying after 2010, if the estate was not required to file an estate tax return and if the decedent was survived by a spouse. However, the simplified method was available only on or before December 31, 2014. Subsequently, the IRS issued private letter rulings which granted an extension of time to elect portability when the decedent’s estate was not required to file an estate tax return. To address the tremendous amount of private letter ruling requests, on June 9, 2017, the Internal Revenue Service issued Revenue Procedure 2017-34 (the “Procedure”). The Procedure, which is effective immediately, provides a new simplified method to obtain permission for an extension of time to file Form 706 (Federal Estate Tax Return) and elect portability. The Procedure is available to all eligible estates through January 2, 2018, or the second anniversary of the decedent’s date of death. If an estate misses the new two (2) year deadline it may still file for a private letter ruling asking for relief to elect portability.

MINNESOTA TAX LAW CHANGE AS TO RESIDENCY REQUIREMENTS

With the number of retirees moving to states which do not access an income, estate or inheritance tax many states are trying to find ways to recoup the lost revenue. The Minnesota Department of Revenue previously took the position that the location of a person’s attorney, CPA, financial adviser or bank account determined where an individual is domiciled for income tax purposes. This was in addition to Minnesota law which found that an individual is a resident of Minnesota for income tax purposes if he or she is either: (1) domiciled outside Minnesota, but maintains a place of abode in the state and spends in the aggregate more than one-half of the tax year in Minnesota (the “183-day test”), or (2) domiciled in Minnesota. The Minnesota tax bill signed into law on May 30, 2017, included a legislative amendment specifically removing from consideration in a domicile dispute the location of an individual’s attorneys, CPAs, financial advisers and banking relationships. The new law is effective for tax years beginning after December 31, 2016. This creates one less hurdle to overcome when becoming a resident of another state.

INCOME TAX EVASION - BELGIUM, COLUMBIA AND PORTUGAL JOIN THE FIGHT

Maintaining an offshore bank account is not illegal, however, failing to report income and interest earned is tax evasion. Effective January 1, 2017, IRS Revenue Procedure 2017-31 added Belgium, Columbia and Portugal to the list of countries that participate in the automatic exchange of information on bank interest paid to nonresident alien individuals. This addition means there are now 43 countries participating in the automatic exchange program. The IRS only shares information with countries that have entered into this mutual information exchange agreement. The IRS is statutorily barred from sharing information with another country without such an agreement in place. All U.S. information exchange agreements require that the information exchanged under the agreement be treated and protected as secret by the foreign government. This is one of the most effective tools the U.S. Government has to combat tax evasion.

MINNESOTA RAISES ITS ESTATE TAX EXEMPTION FOR 2017 AND BEYOND

The State of Minnesota's recent budget brings it closer to joining the thirty-two (32) states that do not impose a state inheritance or estate tax in addition to the federal estate tax. The state budget increases the estate tax exemption amount to $2.1 million for 2017 (from the current $1.8 million level). The change is retroactive to January 1, 2017, and includes incremental increases in the exemption amount to $2.4 million in 2018, $2.7 million in 2019, and $3 million by 2020. The Minnesota estate tax doesn’t have a portability provision and tops out at 16%.

DISTRICT OF COLUMBIA INCREASES ITS ESTATE TAX EXEMPTION

Tax reform dating back to 2014 has resulted in an increase in the District of Columbia's 2017 estate tax exemption amount to $2 million. In 2018 the exemption amount is anticipated to be equal to the 2017 federal exemption amount of $5.49 million. Currently, eighteen (18) states and the District of Columbia impose an estate or inheritance tax—separate from the federal estate tax. However, neighboring states have been repeal their estate and inheritance tax by raising the exemption amount to the federal level. For example, Maryland increased its 2018 exemption to $4 million in 2018, and the federal exemption amount in 2019. The Commonwealth of Virginia does not impose an estate tax on decedent estates.

FLORIDA HOMESTEAD EXEMPTION INCREASE ON THE BALLOT IN 2018

In 2018, Florida voters will have the opportunity to vote on a constitutional amendment to raise the Florida homestead exemption from $50,000 to $75,000, on homes worth $100,000 or more. If 60% of voters approve, the new rate will take effect January 1, 2019. The Florida homestead exemption reduces the value of a Florida residents home for property tax assessment purposes. The proposed amendment would save Florida state residents about $644 million with the average homeowner receiving an annual savings of $170. Florida municipalities and counties are concerned about the decreased revenues impact on critical services (fire department, library, police, etc...).

IRS RELEASES 2018 HEALTH SAVINGS ACCOUNT RATES

The IRS has issued Revenue Procedure 2017-37 which contains the annual inflation-adjusted contribution, deductible and out-of-pocket expense limits for health savings accounts (HSAs) in 2018. Annual contribution limitations, deductibles and out of pocket expenses for 2018 increased in all categories from 2017: Limitation on deductions for an individual with self-only coverage under a High Deductible Health Plan (HDHP) to $3,450 Limitation on deductions for an individual with family coverage under an HDHP to $6,900 Annual deductible for self-only coverage that is not less than $1,350 Annual deductible for family coverage that is not less than $2,700 Annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) for self-only coverage - do not exceed $6,650 Annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) for family coverage - do not exceed $13,300

NEW FINRA RULE TO PROTECT EXPLOITATION OF THE ELDERLY

In an effort to help protect the elderly U.S. population the Financial Industry Regulatory Authority (FINRA) has announced that the Securities and Exchange Commission (SEC) has approved a new rule and an amendment that are specific to customers who are elders. Regulatory Notice 17-11 explains the new rule and amendment: (1) the adoption of new FINRA Rule 2165 (Financial Exploitation of Specified Adults) to permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers; and (2) amendments to FINRA Rule 4512 (Customer Account Information) to require members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. Both New Rule 2165 and the amendments to Rule 4512 become effective February 5, 2018. The new rule and amendment are designed to enable financial specialists to be able to more quickly and effectively address suspected financial exploitation of seniors and other specified adults.

