Posts Tagged ‘gifts’

Lawyers Continue Battle After Guardianship Dismissal

MAY 23, 2016 VOLUME 23 NUMBER 20
It will come as no surprise to anyone who has been involved in guardianship and conservatorship proceedings: the legal fees and related costs can often spiral out of control. Though most guardianship proceedings do not cost tens of thousands of dollars, some do. In fact, the battle can sometimes be about the attorneys’ fees, rather than the need for a guardianship.

A recent case in North Carolina illustrated this problem. It involved a woman we’re going to refer to as Connie, who was estranged from her brother Fred, her closest relative.

Connie knew that she was slipping, and that she was losing her ability to handle her own finances and personal decisions. She consulted a long-time friend, Harriet Hopkins. Ms. Hopkins was a lawyer practicing in the community, and she prepared the documents Connie needed — including a durable financial power of attorney. Because she had no one else to name, Connie chose to make Ms. Hopkins the agent under her power of attorney.

Some time later brother Fred learned that his sister was failing, that her attorney was managing her affairs and (most concerning to Fred) that the power of attorney included a provision that would have allowed Ms. Hopkins to make gifts to herself from Connie’s assets and income. Fred decided that he needed to file a court proceeding to get himself — or someone independent — appointed to take care of Connie’s finances and medical decisions. He hired lawyer James West to pursue the guardianship for him.

As in some other states, in North Carolina initiation of a guardianship automatically results in appointment of a lawyer as “guardian ad litem” for the subject of the proceedings. A local lawyer, Lynn Andrews, was appointed; she immediately reported that she was close friends with Ms. Hopkins and should not be appointed. The local court appointed another attorney as Connie’s guardian ad litem, and Fred’s lawyer began to discuss the case with her.

Very shortly after the case began, however, attorney Andrews let the other two lawyers know that Connie had hired Ms. Andrews as her personal lawyer. She vigorously objected to the proceedings on Connie’s behalf, and filed a motion to dismiss the guardianship altogether. Her argument: there was no doubt that Connie’s capacity was in decline, but no guardian was necessary because Connie had taken appropriate steps to assure her care was supervised and her finances taken care of.

In the course of the controversy, and in order to make sure there were no concerns, Connie signed a new power of attorney. The new document still named Ms. Hopkins as her agent, but removed the authority to make gifts. Everyone agreed that no gifts had actually been made while Ms. Hopkins held that power.

Fred’s petition for guardianship was dismissed within about a month of its initial filing. There were some further skirmishes about the precise terms of the dismissal, but Connie was no longer at any risk of having the court appoint a guardian — Fred or anyone else. And that might have been the end of things.

After the dismissal was finalized, Ms. Andrews filed a new petition with the guardianship court. She alleged that Fred and Mr. West, his lawyer, had behaved improperly by filing a guardianship petition without any basis. She sought an order requiring, as a penalty, payment of Connie’s legal fees by both Fred and his lawyer.

Mr. West responded by filing a petition against Ms. Andrews, asking that she be sanctioned, and ordered to pay his attorney’s fees and costs. His argument: by filing the request for personal sanctions against him (and his client) for allegedly abusive legal proceedings, Ms. Andrews had herself abused the legal system.

After a three-day hearing (which, it is worth repeating, was not about Connie’s capacity or her possible need for a guardian), the trial judge decided that sanctions against Ms. Andrews were appropriate. He first ordered that she would be personally responsible for Fred’s legal fees; later, the judge found that the total fees and costs of $122,987.72 should be assessed against her.

The North Carolina Court of Appeals considered the judge’s order, and decided (by a 2-1 vote, incidentally) that the case did not warrant any punishment against Ms. Andrews. The attorney’s fee award was reversed, and each side ended up paying their own legal fees (though Fred was ordered to pay the cost of a multidisciplinary evaluation of Connie that had been conducted for the proceedings below). Matter of Cranor, May 17, 2016.

What does Connie’s case tell us about guardianship and conservatorship in Arizona? While the proceedings can be different from state to state, some rules do apply across most states. One of those is that the parties — and their lawyers — have a duty not to let the proceedings run up giant legal bills.

A leading Arizona case addresses somewhat similar facts, but with a slightly different result. In the Arizona case, our Court of Appeals ultimately ruled that the lawyer for a guardian and conservator has a duty to constantly recalibrate one question: is the legal representation justifiable considering the cost and possible benefit to the ward?

“Decanting” of Trust for Medicaid Patient Challenged

JANUARY 11, 2016 VOLUME 23 NUMBER 2

Jane Murray (not her real name) died in 2003. She had created a number of trusts, including two for the benefit of her daughter Dana. Jane was very worried about Dana’s future, partly because of a long history of drug and alcohol abuse. She included some strong language guiding the trustee about whether and when to make any distributions. She might not have specifically considered long-term medical care, however.

