Wisconsin's ADRC

This will be a brief blog post. Quite often, I am asked whom to contact for assistance with the elderly.  The best place to begin when trying to locate services that are available to serve your elderly spouse or parent or a disabled person is to contact the local Aging and Disability Resource Center (ADRC). There are many resources available to assisted your elderly or disabled loved ones.  A helpful link to these contacts is here:  https://www.dhs.wisconsin.gov/adrc/consumer/index.htm

For Rock County, Wisconsin, the phone number is 855.741.3600. The email address is ADRC@co.rock.wi.us.

Cabin Trusts and Liability Issues

Many clients have contacted me regarding the establishment of a trust to hold a family-owned lake home, hunting land, or other piece of treasured real property tied to the family. A question that often comes up in my initial discussions with clients is whether a trust or limited liability company (LLC) should be used as the vehicle for this purpose. Clients know that simply deeding the cabin to their children is not always a viable option. The clients need to create structure and procedure for the management of the property.

There are many articles written on websites related to the advantages and disadvantages and comparisons between using a trust or LLC to hold and manage family property on a long-term basis. When a trust is used, the family members, who are in line to inherit the cabin, are long-term beneficiaries of the trust. If drafted properly, the generations beneath the initial beneficiaries are future beneficiaries of the trust. The beneficiaries of the trust do not own the cabin. A trust is a unique legal relationship between the trustee and the beneficiaries. Typically, one or more children are selected to serve as trustees of the cabin trust.  A trustee is also not the precise legal owner of the cabin.  Moreover, the beneficiaries do not have an ownership interest in the trust. They have a beneficial interest. With an appropriate spendthrift clause in a trust, the assets held by the trustees are protected from the creditors of the beneficiaries. For example, if a beneficiary is sued in the future or must file personal bankruptcy, the beneficial interest in the trust is protected from the creditors of the beneficiary. Further, if a beneficiary divorces, the beneficiary's beneficial interest in the trust is not an asset that is divisible in a divorce proceeding.

The management and usage of the cabin is controlled by language in the trust.  This language may be amended in the future to accommodate for unforeseen contingencies that may come up years or decades after the original owner or owners of the cabin have died.

A cabin trust is typically irrevocable upon being funded with the cabin (i.e., the cabin is deeded to the trust). Funding usually occurs upon the death of the parent, but could occur earlier depending upon the circumstances. Many confuse the ability to revoke a trust with the ability to amend a trust. If appropriate language is used in a trust document, an irrevocable trust may be amended, but the trustees and beneficiaries may not revoke or terminate the trust other than pursuant to the terms of the trust or applicable state law.  However, depending upon how the irrevocable trust is written, the trustees and/or beneficiaries may amend the trust.  For example, the trust may provide that a majority or super majority of beneficiaries have the right to amend the trust. I have read many other articles related to LLC or trust usage for cabins, and the writers often speak of irrevocability in the context of amendability. These legal concepts are not the same. Irrevocable trusts often may be amended. In addition, Wisconsin trust law permits trustees and beneficiaries to modify trusts in many circumstances without court involvement (e.g., Nonjudicial Settlement Agreements). The assets of a trust may also be decanted into a completely new trust instrument with brand new language.

When an LLC is used to own the cabin, the LLC owns the cabin.  In addition, the family members, who are in line to inherit the cabin, are members of the LLC.  An LLC has members, which is a concept similar to shareholders of a corporation.  If the LLC structure is used to own the cabin, then each member (e.g.. typically a child of the prior cabin owner), owns a percentage interest in the LLC. The membership interest is the child's asset. The worst possible situation in the LLC context is an aggressive creditor coming after a member of the LLC and obtaining an assignee's interest in the LLC. This essentially means that the creditor becomes an owner of the beneficiary's membership interest. If I am this persons brother, I do not want to have a creditor involved with the family cabin. This could happen in a lawsuit or bankruptcy proceeding. In a perfect world with children or grandchildren, who never have creditor issues, the LLC form would be very useful; but the creditor risk should cause a client to ponder the negative aspects of this situation. Also, if a member divorces, the member's ownership interest in the LLC is an asset of the marital couple. While the law generally provides that inherited property is not subject to a divorce division, the membership interest still must be disclosed on financial disclosures and statements used in divorce proceedings. This is much different than holding a beneficial interest in an irrevocable trust.

The management and usage of the cabin is governed by an operating agreement for the LLC. The operating agreement is basically a partnership agreement between all persons owning an interest in the LLC. This operating agreement is flexible, but as time continues and the ownership interest of one member transfers to the member's children due to death, the ability to obtain the percentage of ownership interest required to amend the operating agreement may prove difficult.  This is different from a trust. A trust can includes two means of amendment.  The trust may be amended by the trustees and also amended by the beneficiaries.  If a trust has three trustees and 20 beneficiaries, the trustees do not always need to obtain the written consent from a majority of beneficiaries to amend the trust to address a needed change, a majority of trustees could make the necessary amendment. This provides an additional functionality for the trust compared to the LLC.