DEDUCTING THE COST OF LIFE IN AN ASSISTED LIVING FACILITY

Many individuals in our aging population are transitioning from home ownership to life in an assisted living facility (“ALF”). Many ALF’s require a onetime entry fee and ongoing monthly charges for housing and services (meal plans, housekeeping, transportation, and social and recreational activities). The benefit of an ALF is that when a resident’s health and personal care needs become more acute, they are not forced to move to a new facility, as their level of service can be increased to include long-term care and skilled nursing care. Although the costs of an ALF can be substantial, a percentage or all of the costs can be deducted as a medical expense income tax deduction either by the individual or third party if they are providing more than half of the resident’s support. Section 213(a) of the Internal Revenue Code (IRC) allows as a deduction any expenses that are paid during the taxable year for the medical care of the taxpayer, his or her spouse, and dependents who are not compensated by insurance or otherwise. Estate of Smith v. Commissioner, 79 T.C. 313, 318 (1982). The deduction is allowed only to the extent the amount exceeds seven and one-half (7.5%) percent of adjusted gross income. Sec. 213(a); sec. 1.213-1(a)(3), Income Tax Regs. For purposes of Sec. 213 the term “medical care” includes amounts paid “for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.” The entire ALF cost, including room and board, can be fully deducted on a federal income tax return as a medical expense if the individual’s health problems are classified as being “chronically ill” and if the appropriate services are “provided pursuant to a plan of care prescribed by a licensed health care practitioner” (physician, registered professional nurse or licensed social worker). An individual will qualify as “chronically ill” if a licensed health care practitioner certifies that the individual: (i) is unable to perform at least two (2) basic activities of daily living (including eating, toileting, transferring, bathing, dressing) without assistance from another individual due to loss of functional capacity for at least ninety (90) days; or (ii) requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

U.S. COURT RULES FEDERAL MEDICAID LAW PREEMPTS FLORIDA'S REIMBURSEMENT STATUTE

In Gallardo v. Dudek (N.D. Fla., No. 4:16-cv-116-MW/CAS, April 18, 2017), a federal district court ruled that federal law prohibits the state of Florida from seeking reimbursement for Medicaid payments it made on a recipient’s behalf from portions of the recipient’s personal injury settlement that were allocated to future medical expenses. Florida’s reimbursement statute uses a uniform formula in which the recipient’s gross settlement is first reduced by twenty (25%) percent to account for attorney fees, the remainder is divided in half (1/2), and the Agency for Health Care Administration (AHCA), Florida’s Medicaid agency, is then entitled to recover the lesser of its total medical payments or one half (1/2). Under this formula, AHCA would recover $323,508.29 in medical payments from Gianinna's settlement. Gianinna’s parents filed suit against the agency in federal court seeking an injunction and a declaration that Florida’s reimbursement statute violates federal law inasmuch as it allows the state to recover from the portion of her settlement beyond that allocable to past medical expenses. AHCA countered that it was entitled to satisfy its lien from the portion of the settlement representing compensation for both past and future medical expenses. The parties filed cross motions for summary judgment. The U.S. District Court, N.D. Florida, granted the Gallardos’ motion for summary judgment and denied AHCA’s motion. The court held, consistent with the U.S. Supreme Court’s decision in Arkansas Department of Health and Human Services, et al. v. Ahlborn (547 U.S. 268 (2006)), that the AHCA is entitled to recover for past medical payments it made on Gianinna’s behalf only from that portion of the settlement allocated to past medical expenses. The court held that where the state reimbursement law explicitly allows for recovery from the portion of the settlement attributable to future medical care, that portion of the state law violates, and is preempted by, federal Medicaid law.

PRESIDENT TRUMPS 2017 INCOME TAX PLAN

On Wednesday, April 27, 2017, President Trump outlined his plan for income tax reform. His plan includes the following: decreasing the top corporate tax rate from 35% to 15%; imposing a one-time tax on the repatriation of previously untaxed overseas profits at a to-be-determined rate; conversion from the current system of taxation on worldwide profits to a territorial-tax system in which foreign profits are not taxed; decreasing the number of income tax brackets from seven (7) to three (3); a top individual income tax rate of 35% (down from the current 39.6 percent); maintaining the long-term capital gains and dividends tax rate at a maximum rate of 20%; repeal of the Alternative Minimum Tax, Estate Tax, and 3.8% Medicare tax on Net Investment Income; elimination of itemized deductions (deduction for state and local taxes); and doubling of the standard deduction (from $12,000 to $24,000 for married couples filing jointly and from $6,000 to $12,000 for single filers). The 15% corporate rate would apply to profits of pass-through businesses (S Corporations and LLCs) whose profits currently flow through to individual taxpayers and are taxed at a current rate as high as 39.6%. Itemized tax deductions for charitable contributions, mortgage interest and retirement savings will remain in place.