In October, 2013, Dana entered a hospital in Connecticut as a quadriplegic. At the time, the two trusts contained assets of about $1 million, though the money was not actually available to Dana. The trusts were both “spendthrift” trusts, meaning that neither Dana nor her creditors could force any distribution. Both trusts also contained this language:

The trustee shall pay to my daughter or utilize for her benefit so much of the income and principal of her trust as the trustee deems necessary or advisable from time to time for her health, maintenance in reasonable comfort, education and best interests considering all of her resources known to the trustee and her ability to manage and use such funds for her benefits. In exercising its discretion the trustee shall bear in mind that my daughter has suffered severely from alcohol and drug abuse and that I do not want these trust funds to be used to support a drug or alcohol habit or any other activity which may be detrimental to her in the trustee’s sole opinion.

My daughter’s health, happiness and best interests are to be considered foremost in priority over those who will receive the remaining trust funds on her death. Subject to the above considerations the trustee is encouraged to be liberal in its use of the funds for her even to the extent of the full expenditure thereof.

Clearly, Dana’s trusts would be quickly exhausted on her medical care unless she could qualify for Medicaid assistance, and she had inadequate funds from other sources. Could the trustee simply refuse to make distributions for medical care? Would the trust’s assets be counted as available resources for Medicaid eligibility purposes?

In order to address these concerns, the trustee (in Florida) sought to “decant” Dana’s trusts into new trusts with more explicit language about her long-term care costs. Florida law permits such trust modification, and spells out exactly how it can be done, and the trustee followed the law’s directions. The changes were submitted to a court in Florida for approval, and Dana signed a form giving her consent to the decanting.

The two new trusts for Dana’s benefit included language that clearly made the trust assets unavailable for Medicaid eligibility purposes. In that way, the trusts could be preserved to pay for extra or supplemental needs for Dana’s benefit, permitting her to have a better quality of life. The new trusts, and the history of the decanting, were given to the Connecticut Medicaid office for review.

Shortly after the decanting was completed, an attorney for the Connecticut Medicaid office decided that Dana’s trusts were originally “general support trusts”, making them available resources for Medicaid eligibility purposes. To make matters worse, Dana’s consent to the decanting amounted to a transfer of resources for less than fair market value. That would mean that Dana was ineligible for Medicaid assistance with her long-term care needs until 2021.

After an unsuccessful appeal through the Medicaid agency, Dana filed a lawsuit in Connecticut Federal District Court. She asked for a preliminary injunction prohibiting Medicaid from suspending her benefits, and a permanent order finding that the trustee’s decanting should not be counted as a gift by her.

The federal court ruled on the preliminary injunction question last month. It is only a preliminary ruling, and it is only one trial court — and therefore not of much use to establish precedent. It does, however, suggest how courts might view similar actions in other cases.

The judge hearing Dana’s case decided that there was a high likelihood that Dana will prevail when her case finally does come to trial. If the Medicaid agency were to be allowed to suspend her benefits in the meantime, the damage to her would be irreparable. Accordingly, he ordered that Dana will continue to receive Medicaid benefits while her case proceeds.

Even though we will probably not know the final outcome of Dana’s case for months (or perhaps even years), there are some useful lessons to be learned:

  • Inclusion of specific “special needs” language in virtually every trust might make sense. Dana’s mother knew that Dana had problems, but apparently didn’t consider the possibility that Dana might end up in a long-term care setting. A single paragraph expressing her wishes for how the money was to be used in such an event would probably have prevented the current dispute, allowing Dana to easily qualify for Medicaid assistance.
  • Decanting a trust in one state but having an effect in another state, while legally permissible, can lead to confusing results. One problem in Dana’s case was that Connecticut law on the interpretation of the original spendthrift trusts, and the ability to decant the trusts, was different from Florida law. That is not a reason to refrain from using local law, but just a caution that it might make sense to take extra care when multiple states are involved.
  • State law on decanting might require the consent of the beneficiary, or make it easier to complete the process, but it will generally make sense to avoid having beneficiaries consent. Although Dana’s agreement to the decanting was clearly not a “transfer of assets” as the Medicaid agency’s lawyer suggested, it did give him something to raise as an objection.
  • Though interpretations by the Social Security Administration usually are followed by state Medicaid agencies, that is not always the case. In Dana’s case, the Social Security rules clearly provide that her mother’s trusts would not be treated as an available resource. The Medicaid agency here disagreed.

Simonsen v. Bremby, Southern District of Connecticut, December 23, 2015.

The bottom line: trust law and Medicaid eligibility law often have uncomfortable intersections. Slightly different circumstances and different states can lead to big differences in outcomes.