Whether a trust or LLC is used, it is best to also fund the trust or LLC with sufficient cash to maintain the cabin for many years to come, which would include money for property taxes, insurance, and repairs. If the LLC or trust is not funded with ample cash, there will be immediate conflict about who is responsible for paying these expenses. While the trust and operating agreement can both address payment of expenses, the ease of available cash is far superior tool.

Rating of Attorney Michael W. Vogel

Earlier this week, Attorney Michael Vogel was rated by Martindale-Hubbell® and was awarded an AV rating.  The AV rating signifies preeminence in the practice of law.  It is the highest rating provided by Martindale-Hubbell®, which has provided data about lawyers in the United States since 1868.  This rating is the result of a confidential peer review by lawyers and judges who have worked with Attorney Vogel or know his work personally. Attorney Vogel joins a select group of lawyers, who have received this designation.

As part of this review process, one of the lawyers participating in the confidential review process wrote this about Attorney Michael Vogel:  "Michael should receive your highest rating. I have retained Michael as my personal lawyer. I routinely refer clients to Michael." Another lawyer simply wrote:  "I would rate Michael at your highest rating."

According to Martindale-Hubbell®, the AV rating represents the following:

Legal Ability ratings are based on performance in five key areas, rated on a scale of 1 to 5 (with 1 being the lowest and 5 being the highest). These areas are:

• Legal Knowledge - Lawyer's familiarity with the laws governing his/her specific area of practice(s)
• Analytical Capabilities - Lawyer's creativity in analyzing legal issues and applying technical knowledge
• Judgment - Lawyer's demonstration of the salient factors that drive the outcome of a given case or issue.
• Communication Ability - Lawyer's capability to communicate persuasively and credibly
• Legal Experience - Lawyer's degree of experience in his/her specific area of practice(s)

The numeric ratings range may coincide with the appropriate Certification Mark:

• AV Preeminent® (4.5-5.0) - AV Preeminent® is a significant rating accomplishment - a testament to the fact that a lawyer's peers rank him or her at the highest level of professional excellence.

Life Estates and Medicaid Planning - Wisconsin Estate Recovery Program

For years, lawyers have used a particular planning technique to protect a client's assets from potential long-term care costs.  The idea used by attorneys is to have the parent change the ownership structure for their real estate.  Generally, a person owns their real estate in what is referred to as fee simple absolute.  This means that parent(s) own the entire parcel of real estate, and no one else has an ownership interest in the property.  In the elder law arena, lawyers would have the parents retain a life estate interest in the property and deed a remainder interest to their children, or, if the lawyer was more sophisticated, he or she would use an irrevocable trust to own the remainder interest.

If this life estate interest was created, it would begin the five-year look-back period related to Medical Assistance planning also referred to as Medicaid planning.  Assuming the parent(s) did not need long-term care services within five years of doing this transfer, then the property would no longer be considered an available asset and would not have to used to pay for the parent's long-term care cost.  In addition, at death, the parent's life estate interest would vanish, and the children or the irrevocable trust would own 100% of the real estate and would be able to move forward with the sale of the real estate and the division of the proceeds from the sale.  Essentially, the state or federal government would have no means of making a claim against the parent's estate, because the life estate interest vanishes as of the parent's date of death. 

This planning has been considerably disrupted by recent law changes made in the State of Wisconsin.  For some time, many states have held that the retention of the life estate interest is still a countable asset or is an asset that can be covered against after the parent's date of death.  Wisconsin has now become a state that will impose an Estate Recovery Claim against the value of the life estate after the parent's date of death.  This means that the entire value of the property will not be protected from a potential Medicaid reimbursement claim in the event the parent does qualify for Medicaid. 

For example, assume a parent creates this life estate/remainder interest ownership structure for their family farm.  During the parent's life time, the parent enjoys the use and income from the farm.  Eventually, the parent's health fails, and the parent needs to enter a nursing home.  Five years has expired since the parent transferred the remainder interest to the children or the irrevocable trust.  The parent qualifies for Medicaid, and Medicaid begins paying for the parent's cost of care at a local nursing home.  The parent ends up living in the nursing home for fourteen months.  Medicaid pays a total of $70,000.00 toward the cost of the parent's care.  During this time, the parent never had to pay for the cost of the nursing home.  However, after the parent's death, the State of Wisconsin has an Estate Recovery Program that will assert a claim against the value of the life estate interest in the family farm.  The value of the life estate interest is determined by an actuarial table contained in the Medicaid eligibility handbook that is published by the State of Wisconsin.  As the parent gets older, the life estate value decreases.  Unfortunately, the life estate always has some value as of the parent's death. 

