Checklist for Selecting a Nursing Home

You are looking for an excellent nursing home placement for yourself or your loved one. These 10 points will help you determine which placement will provide the best care and the most dignity.

1. Ask About Care Plans

Care plans outline the care provided to the resident and should be updated at least every three months and immediately on any change in a resident’s condition. Care plans should be specific and individualized, listing what staff will be involved and what each staff member will do, and should include the resident, family members, and staff. Care conferences to discuss the medical care, activities, and therapies the resident receives should be held regularly and should involve the staff, the resident, and the family. Ask these questions of the residents and their families too. Find out how nonemergency medical concerns are handled. Ideally, a medical director will respond to questions and concerns within 24 hours.

2. Check Last Three Inspections

Nursing homes must be inspected at least every 15 months. Inspection reports are available from Medicare at medicare.gov.  Read the most recent inspections. If there are deficiencies, ask about those deficiencies and find out what is being done to correct the problems. Pay attention to the size and scope of the deficiencies; some deficiencies are more serious than others. If the facility has had any major penalties, find out why the penalties were imposed and if the underlying problems have been resolved. The following penalties should raise a red flag:  government sanctions, decertification from Medicare or Medicaid, partial or total bans on admissions, state appointed monitors, or temporary managers fines.

3. Ensure Minimal Use of Restraints

Restraints are anything used to keep a resident from moving freely, including, but not limited to, cloth ties, bed rails, chair trays, and hand mitts. Restraints can contribute to agitation and depression, development of bed sores, increased likelihood of injury in case of a fall, broken bones, and strangulation. Safer alternatives include pillows to help a person sit straight, reclining chairs, chair alarms, bed alarms, lowered beds, and floor padding. Ask staff and residents or residents’ families about restraints. Look around.  Do you see evidence that restraints are commonly used?

4. Take a Tour

Tour the facility.  Pay attention to what you see, hear, and smell. Do not be limited to public areas, but ask to tour the residential areas too. Check out the food being served. Look at the activities chart. Pay attention to how the staff treats the residents. Try to tour on a weekday and on a weekend and look for any differences.

5. Talk to the Residents

Find out what the current residents or their families think about their care. Talk to them, their family members, and caregivers. Talk to the staff. Get a feel for what they think about their jobs and how they feel about the residents. Ask about coworkers and try to find out if staff turnover is a problem. Lower turnover could mean higher job satisfaction, which results in better care for the residents. Lower turnover also means that the residents can develop relationships with the staff and receive more consistent care.

6. Inquire About Staffing

Facilities are requires to post the number of licensed and unlicensed direct care staff for each shift. Check it out on weekdays and weekends. Homes with more licensed staff tend to provide better care. Do they use temporary agencies? Are staff members permanently assigned to residents?  The better the staff know the resident and the more comfortable they are, the better the care should be.

7. Check the Resident or Family Council

Resident and family councils, made up of residents and their families and friends, help protect against abuse and neglect, tell a facility when culture change is necessary, assist the activity director in increasing resident participation, and provide ongoing appreciation for staff. Resident and family councils benefit residents by providing education about residents’ rights and a means to express concerns and solve problems. They also provide orientation, support, and information for new residents and families.

8. Request Information About Changes in Source of Payment

Federal law prohibits Medicaid certified homes from seeking written promises to pay privately. Most nursing home applications still require financial information and many have written policies stating that someone is more likely to be admitted if that person has a certain level of assets, which ensures his or her ability to pay privately. State law requires that if a nursing home is certified for Medicare, it must be certified for Medicaid.  Medicare beds are, however, more profitable to the nursing home and the Michigan Department of Community Health (MDCH) does not actively enforce this law. In 2004, the MDCH issued a policy stating that any newly certified Medicaid beds (after August 1, 2004) must also be Medicaid certified. Dual certification benefits residents when their source of payment changes.

9. Find Out How Much Control the Residents Have

Find out how much choice the resident has in his or her daily schedule and the care received. For example, can the resident participate in social, recreational, religious, or cultural activities that are important to him or her? Can he or she decide when to participate? Does he or she get to choose what time to get up, go to sleep, or bathe? Can he or she get food and drinks at any time? What if he or she doesn’t like the food that is served? Is transportation provided to community activities? Does he or she get a separate television? Can he or she decorate the living space the way he or she wants?

10. Ask About Visitation

Ideally, the nursing home should be located conveniently for family and friends and should provide a welcoming atmosphere for visitors. Find out what the restrictions are for visiting. Visitors are beneficial to the resident in that they can alert staff to changes in the resident’s behavior or mood, raise concerns with staff members, and ensure that a resident is receiving appropriate and adequate care. Not only do visitors brighten the resident’s day, but residents who have lots of visitors generally receive better care.

Facebook Announces New Policy for Estate Planning

Facebook announced Thursday that it will allow members to designate a friend or family member to be a "Legacy Contact" to make one last post, and manage their account, upon death.

Until now, Facebook verified the death and "memorialized" the account for deceased members. Their account could then be viewed, but not edited or managed.

Use this procedure to designate a Facebook 'Legacy Contact':

1. On the right side of your Facebook page, click on the downward-facing arrow to show the drop-down menu. Click on "Settings."
2. Choose "Security," then "Legacy Contact" at the bottom of the page.
3. Choose your Legacy Contact. 
4. Choose the options you want your Legacy Contact to have.

The system will offer an option to send a message to the designated person.

5 Reasons That Wills and Trusts Don't Always Work

5 Reasons That Wills and Trusts Don't Always Work --

1. Documents Not Clearly Drafted -- confusing or incorrect instructions may lead to family disputes, additional costs, and unintended results
2. Outdated Documents -- documents must be updated to reflect changes in your life (marriage, divorce, children, etc.)
3. Assets Not Covered by Will or Trust - you must coordinate assets with your will or trust; otherwise the documents will not direct your assets in the manner that you intend
4. Estate Tax Law Changes -- recent tax law changes have made many documents obsolete
5. Choice of Documents -- choosing the wrong documents can lead to unintended results and additional costs

We have seen numerous documents that do not work for the reasons set forth above.  Take a few minutes to consider whether any of these issues might affect your estate plan.