Holiday Gifts for Older Family Members and Friends

DECEMBER 7, 2015 VOLUME 22 NUMBER 45

‘Tis the season — the season of uncertainty about what gift to get for your grandparents, older parents or Aunt Myrtle. You want to be festive, you want to be thoughtful, and you know that another two-pound box of chocolates might not be the best idea. But what can you get for an older family member? We have a handful of good ideas:

  • Warm things. Many (not all) seniors are perpetually cold. A lap blanket or throw might be a good choice, especially as it will be given in the cold season. Warm slippers (these look interesting for men, and these for women might be appropriate), or warm and somewhat baggy socks (so they will be easy to slip on and off) make good warming gifts.
  • Sweaters and lighter jackets. Continuing in the “warm” category — but with this wrinkle: make choices that are easy to put on, take off, close or leave open. Think about vision problems as well as arthritis. Avoid pullover sweaters; look for alternative closures (velcro, big buttons, hooks).
  • Phones. You’ve moved on, and no longer even have a landline, right? Your mother has not, however — she still thinks of a “phone” as a handset with a plug connection to a wall socket. She might not want to learn how to use a smartphone — she might just want a phone with buttons big enough for her to see (and touch without hitting the button next to it). She might want some help with her hearing loss, so consider a landline telephone with a screen that provides speech-to-text translation. A client of ours recently bought a CapTel telephone for herself, and is pleased with how much easier it is to talk to a long-time friend in another state. We’ll be looking into this idea for our own mother, though we haven’t used it yet ourselves.
  • Tablets. OK, maybe your grandfather isn’t technologically savvy. But we’ll bet he can figure out an iPad, if it’s properly set up (don’t send it to him and expect him to get it configured to work with the network at his independent living facility). The devices are designed to be intuitive — our two-year-old grandson can figure out how to do all sorts of things (mostly acceptable), and so can your grandfather. Note that we said “iPad”, and not an Android. Though we use Androids in our office, we recommend that you choose the much more widespread iPad, so that others in the facility or neighborhood are more likely to be able to help or explain things. This is the wrong place to argue about technological purity — just make it easier for Granddad to get use out of his tablet. What will he do with it? How about starting with Facetime?
  • How-To-Use-Your-New-iPad. Not the real title, but if you’re getting an iPad for an older relative, maybe you want to get them some old-fashioned paper-based reading material to explain it. “My iPad for Seniors” looks like a good option. Disclaimer: we’ve ordered it but haven’t read it yet.
  • Kitchen implements. Arthritis a problem? Look at the kitchen items — many of them ingenious — on the ArthritisSupplies.com website. Many “OXO Good Grips” kitchen items, made for easier handling, are especially useful for seniors (we use the OXO Good Grips Angled Measuring Cups in our kitchen daily — and they’re just easier to use).
  • Digital photo frame. This is ingenious. We’ve set one up for our mother. It comes alive when she walks past it, it shows a constantly rotating sequence of photos, and a whole collection of family members have the e-mail address to send photos automatically. That means she can keep up on family photos in real time, and she reports that she sometimes watches it as if it were television. The particular device we use is the Nixplay unit, but there are others out there, too.
  • Activity tracker. This one is a little bit more of a stretch, but it might work for your family member. It does require some monitoring, and recharging of the basic unit. We like the Fitbit, but there are other choices. The positives: it makes your family member a part of the competitive group (you have one yourself, right?), it gives you the ability to monitor your family member’s activity (assuming everyone is agreeable with that) and it encourages more exercise and activity.
  • Shutterfly. While we’re thinking about family photos, try putting some on everyday items like mugs, pillows, jigsaw puzzles or all manner of other items. Here’s a lovely idea: get that warm throw (see above) with a family photo or collage! The best-known source for turning photography into household items is Shutterfly, but there are others out there, too. Costs are surprisingly reasonable.
  • Stocking stuffers. Does your dad have a hard time getting in and out of your car when you take him out? Look for this ingenious device (there are several manufacturers) that you can store in your car door’s well or glove box. Some variants include a flashlight as part of the package, which seems like a good idea — but maybe a set of several small keychain flashlights would be a better choice. How about a ballpoint pen that is easier to handle and harder to lose? Look at this oversized-but-comfortable pen (though, frankly, we’ve been using this very retro disposable fountain pen, and handing them out to our elderly clients like candy).
  • Canes and walking sticks. Does it seem to you (as it does to us) like maybe a more attractive cane would get used more often? Especially if it was more comfortable in the hand? How about this cane, or another with a favorite theme (like horses)?

Do you have other good ideas? Feel free to share — quickly, please. We need to complete our shopping list, too.

Mother’s Gifts to Children Create Dispute Over Special Needs Daughter

SEPTEMBER 21, 2015 VOLUME 22 NUMBER 34

What plans should you make when you have a child receiving Supplemental Security Income (SSI) or Medicaid benefits? Should you create a special needs trust? Disinherit that child so their benefits won’t be affected? Leave their “share” of your estate to another child or children instead?

We get asked this question regularly. Most of the time our answer is easy, and strongly delivered: create a special needs trust. Choose a trustworthy child to administer the trust, or maybe a professional trustee. Let the trustee act as your surrogate after your death — deciding how to use the trust’s money to best benefit your child.

Do not, whatever you do, leave your child’s inheritance to another child with instructions to take care of their sibling. Do not do that even if you completely trust that child. Do not do it even if you are prepared to write something that makes clear that they are not required to behave honorably — that you are not trying to create a de facto trust for your child with disabilities.