The good news is that for all life estates created prior to August 1, 2014, the old rules will apply.  This means that the State of Wisconsin cannot make a claim against the life estate value after the parent's death.  On the contrary, if the life estate interest is created after July 31, 2014, the State of Wisconsin will be able to make a recovery claim against the value of the life estate interest in the real estate.  This is a significant drawback to this type of planning.  While the value of the remainder interest will potentially be protected, assuming the five-year timeline has expired, the value of the life estate interest will not be fully protected.  The State of Wisconsin will be able to make a claim against the value after the parent's death.  This is important information to understand, because there are countless properties out there with life estate/remainder interest ownership structures. 

The last few weeks have been interesting in my practice, because I have been assisting several people with the creation of life estates to take advantage of this planning that will soon disappear.  If you find that lawyers are still using this life estate/remainder interest planning technique after July 31, 2014, you will want to make certain that your clients understand that the full value of the property will not be protected through this type of planning.  I am the first to admit that there are reasons for still doing the planning, but the tremendous benefit of protecting the entire value of the property after the expiration of the five-year look-back period is now not one of them.   

Social Security Benefits

Repeatedly, I am asked by my clients for information related to Social Security benefits.  In fact, just yesterday, it happened again.  The benefits available through the Social Security Administration for retired persons are complex.  There are a plethora of options available for those who have reached retirement age.  Questions arise as to whether a person should opt-in and take early benefits at age 62, should they wait until full retirement age, should they wait even beyond full retirement age, should one spouse apply and the other spouse not apply. 

In the Social Security arena, couples especially have many options available to them as to when and how they claim benefits.  Recently, a few different web sites have been created by financial institutions or academic institutions in an effort to assist people with making decisions related to social security benefits.  You may find it helpful to visit any of the following websites: maximizemysocialsecurity.com; socialsecuritysolutions.com; or socialsecuritychoices.com.  Also, AARP and T. Rowe Price have created online calculators for use in determining whether it is logical to claim benefits early or to postpone the receipt of benefits.  Some of these websites charge a fee for the service; however, some are free. 

While it may seem that simply contacting the local Social Security office and telling them that you want to claim benefits is a simple procedure, a retired person will want to make certain that they are maximizing the benefit they receive from Social Security.  My advice is to do your research before you contact the Social Security Administration to arrange for the payment of your benefits.  You may be leaving significant money on the table for you or your spouse by not making the correct choice.  

IRS Formally Recognizes Same-Sex Marriage

Today, in a historic joint ruling, the U.S. Treasury and Internal Revenue Service (IRS) recognized legally-married, same-sex couples for all federal tax purposes.  Revenue Ruling 2013-17 was issued, and the ruling provides the following language:

"For Federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex."

Further, the ruling held as follows:

"For Federal tax purposes, the Service adopts a general rule recognizing a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages."

For Wisconsin, the ruling does not apply to couples registered as domestic partners, unless the couple was legally married in a jurisdiction that recognized same-sex marriage.

This ruling follows in the footsteps of the recent U.S. Supreme Court decisions related to the Defense of Marriage Act (DOMA).  The decisions related to DOMA mandate that the IRS recognize same-sex marriage for federal tax purposes.  Revenue Ruling 2013-17 formally implements this drastic change.

The change will affect countless tax provisions. To begin, the ruling means that same-sex couples must file annual income tax returns as “married filing jointly” or “married filing separately.”

Wisconsin's New Estate Recovery Law

Recently, Governor Scott Walker signed the 2013-2015 budget bill into law.  The new law is referred to as 2013 Wis. Act 20.  The full text of the budget bill is available at this link:  https://docs.legis.wisconsin.gov/2013/related/acts/20.pdf

This budget bill contains significant changes to Wisconsin’s ability to recover funds from the assets of deceased persons whom received medical assistance, a/k/a Medicaid.  The changes made to portions of Chapter 49 of the Wisconsin Statutes are very impactful and will affect countless Wisconsin families.  Unless modifications are made, the new law is effective on October 1, 2013.

For many years, Wisconsin has maintained a Medical Assistance Lien and Estate Recovery law.  The law is codified in Chapter 49 of the Wisconsin Statutes.  This law permitted the State of Wisconsin to recover assets from a person’s estate, if the person received medical assistance during lifetime.  Most commonly, the recovery relates to the decedent’s receipt of Medicaid benefits, but other programs are also involved.  Federal law requires that Wisconsin have this type of law on its books.  Historically, Wisconsin used two methods to recover Medical Assistance cost:  (1) placing liens against a home owned by the recipient of the Medical Assistance, and (2) filing claims against a deceased recipient’s estate.  The claim against a deceased recipient’s estate was generally handled through a probate court proceeding.  A tremendous summary of the old recovery law can be found at this link:  http://cwagwisconsin.org/wp-content/uploads/2011/03/Lien-Law-Estate-Recovery-Program-Brochure.pdf

The new law greatly enhances the ability of Wisconsin to recover funds from a recipient or from the surviving spouse of a recipient of Medical Assistance.  In addition, the new law gives Wisconsin more power to file liens against real estate, in which the recipient of Medical Assistance had an ownership interest of any kind, including a life estate interest.  See Wis. Stat. § 49.849.  Wisconsin’s Estate Recovery rights were primarily contained in section 49.496 of the Wisconsin Statutes.  Among many others, 2013 Wis. Act 20 added sections 49.4962, 49.848, and 49.849 to the Wisconsin Statutes.  Each of these new sections provides broader powers to the Department of Health and Family Services to recover monies from recipients of Medical Assistance or spouses of recipients of Medical Assistance.  The broadness of this change can only be understood by looking at an example.