What is "Estate Planning" Anyway?

Lawyers like to talk about "estate planning", but almost no one else uses that term in the same way.  I have asked many groups "What does estate planning mean to you?", and the responses have varied widely.  Most people just say a "will" or "trust".  That's certainly true, but there is a lot more to it than that.  For me, estate planning is more about objectives than documents.  So, here is my definition --
Estate planning is a combination of documents and strategies that are designed to achieve one or more of the following objectives --

• Transfer assets to beneficiaries

• Disinherit specific heirs

• Manage assets for the benefit of another person

• Minimize administrative costs

• Minimize administrative complexity and litigation

• Nominate persons to handle fiduciary responsibilities

• Protect assets from creditors

• Pay expenses & debts

• Minimize estate and income taxes

• Prepare for incapacity

An exact definition is not as important as achieving a positive outcome for the persons who care. Only one thing is certain -- it must be in writing!

Estate and Gift Tax Under The 2012 Tax Relief Act

New Permanent Indexed Estate & Gift Tax Exemption. The 2012 Tax Relief Act permanently establishes the estate exemption amount (technically, the basic exclusion amount) at $5 million per person (as increased for inflation after 2011). Inflation indexing increased the exemption to $5,120,000 for 2012.  Based on inflation data, the exemption should approximately $5,250,000 for gifts made and decedents dying in 2013. The exemption is allowed in the form of a unified credit. (Code Sec. 2010)

Maximum Transfer Rates Raised from 2012 Levels. The maximum estate and gift tax rate was 35% for gifts made and decedents dying in 2012.  The 2012 Taxpayer Relief Act changes the top rate to 40% for gifts made and decedents dying after 2012.  Under the Act, transfers over $500,000 are taxed at 37%, transfers over $750,000 are taxed at 39% and transfers over $1,000,000 are taxed at 40%. More specifically, the tax on a transfer over $1 million is $345,800 plus 40% of the excess over $1,000,000. (Code Sec. 2001(c), Code Sec. 2502(a), and Code Sec. 2641, as amended by Act Sec. 101) Thus, the $5,250,000 exemption for 2013 would offset $2,045,800 in tax ($345,800 + (.40 × $4,250,000)).

Generation-Skipping Transfer Taxes (GST).  The 2010 Tax Relief Act made the GST tax exemption for decedents dying or gifts made after Dec. 31, 2010 and before Jan. 1, 2013 equal to the basic exclusion amount for estate tax purposes (e.g., $5 million, as indexed), set the GST tax rate for transfers made in 2011 and 2012 at 35%.  The 2012 Taxpayer Relief Act makes these changes permanent, except that it increases the GST tax rate to 40%.  In other words, under the 2012 Taxpayer Relief Act, for decedents dying and gifts made after 2012, (1) the GST tax exemption is equal to the basic exclusion amount of $5 million as indexed, which should be approximately  $5,250,000 for 2013; (2) the GST tax rate is 40%; and (3) the technical modifications to the GST rules made by prior law continue to apply.

Portability of Unused Exemption Between Spouses Made Permanent.  The 2010 Tax Relief Act authorized estates of decedents dying after 2010 and before 2013 to elect to transfer any unused exclusion to the surviving spouse.  The amount received by the surviving spouse is called the deceased spousal unused exclusion, or "DSUE", amount.  If the executor of the decedent's estate elects transfer, or portability, of the DSUE amount, the surviving spouse can apply the DSUE amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death.  The 2012 Taxpayer Relief Act has made this provision permanent. (Code Sec. 2010(c)(2)(B), Code Sec. 2010(c)(2)(4), and Code Sec. 2010(c)(5), as amended by Act Sec. 101)

Other Changes Now Permanent.   The 2012 Taxpayer Relief Act also provides that several  temporary changes made under prior law are now permanent:  (1) replacement of the State death tax credit with a deduction, (2) repeal of the qualified family-owned business deduction, (3) modifications to the rules regarding qualified conservation easements, (4) installment payment of estate taxes, and (5) various technical aspects of the GST tax.

Proposed Regs Clarify New 3.8% Investment Income Tax

The IRS has issued proposed regulations that provide guidance on the new 3.8% healthcare surtax on investment income and gains (IRC Sec. 1411). This article explains the general operating rules of the tax, and specific rules applicable to estates and trusts.  

The proposed regulations can be found at this link:  Proposed Net Investment Income Tax Rules.  This article does not contain a complete analysis of the regulations.  Please review the regulations before applying them to your own situation.

Although there are still many unresolved issues surrounding 2013's tax rates and the so-called “fiscal cliff,” with this surtax, higher taxes on investment-type income and gains are a relative certainty for higher-income taxpayers who meet the thresholds explained below.

Background. Beginning in 2013, certain “unearned income” of individuals, trusts, and estates is subject to a surtax (i.e., it's payable on top of any other tax payable on that income). The surtax, also called the “unearned income Medicare contribution tax” or the “net investment income tax” (NIIT), is 3.8% of the lesser of:

(1) net investment income (NII); or

(2) the excess of modified adjusted gross income (MAGI) over the threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). MAGI is adjusted gross income (AGI) plus any amount excluded as foreign earned income under Code Sec. 911(a)(1).

Example:  In 2013, a single taxpayer has net investment income of $100,000 and MAGI of $220,000. He pays the surtax only on $20,000, which is the amount by which his MAGI exceeds the threshold amount of $200,000, and because that is less than his NII of $100,000. Therefore, the surtax is $760 ($20,000 × 3.8%).