WHAT WILL YOUR ESTATE PAY IN FEDERAL AND STATES ESTATE TAXES?

We live in an ever-changing federal income and estate tax environment. On January 1, 2017, the federal estate tax exemption increased to $5.49 million per individual. That amount excludes over ninety-five (95%) percent of all decedent estates from payment of any federal estate tax. In addition, thirty (30) U.S. states have no estate or inheritance taxes while twenty (20) states and the District of Columbia currently impose an estate (14 states) or inheritance (6 states) tax, or both. As a result, your estate could be exempt from the federal estate tax but subject to a large state estate tax.

PROTECTING YOUR HEIRS FROM YOUR DEBTS AT DEATH

With almost 70% of the retiree population solely living on social security it is not surprising that the percentage of families with debt headed by someone age 65 to 74 rose from about 50% in 1989 to about 66% in 2013. Personal debt nearly doubled during the same time period from 21% to about 41%. For most seniors the debt is not being utilized to live a lavished lifestyle but to pay for expensive nursing home, aids and in-home care. As seniors accumulate this debt their families become concerned over what happens to their unpaid bills when they die. It is recommended that families discuss these increasing debts, what amounts, if any, will be the responsibility of their estate, and what they can do to protect an inheritance for their heirs. Families need to recognize that their children are not responsible for their debts at death and only the decedent’s estate assets (subject to probate or Trust administration, but excluding exempt assets) can be utilized to repay the debt. For example, a retirement account (IRA or 401(k)) with a designated beneficiary is creditor protected. A parent’s federal student loan debt will be canceled at death, although taxes may be owed on the forgiven debt. It is important to consult with a legal specialist to learn more about the options that are available in each state.

NEW STATE OF WASHINGTON POWER OF ATTORNEY STATUTE

The new State of Washington Power of Attorney statute went into effect on January 1, 2017 (“Act”). The Act provides several changes and additions to the previous law, which aim to address previous ambiguity in the law and to provide safeguards to prevent possible abuse of authority by an agent under the power of attorney. Some of the key provisions of the Act are: Agent/Attorney in Fact: If the principal names co-agents to act on his or her behalf, the Act now clarifies that co-agents must exercise their authority jointly, unless the document specifies that each co-agent may act independently. When Effective: Under the Act, a power of attorney must now expressly state that the document is not affected by the disability of the principal, or that it becomes effective upon the disability of the principal in order for the power of attorney to be “durable” and not affected by the principal’s subsequent disability. The powers granted to the agent may be effective immediately upon signing or may spring into effect only when the principal becomes incapacitated. Powers Granted to Agent: The Act allows the principal to grant authority to the agent over broad subject matters, including but not limited to, the authority to manage the principal’s real and personal property, stocks, bonds, and other financial instruments; to make gifts; to manage the principal’s estate, trusts, and other beneficial interests; and to manage and operate a business. By drafting the power of attorney to refer to certain specific categories of powers the agent may be granted, the power of attorney can incorporate the more detailed descriptions of these powers set forth in the Act. This could eliminate ambiguity in the document itself regarding the scope of the agent’s particular powers and may allow the power of attorney document itself to be simplified. Under the Act, the authority to make gifts is limited to the amount of the federal gift tax annual exclusion ($14,000 per year to each recipient) unless otherwise stated in the document. Formalities: The principal’s signature must either be: (i) acknowledged by a notary; or (ii) attested by two or more witnesses, who are competent, and are not home care providers for the principal or related to either the principal or agent by blood or marriage.

THE FLORIDA SLAYER STATUTE DEFEATED BY A CLAIM OF SELF-DEFENSE

Section 732.802 of the Florida Statutes is known as the “Florida Slayer Statute.” Subsection (3) provides “that a named beneficiary of a life insurance policy “who unlawfully and intentionally kills … the person upon whose life the policy is issued is not entitled to any benefit …” Moreover, subsection (5) provides that a final judgment of conviction of murder of any degree is conclusive, but in the absence of such a conviction, “the court may determine by the greater weight of the evidence whether the killing was unlawful and intentional for purposes of this section.” In The Prudential Ins. Co. of Am. v. Harding, 2016 WL 6568085 (M.D. Fla. Nov. 4, 2016), a court found the claim of self-defense to be enough to avoid application of the Florida Slayer Statute in a domestic partners death. A physical altercation in February 2015, resulted in the death of one of the partners (the owner of a life insurance policy with a beneficial value of $466,000). The alleged criminal perpetrator was the sole beneficiary of that life insurance policy. The decedent’s sister argued that the surviving partner was ineligible to collect the life insurance benefits under Florida’s Slayer Statute. However, the State Attorney didn’t pursue charges against the surviving partner as it did not believe there was enough evidence to obtain a conviction. The Circuit Court applied the greater weight of the evidence standard and found that it wasn’t more likely than not that surviving partner acted unlawfully in his actions; and it was just as possible that he acted in self-defense. Accordingly, the court found that Florida’s Slayer Statute didn’t apply and ordered the distribution of the life insurance benefits to the surviving partner.