Why not? Because bad feelings will be generated. Litigation is likely to be involved. Your children, and their children, and your sons-in-law and daughters-in-law, can not be counted on to all agree about how they should behave — especially with you not around to exercise moral authority over them.

How do we know this? Because of Mary Jane. Let us explain.

Mary Jane had several children. We’re going to call them Robin, Randi, Rachel, William and Walter. Robin is developmentally disabled. In 1995, Walter died in a terrible accident. At the time, Mary Jane received a settlement from Walter’s death; she gave $51,000 of her settlement money to each of her children, except that she gave $102,000 to Randi and less than $1 to Robin.

Did Mary Jane intend to have Randi use the “extra” $51,000 share for Robin’s benefit? At the time she said not — there was explicitly no restriction on how Randi could use her gift. The family problem created by this uncertainty didn’t become active until almost two decades later.

After she made the gifts to her children, Mary Jane did her own estate planning. She created a special needs trust for Robin, naming William as trustee. An equal share of her estate was to go to the special needs trust upon her death. She also helped Robin sign a power of attorney, naming William as her agent after Mary Jane’s death. Then, in 2003, Mary Jane died.

After Mary Jane’s death, her third daughter (Rachel) began asking Randi what she had done with what she, Rachel, thought of as “Robin’s” $51,000 gift from back in 1995. Randi declined to tell her. Rachel then turned to William, insisting that he should make Randi answer her questions. He, in turn, also declined to act.

At this point, it’s worth reviewing the players. Robin was to receive an equal share of Mary Jane’s estate, though in a special needs trust. But Robin had not received an equal gift from the settlement of Mary Jane’s claim arising from Walter’s death. Instead, Randi had a double share. Meanwhile, William had been put in charge of Robin’s inheritance and also managed Robin’s own affairs. Rachel had no apparent standing or role in any of these arrangements.

Still, when Rachel did not get a satisfactory answer, she filed a lawsuit. She sued Randi (for not agreeing that half of her 1995 gift was really for Robin) and William (for not insisting that Randi account for that gift). She asked that the court make Randi account, and that the $51,000 (plus interest) should be held in trust for Robin’s benefit.

The trial judge dismissed Rachel’s lawsuit, finding that she had produced no evidence that the gift from Mary Jane was in trust at all. Rachel appealed.

The Wisconsin Court of Appeals upheld the dismissal. The appellate judges agreed that there was no evidence that Mary Jane had intended the “double” gift to Randi to be a trust for Robin. Dismissal of the lawsuit was proper. Robbins v. Foseid, September 3, 2015.

How does Mary Jane’s case establish the importance of actually creating a trust? After all, assuming that she did not intend to make Randi’s “double” gift a trust, the courts upheld her intentions, right?

Yes, but at a significant cost — both in legal fees and in family disharmony. Of course we don’t have enough information about her family to know if they generally got along well before the death of Walter and Mary Jane’s gifts to her children. If they did mostly get along, however, her failure to be clear about her intentions might be a significant part of the later decline in the relationship.

If, on the other hand, Mary Jane actually did intend the double gift to benefit Robin, those intentions are now completely dependent on Randi’s goodwill toward Robin. Maybe Randi will do exactly the right thing, but wouldn’t it have been more effective and better thinking for Mary Jane to have made the original gift into a special needs trust — probably just like the one she created a year later as part of her estate plan? And what happens now if Randi should die, leaving her estate to her husband, or her children, or her creditors?

Our basic point: when you are making plans for your child who has a disability, you should not count on everyone correctly guessing your intentions, or acting honorably, or even living long enough to carry out the tasks you are implicitly setting for them. Make your intentions explicit, and the lines of authority clear. Create a special needs trust.

Why You Aren’t Really Limited to $14,000 in Gifts Each Year

APRIL 27, 2015 VOLUME 22 NUMBER 16

There is so much misinformation (and misunderstanding) around gift taxes, that we thought we would take a few moments and try to straighten out the confusion. Let’s start at the end: if you live in Arizona, and are not fabulously wealthy, you probably don’t actually care very much about gift taxes. Now let us explain why.

Arizona doesn’t assess any gift tax, estate tax or inheritance tax, so those of us living in The Valentine State only have to understand federal estate and gift tax systems — unless, of course, we own property in one of the states that does impose a tax on such transfers. Meanwhile, a basic understanding of the federal gift tax is practically embedded in our DNA: you can make a gift of up to $14,000 per year, but anything over that is prohibited.

The problem with that basic understanding is that it is wrong. The magical $14,000 figure is just the number that Congress has set as being too small to even bother thinking about. Nonetheless, it has a strong hold on the public imagination — even though the number has only been set at $14,000 since 2013. The “don’t even think about it” number was $3,000 for four decades before rising to $10,000 in 1982; it started increasing in $1,000 increments in 2002 and will probably rise to $15,000 within the next couple of years.