For an estate or trust, the surtax is 3.8% of the lesser of undistributed NII, or the excess of AGI (as defined in Code Sec. 67(e)) over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

Net Investment Income (NII) is defined as investment income less deductions properly allocable to such income.  Investment income is (a) gross income from interest, dividends, annuities, royalties, and rents, unless derived in the ordinary course of a trade or business to which the 3.8% surtax doesn't apply; and (b) other gross income derived from a trade or business to which the Medicare contribution tax does apply; and (c) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the Medicare contribution tax doesn't apply.

The 3.8% surtax applies to a trade or business only if it is a passive activity of the taxpayer or a trade or business of trading in financial instruments or commodities.

Investment income does not include amounts subject to self-employment tax, distributions from tax-favored retirement plans (e.g., qualified employer plans and IRAs), or tax-exempt income (e.g. earned on state or local obligations).

The surtax doesn't apply to trades or businesses conducted by a sole proprietor, partnership, or S corporation (but income, gain, or loss on working capital isn't treated as derived from a trade or business and thus is subject to the tax).

Gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as net investment income only to the extent of the net gain or loss that the transferor would take into account if the entity had sold all its property for fair market value immediately before the disposition.

The tax does not apply to: nonresident aliens; trusts all the unexpired interests in which are devoted to charitable purposes; trusts exempt from tax under Code Sec. 501; or charitable remainder trusts exempt from tax under Code Sec. 664.

General operating rules. The IRS has provided definitional rules in the proposed regs designed to both promote the fair administration of Code Sec. 1411 and prevent taxpayers from circumventing its purposes (significantly, to impose a tax on the unearned income or investments of certain individuals, estates, and trusts).  The IRS will closely review transactions that manipulate a taxpayer's NII to reduce or eliminate the amount of the surtax and, when appropriate, challenge such transactions based on applicable statutes and judicial doctrines (e.g., substance over form).

Application to Estates and Trusts. The proposed regs provide rules with regard to these specific trust types:

(a)   Grantor trusts. The income of a grantor trust (i.e., a trust any portion of which is treated as owned by the grantor, with items of income, deduction, and credit attributed accordingly) is taxed to the owner. So, these amounts are taken into account in calculating the owner's NII.

(b)   Electing Small Business Trusts (ESBTs). ESBTs, which are treated as two separate trusts when a portion of the ESBT's holdings is S corporation stock, are subject to special computational rules. The proposed regs treat the ESBT as two separate trusts for computational purposes, but consolidate the ESBT into a single trust for determining the AGI threshold.

(c)   Charitable remainder trusts (CRTs). CRTs are also subject to special computational rules. The trust itself isn't subject to Code Sec. 1411, but the annuity and unitrust distributions may constitute NII to the noncharitable recipient.

(d)   Foreign estates and foreign nongrantor trusts. In general, foreign estates and foreign trusts aren't subject to Code Sec. 1411.  However, IRS and Treasury believe that the NII of a foreign trust or estate should be subject to Code Sec. 1411 to the extent that such income is earned or accumulated for the benefit of, or distributed to, U.S. persons.

(e)   Bankruptcy estates. A bankruptcy estate of a debtor who is an individual is treated as an individual for Code Sec. 1411 purposes.  Therefore, the bankruptcy estate computes its tax in the same manner as an individual, and the rate is the same as that imposed on a married taxpayer filing separately.  

Effective date. The proposed regs are to be effective for tax years beginning after December 31, 2013.  However, taxpayers may rely on the proposed regs for purposes of compliance with Code Sec. 1411 until the effective date of the final regs.

It Pays to Review Your Property Deed

If you own real estate, you should take a good look at your deed.  The form of ownership stated in the deed has a direct impact on what you own, and how it will pass to your heirs.  You may be surprised at what you find. 

These are the typical forms of real estate ownership for individuals in Michigan, and what they mean to the owner:

1. Sole ownership by a single man or woman:  Simplest form of ownership; the owner may freely transfer the property to another person; upon death, probate administration is required to transfer the property to another owner.
2. Sole ownership by a married woman:  A married woman may freely own and transfer property to another person without her husband's consent; upon death, probate administration is required to convey the property another owner, including her husband.
3. Sole ownership by a married man:  A married man may also own property in his own name; however, his wife possesses a "dower" interest by law; dower grants an automatic partial life estate to a widow in all of the real estate owned by her husband during their marriage; therefore, a husband cannot transfer the property during his lifetime unless his wife waives her dower interest; if the property is owned solely by the husband upon his death, probate is required to convey property to another owner, including his wife.
4. Ownership by a married couple as "joint tenants":  Creates a tenancy by the entireties (see #6).
5. Ownership by a married couple as "joint tenants with rights of survivorship":  Creates a tenancy by the entireties (see #6). 
6. Ownership by a married couple as "tenants by the entireties":  Form of ownership exclusive to married couples; one spouse cannot transfer the property without the consent of the other spouse; includes strong statutory protection from the creditors of only one spouse (i.e. a non-debtor spouse is protected from the creditors of a debtor spouse); upon death of one spouse, the surviving spouse assumes sole ownership, and may transfer the property without probate administration.
7. Ownership by a married couple with no stated form of tenancy: Married couples are presumed to own property as tenants by the entireties if no other form of ownership is stated (see #6). 
8. Ownership by 2 or more persons as "tenants in common":  Each owner possesses a divisible interest in the property so each one can transfer his or her respective share without consent of the other owners; one owner cannot force the others to sell or transfer the whole property without a court order; upon death, probate is required to transfer each owner's share; the property is subject to the claims of each owner's creditors.
9. Ownership by 2 or more persons as "joint tenants":  Referred to as a "standard" joint tenancy; joint owners have all of the same rights as tenants in common, but they also possess a right of survivorship among them; therefore, the last surviving joint owner will acquire sole ownership of the property without probate; a joint owner may sell or transfer his or ownership to another person; in that event, the remaining joint owners become tenants in common with the new owner, with no survivorship right with respect to the new owner. 
10. Ownership by 2 or more persons as "joint tenants with rights of survivorship":  Referred to as an "indestructible" joint tenancy because the "right of survivorship" among the owners cannot be destroyed; owners possess the same rights as standard joint owners; however, each owner may only convey a life estate interest, and a transfer by one owner has no effect on the survivorship interest of the other owners; joint owners cannot force each other to sell or transfer the property, even by court order; probate is not required to transfer the interest of a deceased owner to the surviving owners.
11. Ownership by 2 or more persons with no stated form of tenancy:  Creates a tenancy in common among the owners (see #8). 