TIPS TO AVOID A CHALLENGE TO YOUR ESTATE PLAN AT DEATH

Although a challenge to a Last Will and Testament (“Will”) or Revocable Trust (“Trust”) (an inheritance dispute) are a sad reality there is no guarantee that even with proper planning a contest may be avoided. Will and Trust contests are typically the result of a disgruntled family member or friend challenging the validity of the documents. The have a higher probability of occurring in in blended families, when a child is disinherited or when the children are not treated equally. The following are some proactive steps that can be taken: • Create your estate plan early in life and update it regularly. Many inheritance disputes result from estate planning documents being signed shortly before the death of the testator. • Keep copies of your old estate planning documents. Your old estate planning documents may be reinstated or serve as evidence of your intent if a newer document is successfully challenged after your death. It makes it difficult for Nephew John to challenge your estate planning documents when all your prior documents also excluded him as a beneficiary. • Explain a disinheritance or inequity in distributions. Make sure your estate planning documents include specific language as to why an individual who might be expecting an inheritance is not receiving one, or why your estate will not be equally divided between your children (prior gifts to one child). • Establish your competence with regular medical visits and notes. Have disinterested individuals witness the executed of your estate planning documents to diminish the ability of a challenge of undue influence. • Discussing the general contents of your estate plan with your family. If nephew John knows years in advance that he will not be a beneficiary, it may decrease his motivation to challenge your estate plan.

TRUST BENEFICIARY CHALLENGES ADOPTED SIBLINGS ENTITLEMENT TO BENEFITS

Family inheritance disputes have become common place throughout the world. The recent case of Edwards and Kuiper v. Maxwell, 42 Fla.L.Weekly D742a (1st DCA, March 31, 2017) evidences that it know impacts adopted siblings. In this case, an adult son was a discretionary beneficiary (distributions to him were at the sole discretion of the trustee) of his great-grandparents Trust. His father later adopted another child (which also made him a beneficiary of the Trust). After the adopted son was dispersed thousands of dollars from the Trust, the adult son challenged the adoption since he was never provided with notice of the adoption or the opportunity to challenge it. In reversing the lower court, the 1st DCA found that the adult son's "interest as a beneficiary was only “contingent” since subject to the discretion of the trustee," and he did not possess a direct, financial and immediate interest in the trusts.

REVISED DEATH CERTIFICATES FOR SAME-SEX COUPLES IN FLORIDA

The United States Supreme Court ruling in Obergefell v. Hodges in 2015 has brought many changes, protections and complications for same-sex couples. In 2015, after the historic court ruling, a gay widow asked the state of Florida to correct his deceased spouse’s death certificate to reflect their prior marriage in New York. The state of Florida refused since the couple were not legally married, under Florida law, at his date of death. The widower then sued the state to correct the inaccuracy. On March 23, 2017, a U.S. District Court Judge ruled in his favor and ordered the state to correct his spouse’s death certificate to reflect their marriage. As a result, the state of Florida must now re-issue an accurate death certificate for all individuals who were incorrectly designated unmarried at time of death because their spouses were of the same sex.

WHAT HAPPENS TO YOUR DEBT AT DEATH?

Everyone reads about the huge transfer of wealth occurring from one generation to the next, however, it is estimated that 73% of decedents have outstanding debt at their death. According to Credit.com, the decedents carried an average total balance of $61,554, including mortgage debt, and $12,875, without. Approximately 68% had credit card balances, 37% was mortgage debt, 25% had auto loans (25%), 12% had personal loans, and 6% had student loans. Fortunately, the “[d]ebt belongs to the deceased person or that person’s estate.” Only if the decedents estate has sufficient assets to cover their debts will their creditors be paid. Family members are not personally responsible for the unpaid debt. It is important to discuss with your probate attorney what assets will be exempt from creditor claims upon a decedent’s death.

EVER WONDER WHAT YOUR FICA TAX IS FOR?

FICA taxes, which originate from the Federal Insurance Contributions Act, is a United States federal payroll (or employment) tax imposed on both employees and employers. This payroll tax is withheld from employee paychecks and paid by employees and employers for (1) Social Security (OASDI) and (2) Medicare. The tax helps to fund benefits for retirees, disabled people and children. Your tax contribution helps your parents and grandparents have a secure retirement while securing today and tomorrow for you and your future family. Here is the breakdown of these taxes are paid: The employer and employee each pays 7.65% (Social Security portion is 6.2%, and the Medicare portion is 1.45%). The Social Security portion is capped each year at a set amount; while the Medicare portion is not capped.