In calculating whether you have made gifts of over $14,000, by the way, the federal government gives you three important additional benefits:

  1. The $14,000 figure applies to gifts to each person, not the total amount of gifts in a year. Do you have three children you want to make gifts to? No problem. You can give each of them $14,000 this year, for a total of $42,000, without having reached the threshold.
  2. Are you married? It’s simple to double the numbers — even if you (or your spouse) are actually making the full amount of the gift. A married couple can give away $28,000 without having to do anything more (though if all the money comes from one spouse there is one more step required — more about that later).
  3. Will the gifts be used for medical or educational expenses? The lid just got taken off. So long as you make your gifts by paying directly to the college, or hospital, or other provider, there is no $14,000 limit. You can pay your favorite granddaughter’s tuition and books directly, and still give her another $14,000 (double that if you’re married) without having to do another thing.

Does all that mean you are generally limited to giving $14,000 (each) to each recipient? No. That’s just the level below which you don’t have to do anything else but sign a nice card and make a notation in your check register. Want to make a $50,000 gift to your son, or your daughter, or your mailman’s nephew? No problem — you’re just going to have to file a gift tax return.

That sounds scary, but it’s really not. You won’t actually pay any gift tax unless the total amount you give away (over and above the $14,000 + tuition + medical expenses each year) exceeds $5.43 million dollars in your lifetime. And even that number is going up each year.

The bottom line: if you live in Arizona, don’t own property in a state that imposes a gift tax, and are worth less than about $5 million, you are simply going to be unable to pay a gift tax over your entire life, no matter how hard you try. That is also true, by the way, for estate taxes — you are going to have a very hard time incurring an estate tax in those facts, even if you want to do so.

So imagine that you want to make that $50,000 gift to one person (or two $50,000 gifts, or three) in 2015. How hard will it be to prepare and file the gift tax return? Not very. If you ask your tax preparer to do it for you, we predict that you will get charged a couple hundred dollars. You can almost certainly figure out how to file it yourself — just look for information about the federal Form 709. Things can get a little more complicated if you are giving away an interest in your business, or a fraction of a larger asset — you really will need to get professional help in such a case. But there’s no rule that says you simply can’t give away more than $14,000, or that you’ll pay any taxes or penalties if you go over that amount.

By the way, there’s a common misconception about other tax effects of gifts, too. There is no income tax deduction or adjustment for your gifts, and the recipient pays no gift tax on receipt of the gift. Of course, if you give away an income-producing asset the future income will be taxed to the new owner, but the only immediate tax effect of a gift in Arizona is the (almost nonexistent) federal gift tax.

Does all this mean we advocate making large gifts? Not necessarily. There are some secondary tax consequences of giving away larger assets — especially those that have appreciated in value while you owned them. Before making a gift of real property, or appreciated stocks, get good legal and tax advice. And there are plenty of non-tax reasons you might not want to give away a significant portion of your assets. But the federal gift tax shouldn’t be much of a disincentive for most people.

Gift Tax Limit Will Rise to $14,000 in 2013

NOVEMBER 19, 2012 VOLUME 19 NUMBER 42
Here’s the headline: the annual gift tax exclusion amount, which has been set at $13,000 per year since 2009, will increase next year by $1,000. That means you can give up to the higher figure ($14,000) to any one other person without having to file a federal gift tax return.

This confuses people, though it’s not really that complicated. Let’s take a shot at simplifying it.

The U.S. government imposes a tax on substantial gifts. It does that partly to protect the estate tax — if it was easy to just give away all your assets during your life, no one would ever be liable for an estate tax. But the government is not interested in making everyone file gift tax returns for the wool stocking cap and slippers you plan on giving your aunt for Christmas this year, so it has a threshold amount it ignores. In fact, that amount was well over the stocking cap and slippers in 1997, the last time Congress tinkered with it.

That year you could give $10,000 in a year. Your spouse could give another $10,000 (in fact, you could give $20,000 and just say half was from your spouse). Congress decided that figure ought to be adjusted each year for inflation, but no one relished having to remember that in 1998 the figure was $10,257 or some such number — so they set it to increase only in $1,000 increments. The first time it actually increased (to $11,000) was in 2002. It’s been at $13,000 since 2009, and next year it will go up to $14,000.

Here’s the confusing part, at least for most people: it doesn’t mean that you can’t give more than $14,000 (next year) to someone. It doesn’t even mean that you’ll pay a tax if you do. It just means that if you give more than $14,000 to one person, you will have to file a gift tax return. No tax will be due until the total amount of gifts in your lifetime exceeds — well, this is another confusing part of the story. Let’s just say, for now, that all the gifts in excess of the applicable annual exclusion amount each year must total $1 million over your lifetime before you owe any gift tax.

You may have read that the actual figure for 2013 (the amount you have to give away, in excess of your annual exclusion amounts) is $5.12 million. That figure is scheduled to revert to $1 million next year. Nearly everyone who follows these things expects Congress to change the $1 million figure to something larger, though it is unclear what the final figure might be. No one is sure when that change will be finalized, though few expect Congress to act before December 31 of this year.

Does that mean that the $14,000 figure is unsettled? No, it does not. This scheduled increase in the annual gift tax exclusion amount is independent of the tax cuts scheduled to expire next year, and is unlikely to be changed by Congress even if it does act on the larger tax questions.