If your deed does not contain the form of ownership that you expect, then it can always be changed.  However, you must be cautious when changing ownership because it may cause negative consequences to your property insurance, taxes, mortgage, and estate plan.  When it comes to real estate ownership, it pays to be informed - and careful. 

Protect Your Tax-Free Gifts to Children by Using a "Crummey" Trust

It is commonly known that a person can give away gifts up to the gift tax exclusion amount (currently $13,000) each year to each of an unlimited number of donees, free of gift and generation-skipping transfer tax. Where the donee is a minor, many parents and grandparents make their annual gifts to a custodial account under the Michigan Uniform Gifts to Minors Act (UTMA).  A UTMA account works well and is easy to create and maintain. However, it has one major defect: when the child (or grandchild) reaches age 18, the beneficiary can do whatever he or she wants with the money in his or her custodial account.  If, for example, the beneficiary wants to buy a sports car instead of going to college, there is nothing that can be done about it.

Most parents don't want their children (or grandchildren) to receive significant amounts of cash at age18. Fortunately, there is a special kind of trust that avoids this problem.  It is called a “Crummey” trust, named after a court case that paved the way for the use of this kind of trust. With a Crummey trust, the property can remain in trust for as long as required without forfeiting the gift tax annual exclusion. Thus, property can be transferred to remain in a Crummey trust for the beneficiary's entire lifetime or until an appropriate age (e.g., age 30) or event (e.g., graduation from college). Parents can then decide how the money is to be used and how much the beneficiary can receive.

There is one catch to a Crummey trust: annual contributions made to the trust will not qualify for the gift tax annual exclusion unless the beneficiary is notified that a contribution has been made, and give him or her a limited period of time (usually 30 days) in which he or she can withdraw the contributions from the trust.  It is usually understood that the beneficiary won't exercise his or her right to withdraw the contributions, but will let them remain in the trust. However, that expectation should always remain unwritten because, if there is any evidence of it, the IRS will use that evidence to say that the beneficiary did not really have a power of withdrawal.  If the beneficiary violates the unwritten understanding by withdrawing property from the trust, there is nothing that can be done about it, except not making any further contributions, so it is important to use Crummey trusts only in certain situations that make sense.  

Preventing Estate Tax on Life Insurance

Under current estate tax rules, life insurance proceeds are included in the estate of the policy owner upon his or her death if either:

(1) The owner's estate is the beneficiary of the insurance proceeds, or

(2) The owner possessed certain economic rights (called “incidents of ownership”) in the policy at death (or within three years of death).

Avoiding the first situation is easy:  just make sure the estate is not designated as beneficiary of the policy.

The second rule is more complex.  Insurance proceeds are included in the policy owner's estate regardless of who the beneficiary is.  The result is the same even if the policy is transferred to another person if the original owner keeps any so-called “incidents of ownership” in the policy.  These rights of ownership, if retained by the owner, will cause the proceeds to be taxed in the owner's estate:

... the right to change beneficiaries,

... the right to assign the policy (or to revoke an assignment),

... the right to pledge the policy as security for a loan,

... the right to borrow against the policy's cash surrender value, and

... the right to surrender or cancel the policy

Keep in mind that merely having any of the above powers will cause the proceeds to be taxed to the owner's estate even if the powers are never exercised.  However, there are a couple of common strategies that can be used to avoid taxation of death benefits to the estate of the policy owner, including buy-sell agreements and life insurance trusts. 

Buy-sell agreements.  Life insurance obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement will not be taxed in the owner's estate (unless his or her estate is named as beneficiary). For example, say Al and Bob are partners who agree that the partnership interest of the first of them to die will be bought by the surviving partner. To fund these obligations, Al buys a life insurance policy on Bob's life. Al pays all the premiums, retains all incidents of ownership, and names himself beneficiary.  Bob does the same regarding Al.  When the first partner dies, the insurance proceeds are not taxed in his estate.

Life insurance trusts. A life insurance trust is an effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured's estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance itself with funds contributed by the insured. As long as the trust agreement gives the insured none of the ownership rights described above, the proceeds will not be included in his estate.

The three-year rule.  A person who gives away or transfers life insurance to avoid estate taxes must live for at least 3 years after the transfer is made.  Otherwise the life insurance proceeds will be taxed as part of his or her estate.  For policies in which a person never held incidents of ownership, the three-year rule doesn't apply.  Also, bear in mind that taxation of life insurance may not be a concern when the value of the owner's estate is less than the "applicable exclusion amount" (currently $5 million per person), which is the threshhold amount that will cause his or her estate to incur any tax. 

Benefits of a Life Insurance Trust

Few people realize that, even though they may have a modest estate, their families may owe hundreds of thousands of dollars in estate taxes because they own a life insurance policy with a substantial death benefit. This is so because life insurance proceeds, while not subject to federal income tax, are considered part of your taxable estate and are subject to federal estate tax.