Example:  Many Wisconsin parents have deeded a remainder interest in their real estate to their children or perhaps to an irrevocable trust for the benefit of their children.  When this deed is made, the parent retains a life estate interest in the real estate.  When the Quit Claim Deed is signed by the parent, the five-year look-back period under Medicaid law is triggered.  This means that if the parent does not have to apply for Medicaid to pay for nursing home costs during the subsequent five years, the real estate becomes a non-countable asset under Medicaid rules, i.e., the real estate does not have to be used to pay for the parent’s nursing home costs, and the parent will otherwise qualify for Medicaid.  Also, upon the parent’s death, the state could not make a claim against the real estate to recovery sums expended on the parent’s behalf during the parent’s lifetime.  This type of planning has literally been done by thousands of families in Wisconsin.  Unless modified by the legislature, the new law turns this planning on its head.

Under the new law, the State of Wisconsin has the right to file a claim or lien against any real estate owned by the recipient of Medical Assistance.  This is a huge change.  Previously, after the five-year look-back period expired, the real estate was off the table.  Now, the State of Wisconsin may still file a lien against the recipient’s life estate interest, any partial interest, real estate owned by a living trust created by the recipient, or any other “current ownership interest in real property.”  Wis. Stat. § 49.848(3)(a)(1)(a).  The phrase “living trust” is not defined in the new statutory sections.  Basically, the prior life estate planning, which was used by countless lawyers in Wisconsin, is no longer completely effective under 2013 Wis. Act 20.  I write “completely effective,” because there still are some advantages, but clients are interested in securing complete protection for these real estate parcels.  Under the new law, a life estate/remainder interest split will only secure a partial protection after the five-year look-back period has expired.  If five years has expired, then the value of the remainder interest would be protected and not subject to the lien, but the value of the life estate interest remains subject to the Wisconsin’s recovery rights.  The value of the life estate interest at death is determined under an actuarial table published as part of Wisconsin’s Medicaid Eligibility Handbook.  See Wis. Stat. §§ 49.848((5)(bm) and 49.849(5c)(c).  The new law gives the state power to recover from any “Property of a decedent.”  “ ‘Property of a Decedent’ means all real and personal property to which the recipient [of medical assistance] held any legal title or in which the recipient had any legal interest immediately before death, to the extent of that title or interest, including assets transferred to a survivor, heir, or assignee through joint tenancy, tenancy in common, survivorship, life estate, living trust, or any other arrangement.”  Wis. Stat. § 49.849(1)(d)(1).

Further, section 49.4962 of the Wisconsin Statutes gives Wisconsin the power to void a real estate conveyance that was “made by a grantor who was receiving or who received medical assistance . . . during the time that the grantor was eligible for medical assistance.”

It cannot be emphasized too lightly how significant this law change is to elder law planning; Medicaid planning; post-death issues that families must address, if a deceased person received Medical Assistance; and many other issues.  To my knowledge, no articles have been written interpreting this new statutory language.  Furthermore, the Department of Health and Family Services must digest the statutory language and modify the Medicaid Eligibility Handbook accordingly.  Although this law is effective as of October 1, 2013, it will be several months before we have completely clear guidance on how this law will be applied to the public.

Watch Your Beneficiary Designations

Last month, the U.S. Supreme Court ruled in Hillman v. Maretta that federal law trumps state law related to beneficiary designations under a federal life insurance policy.  Often, federal employees receive a life insurance benefit associated with their employment.  The Hillman case presented these facts to the Supreme Court.

The Hillman case concerned a federal employee from Virginia.  He had an employer-sponsored life insurance policy that named his wife as his primary beneficiary.  That was perfectly fine until they divorced.  After the divorce, he never changed the beneficiary designation.  Subsequently, he died.  Virginia law, like Wisconsin law, has a statutory provision that legally removes a divorced spouse from being treated as a beneficiary of a life insurance policy or retirement account.  Oddly, Virginia state law conflicted with federal law.

Federal law regularly preempts or trumps state law.  Federal law is more powerful, and if there is a conflict between federal law and state law; typically, federal law wins.  In the Hillman case, the Supreme Court held that the beneficiary designation remained effective.  The federal law reads that the policy proceeds are paid to the designated beneficiary.  It makes no difference that the employee was divorced from the primary beneficiary.

As a result of the court's decision, the ex-spouse inherited a death benefit of $124,558.03.  The Hillman decision reminds planners that continual vigilance related to beneficiary designations is critical.  Facts change; clients divorce; and clients have more children.  When these life events occur, the beneficiary designations need to be reviewed.

