What is Going on with the Estate Tax?

Is the Federal Estate tax going away in 2010, being extended for 2010, or will there be total repeal?  Will Congress get around to addressing it this year (only 30 days left guys)?  Or will we be in total limbo?

I chuckled last week when fellow blogger David Schulman of South Florida Estate Planning Law quipped that "I'm Not Writing About Pending Estate Tax Legislation".  David rightly points out that until something concrete comes to pass, we estate attorneys might as well be reading tea leaves.

Not all bloggers feel that way it seems as this week I came across a blog specifically dedicated to federal estate tax legislation changes, aptly named "Future of the Federal Estate Tax".  Here you will get a summary of every piece of legislation being offered on the federal estate tax, with links to the bills themselves.  Blogger Hani Sarji also pulls together some of the latest commentary, included several op ed pieces that ran in the NY Times this weekend in response to last weekends opinion piece "Protect the Farm, Tax the Manor"

For me, I don't make law, I just try to make it work best for my clients.  I can only hope that Congress recognizes what a mess a one year repeal could be and takes responsible action before year end. (yes - I am aware that "Congress" and "responsible action" do not always go hand in hand).

Medicaid Annuity Upheld by Federal Court

Third Circuit Court of Appeals Elderlawanswers.com reports today that:

In a much-anticipated decision, the Third Circuit Court of Appeals has affirmed a U.S. district court ruling allowing a community spouse to purchase a DRA-compliant annuity to protect savings from the costs of her husband's nursing home care. Weatherbee v. Richman (3d Cir., No. 09-1399, Nov. 12, 2009)."

This is an incredibly important ruling.  New Jersey is in the 3rd Circuit, so this ruling may have application to New Jersey Medicaid cases.

The Deficit Reduction Act or "DRA" states that a purchase of a Medicaid Compliant Annuity is not a transfer of assets that creates a penalty period under Medicaid.  As I discussed at "Annuity Purchased by Spouse Tarnished in NJ - But is There Light from Other State's Analysis" New Jersey has not enforced the federal law. Instead New Jersey, like Pennsylvania (the state at issue in the case) took the position that a purchase of an annuity by a community spouse is a transfer that results in a penalty period - essentially, even though you used $200,000 to purchase an annuity that can only give you $3500 a month, you are still treated as owning the $200,000 and then penalized for not having it liquid to spend on nursing home care.

In the Weatherbee case, Mrs. Weatherbee purchased a Medicaid compliant annuity for $400,000, which paid her $4,423 a month.  Pennsylvania took the position that the $4,423 a month was an "available resource" that she could sell (i.e.: she could sell the income stream, get a lump sum amount, and spend that amount on care). Normally, an annuity payment is deemed income, and not an asset (assets have to be spent down for Medicaid, but income of the spouse not in the nursing home is not considered).

Pennsylvania's approach (which is similar to New Jersey's) was soundly rejected.  The Third Circuit Court of Appeals confirmed that "treating the income from an otherwise compliant annuity as an available resource is inconsistent with the treatment of annuities under the Medicaid Act."

My colleague Don Vanarelli has a lengthy post  at his blog on the Weatherbee case with some great insight into how it might be effective in New Jersey.   The issue is that while NJ is in the Third Circuit, there are issues of deference and authority between state and federal laws and courts. 

Track those stimulus dollars

I found a great website to track exactly how the stimulus dollars are being spent, down to the county level. 

The Stimulus Tracker at msnbc.com shows the allocation of hundreds of billions of stimulus dollars on contracts, grants and loans to restore infrastructure. These are the dollars intended to jump-start the economy, and you can see exactly how they are being spent in the nation, your state, or your county.  It shows not only dollars, but new jobs created.

For example, New York, Florida, Texas and California are each getting more than $5 billion of stimulus dollars for infrastructure restoration.  I am sure it is a total coincidence that that these states have the highest amount of electoral college votes (not).

New Jersey is getting $1.8 billion of total contracts.  Essex, Camden and Bergen counties will each receive more than $100 million of those dollars.  Here in Morris County, that translates to $68.9 million dollars of total contracts, including $3.1 million to rehabilitate I-287 Nb over Rt 46 (which really needs it).  You can even drill down to the specifics of each project (like here for instance).