HOPING FOR AN INHERITANCE? YOU MAY NOT GET AS MUCH AS YOU EXPECT

Everyone should be grateful to receive an inheritance, and no parent wants to leave their offspring with nothing. But just 21 percent of those who plan to bequeath money to their children tell them how much money they'll get. When kids do find out the size of their inheritance after a loved one passes away, it's often less then expected. It can add an unwanted feeling—disappointment—into an already-volatile emotional stew. More than half of 2,700 adults surveyed for Ameriprise Financial late last year expect to get an inheritance of more than $100,000. Among those who had already received an inheritance, about the same percentage (52 percent) got less than $100,000. The survey focused on Americans between the ages of 25 and 70 with at least $25,000 in assets. Some 83 percent plan to leave money to loved ones. If those heirs have unrealistic expectations, it can lead to family tension later, said Marcy Keckler, vice president for financial advice strategy at Ameriprise. Half of the boomers surveyed plan to leave at least $500,000 to their kids. Forty-seven percent of Gen Xers and 33 percent of millennials wanted to leave that much as well. While the survey found that the majority of those who had already inherited got less than $100,000, perhaps the portfolios of those benefactors hadn't lived through an eight-year bull market. Family conflicts often arise when money mixes with grief. Almost a quarter of those surveyed expect family members will have disagreements after they learn the terms of the will. That proved true for 25 percent of those in the survey who were left money.For parents, sometimes the issue is whether to leave amounts to children that are fair, or that are equal. That can become an issue if one child is wildly successful, while another struggles financially. There's no way to eliminate these conflicts, but you can minimize them, said Eric Reich, a certified financial planner with Reich Asset Management in Marmora, N.J. His clients create what's called an "ethical will," which is a letter, document, or video that explains to kids why their parents divided assets the way they did.Addressing potential conflicts while everyone is still alive is an even better strategy. Reich asks parents to get feedback from their children on what each one really wants from the estate. Usually "it's not money, but items of sentimental and/or intrinsic value," he said. "Most often the things that a particular child values most, the parents had no idea they even wanted to inherit." Jewelry usually causes the most problems, Reich said, especially pieces that have been passed down generations. And siblings can hold grudges for a long time. "I've actually seen two very close siblings who have not spoken for the past 15 years over a piece of furniture, an antique breakfront cabinet valued at $10,000 in an estate valued at $3 million," he said. It may be less anxiety-inducing if parents give children an estimation of what they hope to leave them. "I recommend parents give children some frame of reference," said Keckler. By setting proper expectations, the inheritance will be "less of a source of tension later," she said. Beloved animals may also receive money if an owner dies. Some 5 percent of the people surveyed said they wanted to leave money behind for care of a pet. Whatever the intent, few will match what is perhaps the largest inheritance left to a pet ever: $12 million, from New York hotel heiress Leona Helmsley to her maltese, Trouble. She left her two grandsons out of the will. This article was provided by Bloomberg News.

FUTURE LIFE EXPECTANCY DECLINE FOR THOSE RESIDING IN THE UNITED STATES?

While the life expectancy at birth for residents of industrialized nations will continue to increase in the future the same is not expected in the United States. The life expectancy for US residents is expected to be on par with those in Mexico (women) and the Czech Republic (men). In contrast, South Korean women and Hungarian men are projected to make the largest overall gains (with South Koreans second among males). It is anticipated that South Korean women will live to an average of 90 years old by 2030 (the first time a population will break the 90-year barrier). While US residents are anticipated to gain a couple of years of life expectancy between 2010 and 2030, predicted lifespans will remain in the early 80's for women and late 70's for men (83.3 for women and 79.5 for men in 2030, up from 81.2 for women and 76.5 for men in 2010). The reasons for the small growth are the highest infant and maternal mortality rates, the highest obesity rate, and the “largest share of unmet health-care needs due to financial costs.” In December, the U.S. government reported that life expectancy had declined in 2015 for the first time since 1993 as death rates for eight of the 10 leading causes of death, including heart disease, rose.

NEVADA v. DELAWARE FOR ASSET PROTECTION TRUST?

Delaware has promoted itself as the top jurisdiction for creating an asset protection trust. However, a 2014 court decision, Kloiber v. Kloiber, has put the creators of Delaware Asset Protection Trusts on notice of possibly choppy waters ahead. The case involved a Delaware Dynasty Trust (DDT) which had been established for a son, who later became embrioled in a divorce, his son’s spouse, and their descendants. At the time of the divorce, the trust’s assets totaled around $310 million. The settlement forced the trust to be severed, creating a separate trust for the wife which was funded with some of the original trust assets, and rendered the asset protection plan useless when the now ex-wife received assets intended solely for the son, his spouse, and his descendants. Individuals are now considering creating asset protection trusts in Nevada over Delaware because Nevada does not allow for claims from “exception creditors” (claims for alimony and spousal support from an ex-spouse).

INCREASED IRS AUDITS OF THE WEALTHY IN 2017

The IRS is planning to focus its attention in 2017 on the "Rich." That means individuals and companies who are likeliest to hide money or under-report their tax burden. While the IRS launches fewer full-blown audits, the agency is sending out more “mass notices” addressing specific issues (especially large charitable contribution, large losses, mortgage interest deductions, and 529 college savings plans). So-called “hobby losses” are a frequent IRS target. To combat these audits, be prepared to produce extensive records and documentation to substantiate each and every loss and charitable donation.

THE HOLOCAUST EXPROPRIATED ART RECOVERY ACT

The Holocaust Expropriated Art Recovery Act was enacted to help Holocaust heirs recover art stolen from their families during World War II. The Act will finally be put to the test in a New York court, as the heirs of Fritz Grunbaum are looking to claim two valuable drawings by Egon Schiele. The heirs claim that Grunbaum’s collection, which included eighty-one Schieles, was confiscated by the Nazis. Countering that argument, collectors, dealers, and some museums argue that the Nazis did not steal it and that Grunbaum’s sister-in-law sold fifty-three of the Schieles to an art dealer in 1956. Further, the opponents argue that previous courts have found that they were not stolen. Ultimately, the heirs hope the Act will help them prove they are victims of Nazi art looting. (NY Times Feb 27, 2017)

PLEASE BURY MY DOG WITH ME

Our beloved pets (dogs, cats, pigs, birds, etc..) are typically buried in a pet cemetery. However, there is a growing movement today to allow pet owners to be buried (or their cremated ashes) with their pets in a human cemetery. New York is just one of a few states to pass laws allowing such burials (in cemeteries that are willing to handle them, as Church cemeteries may opt out). Similar bills are pending in Louisiana, Indiana, Massachusetts, and elsewhere. In Pennsylvania, cemeteries can offer one section for people, another for pets, and a third area for both. Virginia permits pets and owners to lie in a designated area of a cemetery, as long as they’re in separate caskets. The issue impacts over half of the households in the U.S. On an international level, Germany has allowed owner-pet cemeteries for several years. While the idea may seem strange to none pet owners, individuals devoted to their pets consider them members of the family and grieve their deaths deeply.