This Supreme Court decision should only apply to life insurance policies and retirement accounts established under federal law; however, some commentators believe that the federal Employee Retirement Income Security Act (ERISA) could cause the court's decision to have a broader impact. If this is true, then an argument could be made that the Supreme Court's decision applies to any retirement plan governed by ERISA, which would encompass countless retirement plans across the nation.

The bottom line is to remember to change beneficiary designations.  This same principal also applies to Payable on Death Designations and Transfer on Death Designations.  Be vigilant, or you may have a deceased client's family pointing a finger at you, because you didn't remind the deceased client to change his or her beneficiary designation after that nasty divorce.

No Bankruptcy Law Protection for Inherited IRAs

Last week, in Rameker v. Clark, the 7th Circuit Court of Appeals ruled that assets held in an inherited IRA are not exempt assets in a bankruptcy court proceeding. This is important for parents and beneficiaries of their IRAs to understand. This ruling clarifies the law on this point, at least for Wisconsin and Illinois, which are states subject to decisions from the 7th Circuit.

This ruling is unique and important. First, if money is in a participant's IRA, the money is an exempt asset in a bankruptcy proceeding pursuant to sections 522(b)(3)(C) and (d)(12) of the bankruptcy code. This exemption is critically important. If a person files for bankruptcy protection and has an IRA, the balance of the IRA is exempt from creditor attack and does not need to be used to pay creditors. The recent court ruling specifically addresses whether the creditor protection extends to an inherited IRA.

For example, parent names child 1 and child 2 as equal primary beneficiaries of his $500,000 IRA. Parent dies. Child 1 and child 2 each inherit an IRA worth $250,000. Child 1 subsequently files a bankruptcy petition. The precise issue before the court was whether the bankruptcy trustee could force child 1 to use the IRA to pay creditors. The 7th Circuit ruled that the bankruptcy trustee could take the assets of the IRA to pay creditors.

The case in question originated in the Western District of Wisconsin. Heidi Heffron-Clark inherited a $300,000 IRA from her mother, Ruth Heffron. The court reasoned that once the IRA was inherited by Heidi, the funds in the IRA were no longer retirement funds. While Heidi's mother was alive, the IRA represented retirement funds, "but when she died they became no one's retirement funds." To the court, the funds in the IRA "represented an opportunity for current consumption, not a fund of retirement savings."

The Clark decision will have a ripple effect. There are likely many pending bankruptcy cases in the 7th Circuit that will be impacted. In addition, the opinion of the 7th Circuit conflicts with opinions from the 8th and 5th Circuits. Consequently, the U.S. Supreme Court will likely eventually grant certiorari to a case to decide this issue on a national basis.

From an estate planning perspective, if a child has creditor issues, and that child is the likely beneficiary of a retirement account, it may be logical for the parent to designate a trust as the beneficiary of the retirement account.  With a properly drafted trust as the beneficiary, the IRA would be exempt from creditor attack.  Heidi Heffron-Clark may be wishing her mother would have considered this type of planning before her death.  Instead, she is now faced with using the $300,000 in the inherited IRA to pay her and her husband's creditors or appealing her case to the U.S. Supreme Court.

President Obama's 2014 Proposed Budget

As the financial community knows, the current federal estate tax exclusion amount is $5.25 million per deceased person for tax year 2013.  This amount is also indexed for inflation and will likely increase each year, pending legislative change.

Last week, President Obama issued his proposed budget for 2014 ("Green Book").  The President's budget contains four significant tax law changes.  One of those changes is a proposal to return the federal estate tax law to the law on the books in 2009.  This would mean a reduction in the federal estate tax exclusion to $3.5 million.

While the passage of the budget plan is likely slim, considering the republican-controlled House of Representatives, the proposal still amazes me.  Just when I thought the estate and gift tax environment was relatively stable and permanently fixed, politicians continue to propose measures to defeat the "permanency."  The concept of wealth redistribution will never die.  People will keep seeking a false utopia through the concept of wealth redistribution.

The Green Book also reminds me that no tax law is permanently established.

Preserving Family Wealth

Earlier this month, the Wall Street Journal published its first edition of a new magazine called: WSJ.Money. The magazine is a helpful resource that addresses wealth planning for families. I read some of the articles with much interest, because my practice is heavily involved in advising families regarding the transfer of wealth and the retention of wealth from one generation to the next. The new magazine included a short article regarding perpetual trusts or dynasty trusts, which I have drafted for numerous families to help preserve and control wealth after death. While the idea of a trust lasting into perpetuity is a bit difficult to grasp, the same format can be used for long-term trusts, and if the trust is drafted appropriately, it can provide each generation with flexible options regarding possible termination of the trust.