A more comprehensive site is Recovery.gov - Track the Money.  However, it was honestly too detailed for me and my stomach started to churn at all the blue dots of "grant money" being distributed.  I seriously couldn't even make out the map anymore.

However, you can use recovery.gov to report fraud, waste and abuse.

We all wonder where the money is going - well, here is your chance to know!

Post Script:

Another useful sight was brought to my attention: Stimulus: How Fast We're Spending Nearly $800 Billion.  

The success of the federal stimulus program may hinge on the speed with which the government is able to distribute the billions authorized by Congress. Unlike some other estimates of the cost of the stimulus, which are based on spending projections, we took our numbers from the actual budget authority issued by Congress — $792 billion and change. We'll be tracking the progress of stimulus payments made by federal agencies weekly.

Estate Tax Being Pushed Back

After a flurry of reports that Congress was going to address the estate tax this week, Derek Jenson posts this week that it is being postponed until at least after Thanksgiving.  Derek comments that this makes the one year extension of the current federal estate tax law (a $3.5 million exemption per person with a 45% rate) virtually a lock - because what else do they have time to do at this point?

Interestingly, Derek comments on how this "band aid" is only going to create more of an issue for congress.  

The 2010 extension is easy. It is a tax increase. What is difficult is raising the exemption and lower the rates for 2011. That will be a tax cut. [snip] It is not difficult to image that a year from now we will still not have a permanent estate tax bill and will be facing another one year extension or a return to the $1.0 million exemption."

Recall that under the current law, while there is no estate tax in 2010, the estate tax returns in 2011 with a $1 million exemption and 55% top rate - so the trade off for one year of no estate tax is potentially agreeing to keep the current level of $3.5 million exemption and 45% permanently (not that anything is ever truly permanent with tax and congress).  

According to the Congressional Quarterly, the cost of keeping the current rates over the next 10 years versus allow the estate tax to go away for 1 year and then come back in at lower levels (ie, if Congress does nothing) is a staggering $233.6 billion over 10 years.  We we are looking at extreme health care costs on top of an already bloated budget - perhaps a do nothing approach may net Congress more dollars in the end.

Large Brokerage House or Independent Financial Advisor

It's your money -  who should be helping you invest it?  Alexis Leondis at Bloomberg reports today that there is a definite trend of dollars leaving the larger brokerage houses to be placed with independent financial advisors instead.

Almost 30 percent of the world’s millionaires withdrew assets or left their wealth management firms last year, and 46 percent lost confidence in their advisers, based on a survey released in June by Capgemini SA and Merrill Lynch & Co.

Independent registered investment advisers are expected to gain about $50 billion in assets this year, in contrast to full- service brokerage firms, whose assets are projected to decline by $189 billion, according to Boston-based consultant Cerulli Associates.

The difference seems to be in the compensation structure and the services offered. The article compares retail brokers who earn commissions on sales, to fee only wealth managers who charge a fee for assets under management.  

However, the larger houses seem to be following this trend towards wealth management.   "The business has “changed dramatically” from transactional to wealth management, said Charles Johnston, president of Morgan Stanley Smith Barney".

Also, the larger houses have security behind them.  After Bernie Madoff and other investment scandals, many still want the financial strength and compliance standards provided by a name brand".

While there are two different models, in my experience, different models fit different clients better. The take away is that you have options out their competing for your business, and if you don't think your financial advisor cares enough about your dollars, or has the security to back up their control of your dollars, there are other advisors out there who would be delighted to give you the service that your deserve.

Computer Generated Wills - The Wall Street Journal's Take

Wall Street Journal - Before It's Too Late: A Test of Online WillsCan you create a Will using a computer program or online? Of course you can.  The Wall Street Journal has an article today comparing different computer programs to do just that.

The better question is: Should you create a Will using a computer program or online?  The answer, like all answers to questions that have variables and complexities, is "maybe".