The solution to this problem is to create an irrevocable life insurance trust that will own the policy and receive the policy proceeds upon death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in the estate as well as in the estate of the surviving spouse. It also protects the trust beneficiaries from their own “excesses”, against their creditors, and in the event of divorce. Moreover, the trust also provides reliable management for the trust assets. Here's how the irrevocable life insurance trust works.

An irrevocable life insurance trust can be created to be the owner and beneficiary of one or more life insurance policies. Cash can then be contributed to the trust and used by the trustee to make premium payments on the life insurance policies. If the trust is properly drafted, the contributions that are made to the trust for premium payments will qualify for the annual gift tax exclusion, so gift taxes won't have to be paid on the contributions.

The life insurance trust typically provides that, during one's lifetime, principal and income, at the trustee's discretion, may be paid or applied to or for the benefit of spouse and descendants. This allows indirect access to the cash surrender value of the life insurance policies owned by the trust, and permits the trust to be terminated if desired despite its being irrevocable. Upon death, the trust continues for the benefit of the spouse during his or her lifetime. The spouse is given certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. On the death of the spouse, the trust assets are paid outright to, or held in further trust for the benefit of descendants.

An irrevocable life insurance trust may be of substantial benefit to anyone who owns a life insurance policy with a significant death benefit.

Duties of a Trustee

A trustee's duties are determined by the trust instrument, common law, and state statutes. A trustee's basic duties are to hold the assets of the trust, to administer them solely for the benefit of the trust beneficiaries and to carry out the terms of the trust instrument. A trustee's duties include the following:

(1.) Duty of loyalty. The trustee must act with undivided loyalty and solely in the interests of the trust beneficiaries. The trustee must act in a manner that avoids placing the trustee's personal interests in conflict with those of the beneficiaries.

(2.) Duty of care. The trustee must act with the same level of care and diligence in carrying out the purposes of the trust as would a person familiar with the role of a trustee. If a trustee holds itself out as a professional trustee or as having special skills, it may be held to a higher standard of care.

(3.) Duty to administer the trust by its terms. The trustee is bound to administer the trust as it is written. If the trust instrument contains ambiguities, it may be necessary to seek help from a court or attorney.

(4.) Duty of impartiality. The trustee is required to treat all of the beneficiaries of the trust impartially, unless the trust instrument provides otherwise. “Impartially,” however, does not necessarily mean “equally.”

(5.) Duty to segregate property. The trustee must not commingle the trust property with the trustee's own property or other property not held by the trust. Absent statutory authority or authority under the trust instrument, the trustee should not even commingle assets of separate trusts created under the same trust instrument.

(6.) Duty to preserve trust property. The trustee is under a duty to use reasonable care and diligence in preserving and protecting trust property for the benefit of the beneficiaries. Thus, for example, a trustee may be required to maintain fire and casualty insurance for any buildings owned by the trust.

(7.) Duty of confidentiality. The trustee is bound to keep personal information about the trust beneficiaries while acting as trustee confidential, and should not reveal details of the trust to third parties (including other beneficiaries), except where otherwise required by law.   

(8.) Duty to keep records. The trustee must keep detailed records showing the assets, liabilities, receipts, and disbursements of the trust.

(9.) Duty to account. The trustee must periodically give a written report to the beneficiaries describing how the trust is being administered. The form and frequency of the accounting varies from state to state.

(10.) Duty to furnish information and communicate. In addition to any written accountings, the trustee is required to keep beneficiaries informed regarding the trust and its administration. The trustee should also furnish other information to a beneficiary that is reasonably requested.

(11.) Duty to enforce and defend claims. The trustee is under a duty to enforce any claims the trustee may have, including against a predecessor trustee, and to defend claims brought against the trust. However, the trustee can also compromise claims if it is the best interests of the beneficiaries to do so. The trustee should consider the economics of suing or defending in making these decisions.

(12.) Duty not to delegate. In general, a trustee is not allowed to delegate the trustee's discretionary (as opposed to ministerial) powers. State law, and possibly the terms of the trust instrument, can vary this duty.

All of these duties are owed to all of the beneficiaries of the trust. Troubles for a trustee often arise when some of the beneficiaries are not treated impartially or kept informed of the trustee's actions, or are not even informed of the existence of a trust.

Inclusion of Jointly-Held Property in Gross Estate

Right of Survivorship. Joint ownership with right of survivorship means that at the death of one co-owner, his interest immediately and automatically passes to the other co-owner. The estate tax rule for property owned jointly with a spouse is easy: 50% of its value is included in each estate. If the joint owner is not a spouse, it depends on how the property was acquired. If it was a gift or inherited, again, 50% is included. (If there are three owners, 33.3%, etc.) If it was purchased, then the amount includible in the estate depends on how much the person and the corresponding joint owner (or owners) contributed to the purchase price.

For example, say A and B (unmarried) bought investment real estate for $30,000 back in 1950. A contributed $20,000 and B contributed $10,000. The value has risen to $1 million at the time of A's death. Because Because A contributed 2/3 of the cost, 2/3 of the value ($666,667) is included in his estate. Had B died first, only $333,333 would have been included in her estate. This difference of $333,334 was caused by a difference of only $10,000 in contributions at the time of purchase.

The effect of debt. If the property owned jointly (not with a spouse) is subject to debt, the debt will have an impact on the rule estate tax described above. Any debt that is outstanding at the time of death is treated as contributed equally by the joint owners. And payments made to pay down the balance of the debt are treated as contributions to the cost of the property.

Example (1). C and D buy investment property that they own jointly with right of survivorship. C contributed $20,000, D contributed $30,000, and a $50,000 mortgage was taken out. C dies when the value of the property is $150,000. The balance due on the mortgage is still $50,000 (only interest had been paid on it). C is treated as having contributed $45,000: the actual contribution of $20,000 plus half of the outstanding debt. This is 45% of the cost. Thus, at C's death, $67,500 (45% of $150,000) is included in his estate.