Many people, and many tax advisers, have counseled wealthy individuals that they ought to consider making substantial gifts before the scheduled reversion to (approximately) 2002 tax levels. For people worth substantially more than $1 million, and especially for those worth well over $5 million, that is probably good advice. But for most people, the increase in the gift tax exclusion figure — the new $14,000 number — is actually more important. It allows the modestly wealthy to make larger lifetime gifts without worrying very much about gift taxes or the prospect of estate taxes.

Let us assume, for a moment, that you are in your sixties or seventies, that you have three adult children and six grandchildren, that you are married, and that you and your spouse are worth $1.5 million. Should you hurry and give away most of your money before the end of 2012? Probably not, as you are likely to be uncomfortable with the prospect of not having complete control over your money for the next decade or two.

That is especially true starting next year, when you and your spouse can give $28,000 per year to each of your children (and, if you are so inclined, another $28,000 to each of their spouses). On top of that, you can give $28,000 to each of your six grandchildren each year. If you feel the need to reduce the size of your estate to below the $1 million taxation level, you can give away over $250,000 without even having to file a tax return — much less pay any tax. You have quite a few years left to accomplish that goal, and you can probably wait to see what Congress does before making any rash decisions.

Your circumstances will almost certainly vary, of course, and that is what good legal advice is all about. You should discuss your individual situation with your estate planning attorney to determine the best course of action for you. But the increase in the annual gift tax exclusion amount gives you just a little more flexibility as you make your plans.

There are at least two other points we should make about the gift tax rules before we leave the subject:

  1. Arizona does not have a gift tax (or, for that matter, an estate tax) at all. If you live and die in Arizona, and all your property is here, you simply do not have to worry about state taxes on the transfer of your wealth to your children or other beneficiaries.
  2. The gift tax exclusion is not the only way you can make tax-free gifts. You can also pay for medical and education costs (you have to pay directly, not just make a gift to one of your children earmarked for college, for example). You can also make charitable gifts without worrying about the limit (your charitable gifts may also give you some income tax breaks, but that is a completely different story).

We hope that helps you understand the gift tax system. We plan on providing updates on the estate tax changes we expect to see over the next few months; stay tuned for the next wave of complications. But we think it pretty likely that this small scheduled change will actually be more important to most readers than what Congress does with the estate and gift tax system.

Lawyer Suspended After Representing Wife as Conservator

JUNE 13, 2011 VOLUME 18 NUMBER 21
Richard J. Murphy was first admitted to practice law in 1964. He was a fixture in local political and legal circles in Osceola, Iowa, for nearly fifty years. He was the attorney for the City of Osceola, and he had been the County Attorney years earlier. His private practice, which he shared with his son, focused on real estate, probate and tax issues.

Helen Doss had been the County Auditor at the same time Mr. Murphy was County Attorney, and their friendship continued after they both left office. Ms. Doss, who had no children, came to rely on Mr. Murphy and his wife for assistance with errands and legal matters. Mr. Murphy prepared her will, which named his wife as executor. He helped her set up bank accounts, including one that named Mrs. Murphy as co-owner. He was named as one of the beneficiaries of her life insurance policy.

When Ms. Doss, at 92, experienced several falls in her home, Mr. Murphy filed a voluntary guardianship and conservatorship petition. Ms. Doss acknowledged that she needed help, and agreed that Mrs. Murphy should be appointed as her guardian and conservator.

For the next four years, Mr. Murphy and his wife took care of Ms. Doss and her finances. He arranged to cash in over $125,000 worth of Series E Bonds, and placed the proceeds in an account jointly held between Ms. Doss and Mrs. Murphy. He arranged the sale of her home and represented his wife at the closing; his son represented the buyers in the transaction. He prepared a new will, naming Mrs. Murphy as executor again.

During the conservatorship, Mr. Murphy prepared annual accountings for his wife to sign and file with the local court. He left off at least one account, one which he said he considered to be Ms. Doss’ own account and not part of the conservatorship. That account named Mrs. Murphy as co-owner, and Mrs. Murphy wrote various checks on it during the conservatorship years — including at least one, for $1,427.96 for a new vacuum cleaner for herself. Other checks on the undisclosed account were for $500 or $1,000 and payable to either Mrs. Murphy or to Mr. Murphy himself.

When Ms. Doss died in 2004, Mr. Murphy represented his wife in filing and administering the probate proceedings. Her will (which he had prepared) left the bulk of her estate to nephews and nieces. However, considering the joint accounts and life insurance proceeds, almost a third of Ms. Doss’ estate went to Mr. and Mrs. Murphy rather than the relatives.

One of the nephews complained, and after negotiations a portion of Ms. Doss’ estate was returned for distribution to family. But the matter did not end there. The Disciplinary Board of the Iowa Supreme Court, which regulates lawyers, got involved.