DOES YOUR FORMER STATE OF RESIDENCE STILL BELIEVE YOU ARE A RESIDENT?

The term “Snowbird” refers to an individual who spends their winters in one of the sunshine states (Florida, Arizona, etc..) and their summers in one of the cooler weather states (Northeast, Northwest, etc..). Most Snowbirds claim one of the sunshine states, without or a limited state income tax, as their permanent residence. Problems can arise for a Snowbird when their former state of residence still deems them to be a resident of that state and subject to its states taxing authority. For example, a New York resident is subject to both state and federal income taxes on all income earned. In contrast, a Florida resident is only subject to New York income taxes on income derived from “New York sources” (rental income, etc.). When challenged, a former New York state resident will be forced to show by “clear and convincing evidence” that they intended to moving to Florida or another one of the sunshine states permanently and not just a rouse to avoid their former state of residences income tax burden. While “intent” can be a very subjective test, states with income taxes and estate taxes use written audit guidelines to help them determine a taxpayer intent (where is your permanent place of abode). They will examine and look at where you spend more than one hundred eighty-three days a year, business involvement, family connections, your driver’s license registration, where you are registered to vote, where you maintain your family heirlooms, works of art, books, antiques, family photo albums and receive your mail. It is important, to avoid this dilemma, that if you intend to make Florida your permanent residence you: (i) obtain the homestead exemption on your Florida residence; (ii) register to vote in Florida (even if you are renting a home or condominium); (iii) register your vehicles in Florida; (iv) update your estate planning documents to reflect Florida as your state of residency; and (v) affiliate with a Florida house of worship (church, temple, mosque, etc..).

FEDERAL ELDER ABUSE AND PREVENTION ACT ON THE HORIZON

The Elder Abuse and Prevention Act has a high chance of becoming law this year. The legislation has received substantial support among elderly advocacy groups because of its promise to make the world a safer place for seniors. Additionally, the Act will increase penalties for marketing fraud schemes targeting seniors and expand data collection of elder abuse to help create more reliable statistics highlighting the prevalence of this problem. The Act is also aiming to enlist the Justice Department to become a greater protector of seniors.

EVEN THE WEALTHY FAIL TO UPDATE THEIR ESTATE PLANNING DOCUMENTS

In a 2016 study, 26% out of 3,105 wealthy individuals surveyed had a complete estate-planning strategy to transfer their wealth to the next generation. Further, only 54% had created a will, but most had not updated them. As a result, $1.5 trillion of the $3.2 trillion is without direction as it falls into the hands of the next generation. Perhaps, the reason why people avoid preparing an estate plan is because they are not sure what they want to do with their wealth at some distant point in the future and a clearer picture of what heirs should receive will present itself at a later date. Another part of a solid estate plan is to communicate important facts so that the heirs are able to prepare for an inheritance. The sooner in life these conversations are expressed, the smoother the wealth transfers. Don’t Delay Planning Your Estate, Barron’s, February 10, 2017.

IRS TAX DEBT CAN RESULT IN PASSPORT DENIAL OR REVOCATION

In December 2015, legislation went into effect that requires the IRS to provide a list of names to the State Department of individuals with “seriously delinquent tax debt” (more than $50,000 in unpaid federal taxes, including interest and penalties). These individuals, if their tax debt is not resolved (pays the tax in full, enters into an installment agreement, an offer in compromise with the IRS or a timely request for collection due process hearing), are at risk of having their U.S. passports revoked within the next few months. The legislation requires that the State Department to refuse to issue new passports and provides them with discretion to revoke currently issued passports. The IRS recently announced that it would begin sending IRS Letters 508C, notice of certification of seriously delinquent federal tax debt to the State Department, to the taxpayer’s last-known address. The letter will inform the taxpayer that the IRS has certified him/her as owing “seriously delinquent tax debt.” At that time, the IRS will also send the certification to the State Department. The IRS reports that the State Department will take action within 90 days.

THE 2017 FEDERAL ESTATE AND GIFT TAX LIMITS

The IRS has published Rev. Proc. 2016-55 and the federal estate and gift tax limits for 2017. For 2017, the credit against federal estate tax (federal exclusion amount) is increased to $5,490,000. For an individual who passes away during 2017, no federal estate tax will be imposed if his or her gross estate is less than $5,490,000. For a married couple (including a same-sex couple) the federal exclusion amount is $10,980,000. For 2017, the federal gift tax limit of $14,000 remains in place. This allows an individual to gift up to $14,000 in 2017, to any individual without being required to report the gift to the IRS or utilizing a portion of their lifetime gift tax exemption (also $5,490,000). Spouses can make a joint gift of $28,000 without being required to report the gift to the IRS or utilizing a portion of their lifetime gift tax exemption. The federal gift tax limit does not apply to gifts between spouses. However, if the gift is made to a spouse who is not a United States citizen, the first $149,000 of gifts are not included in the total amount of taxable gifts that must be reported to the IRS. In addition, the federal gift tax limitation does not apply to qualified gifts paid on behalf of another individual directly to a college or university or for medical purposes.