Example (2). The facts are the same as in Example (1) except that $10,000 of the mortgage had been paid off with the $10,000 in payments made by C. Now, of the $100,000 cost, C will be treated as having contributed $50,000: his original actual $20,000, his mortgage payments of $10,000, and one-half the debt balance (1/2 of $40,000 = $20,000). Thus, $75,000 would be included in his estate.

Tenancy in common. Another form of joint ownership is tenancy in common in which the co-owners do not have any survivorship right. Thus, for example, if there are three equal co-owners and one dies, his interest passes to his heirs and not to the other owners. Where a decedent dies owning property held in this form of joint ownership, the fraction of the property's value representing the decedent's ownership share is included in his estate. It is irrelevant how much each owner contributed to the cost.

Tax Court Warning: Agreements to Care for Aging Parents Must Be In Writing

The Tax Court has held that an estate could not deduct as a claim against the estate a large amount supposedly owed by the decedent to her son for care taking services he provided to her for several years before her death. The claim was based on an alleged agreement that had not been reduced to writing, even though the son had been a practicing attorney before he became engulfed in care taking. The only evidence the estate offered to prove the alleged agreement was the son's testimony, which the court found to be improbable, self-serving, and uncorroborated. (Estate of Emilia W. Olivo, TC Memo 2011-163)

Emilia W. Olivo died without a will on April 26, 2003. At the time of her death, she was a widow living in New Jersey. She was survived by two sons and two daughters. One son, Mr. Olivo, the administrator of the estate, lived with his mother at the time of her death. He cared for his mother and father for many years before their deaths. His care taking started in the fall of 1994, when his mother fell and suffered a compression fracture of her lower spine that left her nearly paralyzed in both legs.

Mr. Olivo was a lawyer, but his practice began to disintegrate during the mid '90s, in part because of the amount of time he devoted to his parents' health problems. He prepared durable powers of attorney for his parents and they executed them in 1995 (father) and 1996 (mother). His father died in the fall of 1995, and the probating of his will was highly contentious. Family relationships became strained after that and remained so until 2000.

Emilia had numerous health problems during the last years of her life. The compression fractures to her spine left her incapable of caring for herself and basically paralyzed in both legs. Mr. Olivo purchased a Hoyer lift to move her from bed to her wheelchair and back. She also required assistance to use the bathroom, to get dressed, and to bathe. She had a number of other problems including incontinence, which required Mr. Olivo to clean up after her and change her clothes. She was a diabetic, which required Mr. Olivo to test the insulin levels in her blood several times each day and, if needed, inject her with insulin.

Mr. Olivo was also responsible for preparing all meals and doing general housekeeping. He employed home health aids to assist him, but the aids were not registered nurses and therefore could not administer Emilia's medications or do the blood sticks and insulin injections she required. Mr. Olivo kept extensive records of his mother's medications, hospital visits, and diagnoses. He also kept a composition notebook where he recorded her blood sugar levels, blood pressure, pulse, and body temperature.

Caring for his mother took a toll on Mr. Olivo. At some point during 1998, his brother, an M.D., became concerned about Mr. Olivo's health. After being criticized by a sister, Mr. Olivo offered to stop providing care and to hire round-the-clock nurses instead. His three other siblings, however, asked him to continue the care and he did so until his mother's death.  Mr. Olivo prepared an estate tax return before he was formally appointed as administrator (there was a delay because one sister initially refused to renounce her right to be appointed as administratrix). This return claimed a deduction of $1,240,000 as a debt the estate owed to him for the care he provided to his mother pursuant to an alleged agreement he had with her to compensate him for his services in caring for her (alleged agreement).

Regarding the alleged agreement, during the Tax Court trial, Mr. Olivo testified that at some point during 1998, he learned that one of his sisters had commented that all he did was sit around and watch television while getting free room and board. He was upset by the remark, and he told his mother, who offered to pay him $1,000 per week for the care-giving. Mr. Olivo said that he suggested that $200 per day would be agreeable to him. However, he further testified that he became worried about his mother's finances, and he suggested that she defer the payment until her death. He said that, to avoid a complicated interest calculation, she agreed to pay him $400 per day with payment deferred until after her death.

However, Mr. Olivo never reduced the alleged agreement to writing. He acknowledged during his testimony that he “could have and should have” memorialized their agreement, but he was too distracted by the day-to-day details of caring for decedent. He explained that he was not thinking like a lawyer during that time.

The Tax Court observed that the only evidence the estate offered to prove the alleged agreement was the testimony of Mr. Olivo. It stressed that Mr. Olivo never reduced the alleged agreement to writing, nor were there any other witnesses to the alleged agreement or any other corroborating evidence. The Tax Court said it did not have to accept testimony that is improbable, self-serving, and uncorroborated by other evidence.  The Tax Court also noted that, under New Jersey law, the oral promise of a decedent must be proved by clear and convincing evidence. However, it did not decide whether to apply that standard because it found that Mr. Olivo's testimony failed to satisfy even the less exacting preponderance standard normally applied by the Tax Court.

The court said that Mr. Olivo's testimony recounting the facts surrounding the alleged agreement was highly questionable. Although the court understood that he had a lot on his mind during the years when he was caring for his parents, his claim that he was unable to think like a lawyer during that period was belied by the fact that he prepared powers of attorney for both of his parents and had his parents execute them. Given his training and experience as an attorney, how contentious the probating of his father's estate had been, the apparent animosity between him and one sister, and his vested interest in ensuring that he would receive compensation from his mother pursuant to the alleged agreement, the court did not believe that he would not have reduced the alleged agreement to writing or at least have some corroborating evidence beyond his self-serving testimony.