The Disciplinary Board conducted hearings and ultimately recommended a public reprimand for Mr. Murphy’s multiple violations of legal ethics rules. Mr. Murphy appealed, and the matter was considered again — this time by the Iowa Supreme Court.

In its ruling last month, the Court decided that public reprimand was not the right sanction. Instead, Mr. Murphy was suspended from the practice of law indefinitely, with no ability to reapply for admission for at least eighteen months.

After the fact, violations like Mr. Murphy’s always seem obvious. It is hard to imagine what he thought was defensible about filing a petition against his own client (even with her consent), and then representing the guardian and conservator. It seems even more obviously wrong when the guardian and conservator is his own wife. Add to that the transactions giving an increasing share of Ms. Doss’ estate to his wife, his failure to include all of Ms. Doss’ assets in the conservatorship accountings, and then the multiple representations in the sale of her home.

What was Mr. Murphy’s explanation for his actions? The Iowa Supreme Court characterizes his response as arguing that he was just following Ms. Doss’ instructions. She was strong-willed and had a generous nature, he argued. He denied that he had influenced her in any way in the exercise of her generosity. Supreme Court Attorney Disciplinary Board v. Murphy, May 27, 2011.

Uniform Transfers to Minors Act Accounts in Arizona: A Primer

JANUARY 31, 2011 VOLUME 18 NUMBER 4
One question we are frequently asked: isn’t it a good idea to set aside money for a child or grandchild, and isn’t a UTMA (Uniform Transfers to Minors Act) account a simple way to do that? OK — that’s really two questions. Our answers: Yes, it is a good idea to set aside money. Yes, the UTMA account is a simple way to do it. Don’t set up a UTMA account, however, until you understand the consequences.

There are confusing issues about UTMA accounts. Sometimes the confusion is heightened by the fact that each of the 48 states which have adopted versions of the UTMA Act has changed it a little bit — so what is true in Arizona may not be true in another state (and vice versa). Rather than indulge in all that confusion, however, we are going to tell you in straightforward language what to watch for in Arizona. Be careful about applying these principles to other states’ UTMA acts.

First, the good news. Here are the positive things about Arizona UTMA accounts:

  1. They are inexpensive to set up and to administer. They do not require a lawyer, and avoid courts and formal accounting requirements altogether. All you have to do to create an Arizona UTMA account is to include the name of a custodian, the name of the beneficiary, and the letters UTMA in the title. This will work: “John Jones as custodian pursuant to the Arizona UTMA for the benefit of Marie Smith.”
  2. A UTMA account can simplify the gifting of substantial amounts of money by multiple family members. Set up an account for your 2-year-old, and all four grandparents can put $13,000 each into the account each year (using 2011 numbers — the maximum non-taxable gift may go up next year or in future years).
  3. They automatically end at 21, so the money will not be tied up indefinitely. One of the points of confusion: sometimes UTMA accounts end at 18 in other states, and in some circumstances in Arizona. But if you are putting your money into an account for a minor in Arizona, the end date is age 21.
  4. They encourage regular savings by simplifying the process. Open an account with, say, $1,000, and put $50/month into the account. You won’t save a fortune in 15 years, but you will have $10,000 that you wouldn’t otherwise have saved without this discipline. Plus the earnings and growth on the investment, as a bonus.
  5. If the minor receives public benefits like SSI or Medicaid, the money will usually not be treated as “available” (and therefore reduce or eliminate benefits) until age 21.

Of course it’s not all good news. Here are some problems or limitations:

  1. The money in the UTMA account will need to be reported on the minor’s FAFSA (Free Application for Federal Student Aid) form when applying for student aid — and it will be treated as completely available to the student. In other words, the very existence of a UTMA account may prevent receipt of needs-based student aid.
  2. The income in the UTMA will be taxed at the minor’s parents’ income tax rates. Unless, of course, there is so much money in the minor’s name that his or her rate is higher — then the UTMA account will be taxed at that higher rate.
  3. The minor may have to file an income tax return if the UTMA money produces significant income. The UTMA account may be used to pay any income tax due, and the tax preparation costs, but it will require that a return be prepared.
  4. At age 21 the (former) minor is entitled to receive all the money. Period. It doesn’t matter if he or she has become a drug addict, a spendthrift or a cult member.
  5. If the (former) minor receives public benefits like SSI or Medicaid, at age 21 the UTMA account becomes an “available” resource and may compromise those benefits.
  6. If the UTMA custodian is the parent of the minor (which is by far the most common arrangement), then there may be additional complications in how the money can be used and/or what tax effect the money might have. Since a parent has an obligation to support his or her minor children, the UTMA account generally can not be used by a parent/custodian in ways that reduce or satisfy that support obligation. If, on the other hand, the donor of the money acts as custodian, he or she may not have gotten the money out of his or her estate (which is usually one intention on the donor’s part).
  7. Although UTMA accounts are usually seen as simple mechanisms avoiding lawyers and conflict, the custodian still has an obligation to give the minor (or his or her guardian) account information. Thinking of giving a divorced and non-custodial parent money for the benefit of his or her minor child? Know that you are inviting a dispute between the custodial parent and the UTMA custodian over how the money is invested and spent (or not spent).
  8. What happens if the custodian dies or becomes incapacitated? There is no easy mechanism to select a successor custodian; it may require a court proceeding to name a successor. A fourteen-year-old minor may be able to select his or her own custodian, which could raise concerns for a thoughtful donor. (Note: Arizona law does allow the current custodian to name his or her own successor custodian, but few do. If you are planning on setting up a UTMA account, insist that the custodian select a successor.)
  9. What happens if the beneficiary dies before reaching age 21? The money goes to his or her estate — which may require a probate proceeding (if the total is over $50,000 in Arizona) and usually means that the money will be split between the child’s parents. That may be fine, but it may not be what the donor intends or wants.
  10. The effect of interstate proceedings is unclear. If you live in New Mexico and set up a UTMA account in an Arizona bank with an Arizona custodian for a minor who lives in Iowa, what happens when your custodian moves to Wisconsin? What courts might the custodian have to answer to, and whose law applies in the case of a disagreement? Fortunately, this problem seldom arises — there are few legal proceedings involving UTMA disputes. But they do happen, and increasingly so in an increasingly mobile society.