CONGRESSIONAL ATTEMPT TO CLOSE MEDICAID LOOPHOLES

Congress is considering making it more difficult for a community spouse to utilize an annuity to qualify for Medicaid. The proposed bill would prevent married couples from using assets to purchase an annuity for the community spouse, so that the institutionalized spouse can apply for Medicaid. The bill would count half of the income from a community spouse's annuity as income available to the institutionalized spouse for purposes of Medicaid eligibility. Savings from the legislation would be utilized to reduce waiting lists for home health care waivers. In addition, Congress is reviewing legislation that would: count lottery winnings as income; and require Medicaid applicants to prove U.S. citizenship or residency before receiving benefits.

PRE-2013 FEDERAL ESTATE AND GIFT TAX RELIEF FOR SAME SEX COUPLES

The IRS has issued Notice 2017-15 which provides same-sex spouses with federal estate, gift and generation-skipping transfer (GST) tax relief. The Notice allows same-sex spouses to recalculate taxes that were incurred or paid prior to the repeal of the Defense of Marriage Act (DOMA). Prior to the repeal of DOMA, for purposes of federal law the terms “marriage” and “spouse” were defined to exclude same-sex couples. This resulted in same-sex marriages not being treated as a legal marriage under Federal law. This precluded same-sex couples from being able to claim a marital deduction for gifts or bequests made to each other and required them to allocate limited exclusion amounts to (or pay gift or estate taxes on) gifts and bequests to each other. That all changed in 2013 with the U.S. Supreme Court’s ruling in Windsor and subsequently IRS Rev. Ruling 2013-17 (which only applied prospectively). Notice 2017-15 provides administrative procedures to allow taxpayers in same-sex marriages (or, if the taxpayer is deceased, the executor of his or her estate) to recalculate the transfer tax treatment of prior gifts or bequests (before 2013) made to each other. When filing for the relief, the taxpayer should include a statement at the top of the form stating “FILED PURSUANT TO NOTICE 2017-15” and attach a statement supporting the recalculation of the taxpayer’s remaining applicable exclusion amount for purposes of federal estate and gift taxes and/or the taxpayer’s remaining GST exemption for purposes of federal GST taxes.

NEW MICHIGAN LAW ALLOWS FOR THE CREATION OF DOMESTIC ASSET PROTECTION TRUSTS

On December 5, 2016, the State of Michigan joined the ranks as one of seventeen states (including Alaska, Delaware, Nevada, Utah and South Dakota) that permit the use of irrevocable self-settled asset protection trusts for purposes of creditor protection planning. The law becomes effective on February 5, 2017. A Michigan domestic asset protection trust ("DAPT") will enable an individual to shelter assets from future third party creditors. A DAPT is an irrevocable self-settled trust which, when established and funded properly, allows the grantor (the individual establishing the trust) to protect his or her property from the claims of future third party creditors and still maintain a beneficial interest in the trust property. The majority of DAPTs are administered by an independent Trustee (usually a corporate Trustee), friend or family member who is domiciled or has a business presence in the jurisdiction in which the DAPT is established. The Trustee will have the absolute discretion to make distributions to a class of beneficiaries, which may include the grantor. A DAPT can be a highly effective creditor protection tool.

IS A PAY-ON-DEATH OR TRANSFER-ON-DEATH ACCOUNT THE RIGHT CHOICE FOR THE ACCOUNT BENEFICIARY?

The benefits and negatives associated with establishing transfer on death (TOD) and pay on death (POD) accounts has been debated for a long-time. The main benefit of an account of this nature is that the account assets will pass directly to the beneficiary(s) named on the account without probate or being subject to the decedent’s creditor claims. This is a simple way to transfer assets at death to an individual not involved in any dispute or litigation (divorce, bankruptcy, judgment creditor, etc.). In contrast, if the individual is involved in a dispute or litigation the assets passing outright to them could be at risk to the dispute or litigants claims. Consideration must also be taken if the individual named as the account beneficiary is a “special needs” individual, as direct receipt of the account funds could result in them loosing eligibility for the government benefits they are receiving. In addition, a POD or TOD could alter the end result of the decedent's intended estate plan.

IRS NOTICE 2017-12 - FEDERAL ESTATE TAX RETURN CLOSING LETTER GUIDANCE

For years, probate practitioners relied upon a Federal Estate Tax Closing Letter (Closing Letter) as evidence that the IRS has accepted a Federal Estate Tax Return (Form 706) as filed and that the federal tax liabilities of the estate were satisfied. Upon receipt, the Closing Letter provided the estate administrator (Personal Representative, Executor, etc..) with an assurance to proceed with closing out the estate administration process. In many situations, a Closing Letter was required to satisfy state law probate proceedings. Except in extreme circumstances, such as fraud, substantial error by the Internal Revenue Service (IRS) or when a failure to reopen would be a serious administrative omission, the IRS will not reopen or reexamine an estate tax return when a closing letter has been issued. Effective on June 1, 2015, the IRS changed its policy and ceased issuing a Closing Letter to the taxpayer’s representative. Instead, the taxpayer’s representative will receive a closing letter only upon affirmative request. To avoid the confusion created by this policy change, the IRS recently issued Notice 2017-12, as guidance on methods to confirm that the IRS has closed its examination of an estate tax return. Notice 2017-12 officially confirms an account transcript issued by the IRS is a valid substitute for an estate tax closing letter, so long as the transcript bears the transaction code of 421 (that Form 706 has been accepted as filed and an examination has been concluded). An account transcript can be obtained online through the IRS’s Transcript Delivery Service or by fax or mail through filing Form 4506-T. Account transcripts will only be issued to an estate representative when a properly executed Form 2848 Power of Attorney or Form 8821 Tax Information Authorization is already on file. Alternatively, a Closing Letter can be obtained by calling (866) 699-4083 and providing the IRS the following information: (i) the name of the decedent; (ii) the decedent’s social security number; and (iii) the date of death. The closing letter will then be issued to the estate administrator at the address of record.