What was most interesting to me was the magazine’s focus on the inability of many wealthy families to preserve wealth from one generation to the next. Recently, I have seen two figures regarding the total wealth of American families. One figure estimates the total wealth at $64.8 trillion. Another source represented the total wealth at just over $63 trillion. Unfortunately, when this wealth transfers down from one generation to the next, the younger generation has a very difficult time preserving the wealth. Often, the wealth is wasted on lavish living and child-like pursuits or hobbies. It is my goal as a planner to help families preserve the wealth and not have it slip through the fingers of their descendants.

It is estimated that $7.6 trillion will be inherited by the Baby Boomers during their lifetimes. This is a significant amount of wealth, and many Baby Boomers will inherit wealth that is simply added to existing wealth which they generated during their lifetimes. It is critical that appropriate estate planning and financial planning be used to preserve this wealth so that it is not wasted through prodigality. The greatest means of preserving and controlling wealth is done through family instruction and the use of effectively drafted trusts. Families must have open dialogue between the older generations and the younger generations. If there are relationship problems or lack of communication, the added wealth will only increase the problems. Families need to prepare their descendants for the receipt of inheritance. Americans need to take the time now to adequately plan and inform their descendants of the transfer of this wealth. Time is of the essence, and your descendants’ livelihood may depend upon it. Leave a legacy—not a mess.

Long-Term Care Changes

The long-term care industry is becoming increasingly disrupted. Last weekend in the Wall Street Journal, an article appeared addressing the affordability of long-term care. As many have learned, the cost of long-term care insurance has skyrocketed, and many insurance companies that previously offered the product have exited from the market place.

Recently, Genworth Financial, which is the largest seller of long-term care insurance in the United States, declared that it would stop writing new individual long-term care policies in the State of California. The company’s withdrawal from the State of California may portend Genworth’s future action in other states. It is becoming increasingly difficult for families to address the cost of skilled-nursing care or other long-term care facilities. In Wisconsin, cost of a skilled-nursing home can exceed $300.00 per day. In fact, at one of the nursing homes in Janesville, Wisconsin, the cost does exceed $300.00 per day, depending upon the needs of the patient. In addition, the Medicaid system in the United States is becoming excessively drawn upon to cover the long-term care costs of millions of aging Americans. While the idea of government support is useful, the extent of the support is beginning to drain the federal budget. As the Baby Boomers increase in age, we will only see an even larger scope of Medicaid applicants.

It is never too early to consider how you will address the cost of long-term care. While my firm does not sell the insurance product, I can provide you information on long-term care insurance alternatives and options. The State of Wisconsin has also published a comprehensive report, which can be found at oci.wi.gov/pub_list/pi-047.pdf. The report provides detailed information on long-term care insurance policies and other aspects of the long-term care industry.

Permanent Tax Law. Are you serious?

Obviously, President Obama still needs to sign the fiscal cliff bill that passed the Senate and House, but assuming he does so, our country’s tax law just became much more predictable. Sometimes, even legislators surprise me. As everyone knows, congress passed legislation to permanently extend the majority of provisions originally enacted under the Bush Administration by virtue of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Amazingly, these are “permanent” extensions. In 2010, congress extended the tax provisions for two years by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Now, congress has nearly done the unthinkable. We now have fixed tax law. We can plan. We can forecast. We can sleep.

As the fiscal cliff drew closer, estate planning attorneys from around the country were scurrying with their clients to move money out of clients’ estates. The fear of being subject to a $1 million estate tax exemption was unthinkable to many, especially older clients with assets between $1 million and $5 million. I tend to believe that more money was transferred from one generation to the next in 2012 than in any other year in history. In fact, if we could see numbers, I suspect the month of December may have surpassed any other single month in history.

Fortunately, the new legislation provides us with permanent gift tax, estate tax, and generation-skipping transfer tax law. This is a tremendous relief from a planning perspective. The new law repeals the sunset provisions of Title IX of EGTRRA and section 304 of the Job Creation Act of 2010. The federal estate tax applicable exclusion amount and generation-skipping transfer tax exemption will remain $5.12 million per person in 2013. In addition, the current index for inflation will remain in place moving forward. Due to the inflationary index, the exemption will grow each year. It is possible that the 2013 amount of $5.12 may be increased slightly, but I have not seen any figures yet. The only change relates to the actual estate tax rate. In 2012, if a decedent’s estate exceeded $5.12 million, his or her estate was subject to tax at 35% on all amounts above $5.12 million. Beginning in 2013, the tax rate will be 40%. This is the result of a compromise between Republicans and Democrats. The Republicans retained the higher exemption amounts, but the Democrats gained a higher tax rate.

The lifetime gift tax exemption of $5.12 million will remain in place subject to the same inflationary index. This is also pleasant news, because the estate tax, gift tax, and generation-skipping transfer tax exemptions will remain unified. This unification creates simpler planning. For 2013, the federal gift tax annual exclusion has been increased to $14,000 per donee. Last year, the exclusion amount was $13,000, but the inflationary index made the amount increase to $14,000 for 2013.