In light of the foregoing, the court declined to accept Mr. Olivo's uncorroborated testimony regarding the alleged agreement. Accordingly, it concluded that the estate failed to establish that his mother entered into the alleged agreement with Mr. Olivo. Consequently, the court held that Mr. Olivo's claim for compensation pursuant to the alleged agreement may not be deducted by the estate.

In the alternative, the estate contended that Mr. Olivo was entitled to some recovery under quantum meruit. Even in the absence of a contract, when one party has conferred a benefit on another and the circumstances are such that it would be inequitable to deny recovery to the party conferring the benefit, New Jersey courts allow recovery in quasi-contract. Quantum meruit is a type of quasi-contractual recovery that allows a plaintiff to recover the reasonable value of services rendered when the plaintiff conferring the services had a reasonable expectation of payment.

The court stressed that Mr. Olivo's care for his mother during the last years of her life was extraordinary, and the efforts he expended on her behalf were commendable. However, it concluded that the estate did not show that Mr. Olivo was entitled to recover for that care under quasi-contract because there is a presumption under New Jersey law that services rendered to a family member living in the same household are rendered gratuitously.

10 Ways to Prevent Estate Litigation

There are many things that can be done to avoid protracted litigation over estate assets. Here are a few suggestions:

1. Treat Siblings Equally.  Litigation can be avoided most of the time by treating people with the same degree of relationship equally.  However, decisions get more complicated with multiple marriages. Another area of dispute may occur if one child predeceases his or her parent.  The default rule is that a deceased child’s share goes to his or her kids.  If estate planning documents mirror the default rules, there is very little for heirs to gain by fighting.

2. Decide Who Gets What.  Direct important items of personal property to the specific person who should receive it.  These directives may be contained in a will, trust, or by a list (referred to as a “personal property memorandum”) attached to either document.

3. Keep Track of Loans and Advances.  Specify whether any loans are to be forgiven or repaid at death.  If a loan must be repaid, then it may be identified as an “advancement”, and counted against the share distributed to an heir.

4. Transfer a Business with a Contract.  A business may be transferred to an heir by contract, rather than by will or trust.  Contracts are generally harder to contest than a will or trust.

5. Check Ownership of Assets.  A will can only direct the distribution of property owned by the person who signed the will.  Jointly owned property goes to the surviving joint owner, and assets with a specific beneficiary will be distributed to that person - regardless of the what the will says.

6. Get Your Own Lawyer.  It’s common for one lawyer to draft estate planning documents for a couple and perhaps even more family members.  But if the lawyer represents someone other than the testator (the person writing the will), trouble can result.  For example, if a lawyer represents both the testator and a second spouse — the children from a first marriage may contest the documents by claiming that the lawyer had a conflict of interest.

7. Consider a Corporate Executor.  A professional trustee or executor is expensive, but there’s less chance of fights among siblings.

8. Establish Mental Capacity to Sign Documents.  One of the most common allegations in estate litigation is that the testator lacked the mental capacity to sign his or her will.  Proper witnessing of the documents will prevent most problems related to claims of incapacity.  If the testator's capacity is in doubt, one way to counter a claim is to be evaluated by a physician before signing the documents.  The document signing procedure may also be recorded with video or audio equipment, but it should be carefully controlled so as not to generate more evidence for people who want to fight.

9. Include a “No-Contest” Clause.  No-contest clauses are also known as “in terrorem” clauses.  A typical no-contest clause says that if any beneficiary of the will contests the validity of the will or any provision of the will, he or she forfeits his interest.  No contest clauses are not fully enforceable in Michigan due to statutory restrictions on their use.  However, putting one in a will or trust may cause enough fear on the part of a beneficiary to make it work.

10. Spell Out Any Disinheritance.  Disinheritance of a beneficiary should be explicit rather than by omission.  It is not necessary to provide a reason for disinheriting a beneficiary.

11. Don’t Delay.  Deathbed estate planning is almost always a recipe for trouble.  Claims of incapacity and undue influence are more common in such situations.

Estate Planning is Crucial for Unmarried Couples

Same-sex and unmarried couples do not enjoy the same legal rights as those of traditional married couples because Michigan does not recognize same-sex marriage or common-law marriage for its residents. Michigan law does not provide for ownership of property, or recognition of decision-making power, for unmarried couples unless specific legal documents are in place for those purposes. Therefore, it is very important for life companions to pay special attention to their estate plans, including wills, trusts, beneficiary designations, and property ownership, to ensure that each of them receives the property intended by the other partner.

 

Married couples enjoy certain property rights under Michigan law even if they did not make advance arrangements for each other prior to death or incapacity. For example, if a married person does not provide any property for his or her spouse upon death, the survivor is still entitled to certain cash or property “allowances”, and a portion of the deceased spouse’s estate. Most states have rules specifically designed to prevent a surviving spouse from being disinherited. Unmarried couples do not have any such rights.

Unmarried couples must also give special consideration to medical and financial powers of attorney so that their companion will be recognized to make decisions in case of incapacity. Again, Michigan law grants no such power to unmarried couples no matter how long they have been together. Living trusts are especially useful for unmarried couples to maintain uninterrupted property management and decision making power for each other.

Similarly, federal law does not grant any rights to retirement plans, annuities, or other financial assets for an unmarried partner. Therefore, it is critical to designate beneficiaries on all insurance policies, annuities, retirement accounts, and other financial assets.

Unmarried couples with children have even greater estate planning needs because children have higher priority to inherit property than an unwed partner. In that case, conflicts are certain to arise with respect to property ownership. The only way to overcome these challenges is ensure that beneficiary designation and estate planning documents are coordinated to achieve specific objectives.

Life companions must carefully plan every aspect of their estate to prevent unintended consequences. They cannot depend on protective laws to correct mistakes, or to compensate for failure to plan.