SOCIAL SECURITY - NEW AGE FOR FULL RETIREMENT

Understanding social security can result in a happier retirement. January 1, 2017 brought in significant changes and the new age of 66 years and 2 months (it had been 65 years) for full retirement benefits (for those born between 01/02/1955 through 01/01/1956). It is expected to increase to age 67 for individuals born in the 1960’s. Individuals may receive permanently reduced retirement benefits when they turn 62 in 2017. As the full retirement age continues to increase, there are greater reductions in benefits for individuals who claim the benefits before they reach full retirement age. For example, if you apply for benefits in 2017 at age 62, your monthly benefit amount will be reduced nearly twenty-six (26%) percent. Your spouse’s benefits, if any, will also be significantly reduced if you claim benefits before reaching full retirement age. There are both advantages and disadvantages to receiving your social security benefit before full retirement age. An advantage is that you will collect benefits for a longer time period. In contrast, the amount you receive will be reduced based upon how early you elect to begin receiving them.

STATE ESTATES AND INHERITANCE TAXES IN 2017

For years it has been discussed that for estate tax purposes it was better to die a resident of certain states than others. The following is an updated list, as of January 1, 2017, of the states which impose a "death or inheritance tax" on its residents and those who follow the Federal Estate Tax Exemption amount. Good States in Which to Die a Resident: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Indiana, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, and Wyoming. Bad States in Which to Die a Resident: Connecticut ($2,000,000), Delaware ($5,490,000), District of Columbia ($2,000,000), Hawaii ($5,490,000), Illinois ($4,000,000), Iowa (inheritance tax on transfers to others than lineal ascendants and descendants), Kentucky (separate inheritance tax), Maine (estate tax and no portability), Maryland ($3,000,000), Massachusetts ($1,000,000), Minnesota ($1,800,000), Nebraska (County Inheritance Tax), New Jersey ($2,000,000), New York ($4,187,500 for April 1, 2016 through March 31, 2017 and then $5,250,000 for April 1, 2017 through December 31, 2018), Oregon ($1,000,000), Pennsylvania (Inheritance Tax), Rhode Island ($1,500,000), Vermont ($2,750,000), and Washington ($2,129,000).

STUDENT LOAN DEBT AND SOCIAL SECURITY DUE NOT MIX

Student loan debt is not dischargeable in bankruptcy. As a result, the baby boomer’s generation enters retirement with student loan debt (approximately seven million Americans age 50 and older owed about $205 billion in federal student debt in 2016), either borrowed for their own educations or to pay for their children’s, with approximately 33% in default. Those in default will be shocked to learn that their Social Security checks can be reduced (known as an “Offset”) to repay their student loan debt. The Offset can be as large as 15% of a social security recipient’s benefit payment. This has left some Social Security recipients at or below the poverty level. Government statistics show that older borrowers had a monthly Offset of approximately $140, and almost half of them were subject to the maximum possible reduction. In 2015, the Department of Education collected about $4.5 billion on defaulted student loan debt. A total of $171 million, almost 10%, was collected through an Offset.

COMMON FLORIDA MEDICAID MYTHS - DON'T ALWAYS LISTEN TO YOUR FRIEND

Medicaid is both a federal and state level program through which health care assistance is offered it’s to members. Each state administers their program differently than the next. Your Home in Florida: A Florida residents can own a personal residence (home) and still qualify for Medicaid. Medicare Covers Long-Term Nursing Care: The Florida Medicare program covers skilled nursing care, but only for a limited period of time following a three-day hospital stay. Medicare is only meant to help a person with activities of daily living, such as bathing, eating, and using the bathroom, and can’t be used to cover long-term health care expenses. Transfers Made Within five years of Applying Will Make You Ineligible: Medicaid will consider any uncompensated or below-market transfer (“transfers”) when the office reviews an application. Only certain transfers will be considered when determining whether a penalty period will apply. Medicaid benefits are not available during a penalty period. You Must Spend of All of Your Assets to Qualify: Florida does place a cap on the amount of gross income and assets a person can own and qualify for Medicaid. A person with too many assets or income is ineligible to receive Medicaid benefits. A single person applying for Medicaid benefits may only have $2,000 of countable assets. The other spouse may possess up to $120,900 of countable assets. There are also many exempt assets or noncountable assets that a person or couple may own, including a home. Florida’s Medicaid Rules are the Same as the Rules in Other States: Each state participates in Medicaid funding, it is a federal program, and has its rules on how these funds are administered. A person that lives in another state may not have to meet Florida’s requirements for Medicaid. Further, the rules can change on an annual basis.