Serving as a Personal Representative or Executor

Recently, I was interviewed by an author regarding the obligations and responsibilities imposed upon a personal representative, administrator, or executor of an estate.  The article was published by the Credit Union National Association, Inc.  You may read the article by clicking on this link:  http://hffo.cuna.org/download/3161_turningpoint.pdf

New Tax Proposed for Inherited IRAs

Senator Max Baucus, who is the chairman of the Senate Finance Committee, has proposed a new tax law provision that would require all persons inheriting assets held in an Individual Retirement Account, such as a 401(k) or a traditional IRA, to remove all assets from the accounts within five years and pay the income tax on the accounts. Currently, the Internal Revenue Code permits beneficiaries to stretch out the distribution of the retirement account assets over the life expectancy of the designated beneficiary. For example, a ten-year-old beneficiary could stretch out the required minimum distributions over a period of seventy-three years.

The logic of Senator Baucus is that Individual Retirement Accounts are designed for retirement and not inheritance. Senator Baucus’ proposal was attached to the Highway Investment, Job Creation and Economic Growth Act of 2012. However, it was removed in Committee. Even though the proposal was removed from the Act, Senator Baucus has indicated strongly that he does want to attach it to a future bill.

The impact of this legislation would be significant on estate planning for several families. In addition, the tax impact on beneficiaries inheriting IRAs would be significant. The proposed rule would not apply to surviving spouses and other specific classes of beneficiaries, including, children with special needs.

While recently, this legislative proposal appears dead for the time being, the idea could easily come up again as Congress seeks diligently for revenue increases to address the daunting federal deficit.

Long-Term Industry Continues to Change

The Long-Term Care Insurance market has experienced numerous changes over the last couple years. A few major companies have announced that they will discontinue selling long-term care policies. Among this group of insurers are Prudential Financial, Unum Group and Met Life. According to information that I follow, 10 out of the top 20 insurance companies have exited the long-term care market in the last five years.

Over the past several months, I have followed the changes to the long-term care industry. During this time, I kept thinking about John Hancock and wondering what this company would do to handle the rising out-flow of long-term care benefits. For the companies that have remained in the long-term care business, rate increases are becoming the norm and this now includes John Hancock. According to Roy Anderson, John Hancock’s Vice President of Corporate Communications, “The long-term care industry is still young, and only now is seeing actual usage data which indicate the need for rate increases.” Corresponding with this announcement, the Chicago Sun Times recently published a story about a couple in Illinois facing a 90% increase to their long-term care premium. Click on link to view full article: http://www.suntimes.com/business/savage/11378009-452/how-is-a-90-long-term-care-rate-hike-ok.html. The Star-Tribune in Minnesota recently reported a similar story.  Click on the following link: http://www.startribune.com/business/yourmoney/143267316.html?source=error.

Hopefully, this information helps you assist your clients with long-term care decisions and gives you insight into this volatile piece of the insurance market. I question whether any company can really make money in the long-term care market. With costs rising significantly, the option of long-term care insurance may become too difficult for people to stomach.

Steve Jobs Died

As nearly the entire world knows by now, Steve Jobs, the founder of Apple died on Wednesday evening. He and Steve Wozniak were the founders of Apple. Essentially, rising from the ashes as an adopted child, Steve Jobs was responsible for establishing one of, if not the most, iconic brands ever. After hearing of Steve Job’s death, my mind shifts to estate planning.

His worth is estimated to be $7 billion. Quite likely, a vast majority of his wealth is a heavy concentration of Apple common stock. This morning I contemplated the following:

1. His estate will receive a step-up in basis under section 1014 of the Internal Revenue Code based upon the Hi/Low average of the trading price for Apple common stock on October 5, 2011. This is a tremendous benefit because Apple stock is very near an all-time high. The stock closed at $378.25. His new basis per share is $378.68. I also thought about the fact that he died in the evening. Perhaps, if he had died while the market was still open, the stock may have dropped in price causing his estate to obtain a lesser step-up in cost basis.

2. I then considered Steve Job’s family. He left a wife and four children. What type of estate plan did he create, if any? If he did extensive planning, who was his attorney. How does a multi-billionaire go about choosing an estate planning attorney? What types of trusts did he create? Does he have a family foundation? Will monies be contributed to the family foundation upon Steve Job’s death, or did he simply leave all assets to his wife in various trusts? If he did leave assets to his wife, is a motivation his partial reliance upon Congress ultimately eliminating the estate tax, which would result in his children inheriting his wealth transfer tax free?

3. Then I thought about the preparation of his estate tax return. Some professional tax attorney or CPA has the utmost privilege of preparing his estate tax return. Who is it? How is this person selected? Also, has he been aggressively gifting through use of GRATs and other freeze techniques since learning of his cancer diagnosis?

The above are just a few of my thoughts. Like any other family facing the death of a loved one, the family of Steve Jobs must now cope with a variety of financial, legal and tax matters. Hopefully, Steve Jobs was amply prepared.