As Joel Schoenmeyer points out today in Death and Taxes -- The Blog:

The biggest program with the article is that it leaves out the most important question: did the documents accomplish what they were supposed to? By "supposed to," I mean "do the documents leave property to desired beneficiaries in the most efficient manner, with no ambiguities and the fewest tax consequences, and are documents valid under the relevant state law."

For some, computer generated Wills are a cost effective solution.  I have referred people (generally single without children) to legal zoom to get a basic Will.

For many, it is the variables and complexities that need addressing. New Jersey has a $675,000 estate tax exemption and allows personal property to be distributed by a separate written letter (personal property being your jewelry, pictures, furnishings, etc.). New York has a $1 million estate tax exemption and does not allow personal property to be distributed via a letter - it must be in the body of the Will. California is a community property state, which means that couples have different rights to property (real estate, investments, etc.) in California than New Jersey - and those property rights continue even if they used to live in California when they got the property but now live in New Jersey. I prepare Wills all the time, and I would not try to address a California property law question without getting advise from someone who practices there.

 The answer to "What should my Will say" depends on the questions asked. If not enough questions are asked, or if the right questions are not asked, then the Will might not solve your problems. While there is definitely a place for computer generated Wills, they aren't the solution for everyone, just as much as getting a lawyer prepared Will is not the solution for everyone.

Two touchstones in my mind of if you should see an attorney to invest in an estate plan - Do I have a taxable estate (remember to count death value of life insurance)? Do I have children? In these situations a lawyer may do a better job of asking questions and explain why the questions are important and what is behind them than a computer model.

Joel ends his post by noting:

[From WSJ] 'Each site purports to yield documents that clearly outline our intentions in the event of our demise or death, although we didn't hire a lawyer to review them. We're hoping that we—and our heirs—won't have to worry about it any time soon.'

There you go -- the author has spent $X on these programs, and has no idea whether they do what she wants them to do.


New Case Clarifies Transfers to Disabled Children Exeception to Mediciad Penalties

US District Court, Newark, NJGenerally speaking, a transfer of assets from a parent to a child within 5 years of making an application for Medicaid for long term care benefits creates a "Penalty Period".  During the Penalty Period, the parent will not receive Medicaid under the basic theory that if the parent had not transferred their assets, they would still have them and would not need Medicaid.

If anyone remembers the TV show Ed, the premise was that the main character was fired from his job at a big law firm because of where a comma was - this is much the same case.  (Only attorneys could argue so much about a comma, but the legislature should do a better job of how they write laws).

At issue is the "Disabled Child Exemption" to the transfer penalty rule.  Transfers to a disabled child are exempt from creating a transfer penalty period.  New Jersey took the position that transfer to a disabled child were exempt ONLY IF the transfer was made to a trust for the sole benefit of disabled child.  The plaintiff/Medicaid applicant had made the transfer outright to their disabled child, and not in trust, and argued that that the transfer should not create a penalty period, whether made to a trust for the disabled child, or to the child directly.

In Sorber v. Velez, the US District Court the District of New Jersey agreed with the plaintiff/Medicaid applicant that that a transfer to a disabled child does not have to be in trust to qualify for the exemption from the transfer penalties.

The problem in the case arises from a section of the Medicaid statutes that the court correctly describes as "not a model of legislative draftsmanship".  The statute (42 U.S.C. § 1396p(c)(2)(B)(iii)) reads in relevant part:

“An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that . . . the assets were transferred to, or to a trust (including a trust described in subsection (d)(4) of this section) established solely for the benefit of, the individual’s child [who is blind or disabled].”

So, does "established solely for the benefit of" describe the "trust" or "assets transferred to". The court found it described the trust, so that the trust the assets were transferred to needs to be "solely for the benefit of" the disabled child, not that a transfer must be in a trust.

I have to say that the court's analysis seems just plain common sense from the reading (the words "trust" and "solely for the benefit of" are in the same sub-phase set aside by commas - thank you Ed again for showing the world how important commas can be).  So, as a taxpayer I have to ask why Health and Human Services would expend the dollars to fund the time and energy of a legal battle when a plain reading of the language, giving the commas the proper weight, seems to answer the issue?