Court of Appeals Denies Estate Tax Reduction for Family Limited Partnership

The Ninth Circuit has affirmed a Tax Court decision that assets transferred by an individual to two family limited partnerships (FLPs) were includible in her gross estate under Code Sec. 2036. This decision is instructive on the planning requirements for FLPs to achieve estate tax savings.

 

Background.  Individuals typically transfer assets to FLPs in the hope of achieving large valuation discounts for the assets that would not otherwise be available if the assets were retained in outright ownership. The valuation  discounts, in turn, could result in substantial estate tax savings. However, in order to achieve the desired results, a number of legal hurdles must be overcome.

Facts.  Erma V. Jorgensen (Ms. Jorgensen) was a resident of California when she died with a will on April 25, 2002. In 1995, Ms. Jorgensen and her husband, who died a year later, formed an FLP called the Jorgensen Management Association (JMA-I) by each contributing marketable securities valued at $227,644 in exchange for 50% limited partnership interests. Other family members were given interests in the partnership.

A second FLP, JMA-II was formed by Ms. Jorgensen on July 1, 1997 when she contributed about $1.8 million of marketable securities in exchange for her initial partnership interest. Children and grandchildren received interests in JMA-II. Because the value of each of these interests exceeded the then available $10,000 annual exclusion, gift tax returns should have been but weren't filed.

Neither JMA-I nor JMA-II operated a business. The FLPs held passive investments only, primarily marketable securities, and neither maintained formal books or records. Although the partnership agreements stated that withdrawals could only be made by general partners, Ms. Jorgensen was authorized to write checks on the JMA-II checking account, and she wrote checks on both the JMA-I and JMA-II accounts. Some withdrawals were used to make gifts, some of which should have been, but weren't, reported on gift tax returns.

In 2003 through 2006, JMA-I and JMA-II sold certain assets, including stock that Ms. Jorgensen had contributed to the partnerships during her lifetime. In computing the gain on the sale of those assets, the partnerships used Ms. Jorgensen's original cost basis in the assets, as opposed to a step-up in basis equal to the fair market value of the assets on Ms. Jorgensen's date of death under Code Sec. 1014(a). The JMA-I and JMA-II partners reported the gains on their respective Forms 1040 and paid the income taxes due.

Tax Court's Decision. The Tax Court determined that Ms. Jorgensen's estate included the value of the securities which she contributed to both of the FLPs. The court rejected the estate's argument that the transfers of securities weren't “transfers” under Code Sec. 2036(a). The estate's claim that the transfers were bona fide sales for full and adequate consideration, because Ms. Jorgensen had several nontax reasons for making the transfers, including management of her assets and financial education of family members, was overcome by circumstances surrounding the formation, funding, and management of the partnerships.

The court also concluded that there was an implied agreement at the time of the transfers that Ms. Jorgensen would retain the economic benefits of the property, even if the retained rights were not legally enforceable.

Ninth Circuit Affirms. The Ninth Circuit agreed with the Tax Court's decision to include the transferred amounts in Ms. Jorgensen's estate. The estate argued on appeal that, although Ms. Jorgensen retained some benefits in the transferred property, the amounts for which benefits were retained should be considered de minimis or should be limited to the actual amount accessed by decedent. However, the Ninth Circuit rejected these arguments, finding that the $90,000 in checks personally written by Ms. Jorgensen and the use of $200,000 FLP funds to pay her personal estate taxes weren't de minimis.

The Ninth Circuit also agreed with the Tax Court's conclusion that there was an implied agreement that Ms. Jorgensen could have accessed any amount of the transferred assets, and the fact that she only accessed a specified amount doesn't undermine that conclusion. Additionally, it found no clear error in the Tax Court's conclusion that the transfer wasn't a bona fide sale for adequate consideration. Noting that transfers to FLPs are subject to heightened scrutiny, the Ninth Circuit agreed that the nontax reasons advanced by the estate were either weak or refuted by the record.

Planning Lessons.   FLPs can be still be used to achieve large assset valuation discounts that result in significant estate tax savings.  However, the IRS scrutinizes these transactions very carefully - especially among family members.  Great care must be taken to ensure that the FLP has a legitimate business purpose, appropriate gift tax returns are filed, detailed management records are maintained, and that the FLP owners don't use the partnership assets as though they were still personally owned by themselves.  

Designating IRA Beneficiaries to "Stretch" Investment Growth

Desgnating beneficiaries of an IRA can be tricky - especially when using a trust.   I posted an article on my web site to describe the various options for designating the beneficiary of an IRA to "stretch" the payments for maximum investment growth.  Special provisions are required when designating the trustee of a trust as a beneficiary.  Click here for the full article.

Implementing "Portability" of a Deceased Spouse's Unused Exclusion Amount

One of the most important changes under the Tax Relief Act of 2010 is the addition of “portability” for unused estate tax exclusions of married couples.  Portability is a major shift in estate tax law.  I have drafted an article to explain this new concept, and to provide examples of how it is implemented.  Click here to read the full article. 

New Tax Law May Impact Your Estate Tax

I have posted an article on the new estate tax changes. The changes are generally favorable for taxpayers, but they only last until 2013. Click here for the full article.

Senate Passes Tax Patent Reform

On March 8, the Senate passed “The America Invents Act” (Patent Reform Bill). Sec. 14 of this bill would prevent individuals or firms from receiving patents on tax avoidance strategies. Dozens of such patents have been issued, and applications for dozens more are now pending.

This is a meaningful win for all taxpayers because a huge industry has sprung up to create and promote tax avoidance strategies - some of which were duious or outright illegal. In my opinion, it makes no sense to issue a patent that may limit how the tax code may be used, regardless of how novel or inventive it may. Several patented strategies in the area of estate tax planning have arisen in recent years. It's hard enough to comply with the tax code without having to worry about impinging on someone else's patent. Now, we are one step closer to making the tax code the rightful property of all taxpayers. Congress does get things right from time to time.