Proposed Temporary Estate Tax Rate of 35% and $5 Million Exemption

In 2009, the federal estate tax reached an exemption of $3.5 million. During 2010, the estate tax disappeared for one year. Now that we are on the eve of 2011, Congress is trying to address numerous tax increases that will take effect on January 1, 2011. One tax increase on the books to take effect on January 1, 2011 is a return to a $1 million estate tax exemption. Yesterday, Republican members of Congress and President Obama struck a deal to temporarily reinstate the federal estate tax exemption at $5 million per person, beginning with deaths that occur after December 31, 2010. This means that the estate tax will not be imposed upon a person’s estate unless the person’s taxable assets exceed $5 million. Under this compromise, the proposed estate tax exemption would be law for only two years. Again, this is only a temporary adjustment. Current law on the books would return the estate tax exemption to $1 million and estate tax rate to a maximum of 55% for deaths in 2013 and after. The proposal would also include portability of exemption between spouses so that a married couple could transfer $10 million without complicated bypass trust planning.

Unfortunately, this is a deal between Republican members of Congress and President Obama. Now President Obama has the ill-fated task of convincing Democrat members of the House and Senate to approve this compromise. It has been reported by the press that many Democrats do not support an increase in the estate tax exemption to $5 million; nor do they support an estate tax rate of 35%. In addition, President Obama said, “Republicans have asked for more generous treatment of the estate tax than I think is wise or warranted.” He also stated that this is “generous treatment” and is “temporary.”

Although not reported yet, we can assume the federal lifetime gift tax exemption will remain at $1 million and the generation skipping transfer tax (“GSTT”) exemption will also increase to $5 million, but details related to gift tax and GSTT tax have not been circulated.

Certainly, Congress will be working overtime as the Christmas break approaches to try and pass the proposed legislation, but there has already been word of lack of support in the U.S. Senate. This proposal is not law; but, we could see passage of this proposal before Christmas. Of course, we all know that strange things can happen. Everyone thought Congress would act last year at this time to avoid a year without any estate tax, and Congress failed to pass legislation. At that time, no one thought we would see 2010 be a year without any estate tax. Are we in for a repeat or will a lame duck Congress and the President actually pass this proposal? Stay tuned.

Investment Firms Required to Provide Cost Basis Information

Beginning with securities bought after January 1, 2011, investment firms will be required by law to calculate and supply cost basis information to investors. The cost basis information will be provided to the seller of the security on IRS Form 1099-B.

To date, some brokerage houses have taken the initiative to provide cost basis information to clients. For these investment firms, the new law will not be a hurdle. However, for those firms that have not historically supplied cost basis information, the new law will be an added burden to the already heavily regulated securities industry.

For financial advisors, the required cost basis information will reduce the number of calls received by tax preparers and clients seeking cost basis information. Unfortunately, the new law will still not eliminate the problems with cost basis on purchases made before January 1, 2011. In addition, I question how investment firms will implement changes to cost basis based upon the step-up in cost basis under section 1014 of the Internal Revenue Code. It has been my experience that investment firms and tax preparers are not consistently altering cost basis figures based upon date of death value step-up under the code. In this instance, will investment firms be required to reconfigure cost basis after a client's death?

Wisconsin Cures Formula Clause Woes

A few days ago, Governor Doyle of Wisconsin signed 2009 Wisconsin Act 341. This new law creates section 854.30 of the Wisconsin Statutes. Click here to read the act: http://www.legis.state.wi.us/2009/data/acts/09Act341.pdf.

Due to the current one-year repeal of the federal estate tax, if a person dies in 2010, the decedent's will or trust may not make sense. Many provisions in a person's will or revocable trust are interpreted by reference to the Internal Revenue Code, specifically, the estate tax, generation-skipping transfer tax and gift tax provisions. For couple's with larger estates, many times, the distribution of assets upon the first spouse's death is determined by the application of a formula clause. Typically, the formula clause refers to existing federal estate tax exemption amounts and Internal Revenue Code provisions. Well, for 2010, those provisions of tax law do not exist due to the estate tax repeal for 2010. Consequently, the estate plan may not work as designed.

New section 854.30 is Wisconsin's version of a cure for this ailment. Basically, the new section provides that if a person dies in 2010, and the person's will or trust includes a formula clause, then any reference to the estate tax laws in the decedent's will or trust is a reference to the laws in effect on December 31, 2009. Also, if certain factual circumstances apply, the federal applicable exclusion amount under I.R.C. § 2010(c) will be unlimited rather than equal to the 2009 figure of $3.5 million.

Wisconsin is not the first state to pass this type of legislation. Several other states have passed similar legislation in recent months to save attorneys from having to petition the court for reformation assistance on this issue. Wisconsin's new law also provides that a personal representative or trustee may also petition the court for a different construction and interpretation in the event that is logical under an estate's particular facts. Even with this new legislation, it is critical to obtain skilled legal advice in the event a client dies with a larger estate during 2010.