What are your alternatives to a UTMA account? Consider 529 plans for educational purposes, and separate trusts if the money is intended to be for more general use. For a child who earns income an IRA might even be an appropriate choice — if the child earns $3,000 in a given year, he or she can contribute up that amount to an IRA (and the source of the money does not have to be the earnings). Talk to your financial adviser and your lawyer about the cost of the various options, the problems they raise, and the best alternative in your circumstances.

Attorney Disciplined for Advice to Ignore POA Limitations

JANUARY 3, 2011 VOLUME 18 NUMBER 1
Lawyers, of course, grapple with ethical issues constantly. Elder law attorneys see particular ethical issues recur frequently. Sometimes the lawyer’s eagerness to accomplish the client’s wishes can cloud the lawyer’s ethical judgment. Sometimes the lawyer’s fascination with what might be done can even gallop ahead of the client’s wishes.

None of that is terribly profound or original. Last month, however, we were reminded of how easy it is to get enamored of a particular legal stratagem even though it may not be appropriate in a given case. The notion surfaced in the form of a Minnesota disciplinary proceeding involving attorney Donald W. Fett.

Mr. Fett was consulted by a man (we’ll call him Richard here, just to give him a name) whose brother (let’s call him Martin) was failing. Martin had moved into a nursing home, where he was likely to spend the rest of his life. Martin was unmarried, had no children, and was worth a little more than $600,000.

Martin had already signed a power of attorney naming Richard as his agent. Minnesota law provides a simplified form for powers of attorney, and it has a space where the signer can indicate whether his agent will have the authority to make gifts, including to himself. Martin had checked the line to give Richard the power to make gifts of Martin’s property, but not to Richard himself.

Mr. Fett knew that Martin’s money would be used up in relatively short order if it had to be spent on his nursing home care. Richard had told him that Martin would not want that to happen if it could be avoided, and Mr. Fett could see a way to allow at least a portion of Martin’s money to be protected. In a letter to Richard, and in several follow-up communications, he outlined his plan.

Basically, Mr. Fett suggested that Richard could make a gift of nearly all of Martin’s money, leaving him less than $3,000 (the asset limit in Minnesota for Medicaid assistance with long-term care — note that the limit is even lower in most states). That would make Martin ineligible for Medicaid assistance, but only for a limited time. The money that Richard had given away could be given back over the next couple of years, and then the ineligibility period would expire and Richard could keep the remaining money aside until after Martin’s death. That way at least a portion of his assets could go to the people he had named in his will — including Richard, his other siblings, and some charities.

The fly in the ointment for Mr. Fett’s advice: Martin’s power of attorney had expressly prohibited gifts to Richard himself. In order for the plan to work, though, Richard would have to be confident that Martin’s money would be used to benefit Martin during the ineligibility period. It was a conundrum.

Mr. Fett’s proposed solution was to have Richard liquidate all of Martin’s investments, transfer them to a bank account in Richard’s and Martin’s names as joint owners, and then withdraw them from the bank into his own name. That way, he apparently reasoned, Richard wouldn’t be using the power of attorney in a way that was prohibited — he would instead be using general rules governing joint accounts.

Richard was apparently suspicious of Mr. Fett’s advice, and eventually he consulted another attorney. That resulted in a complaint to the Minnesota disciplinary commission, the Office of Lawyers Professional Responsibility. After hearings the Office recommended that Mr. Fett be publicly reprimanded and placed on probation for a year.

The Minnesota Supreme Court agreed, and upheld both the discipline and the sanction. The Court’s opinion takes a dim view of Mr. Fett’s argument that he was not really recommending a course of action in violation of the limitation in the power of attorney. The Court notes that even if Richard could have used the joint tenancy account to circumvent the limitations of his brother’s power of attorney, Mr. Fett’s correspondence with his client failed to explain the distinction in sufficient detail to allow Richard to make an informed decision about how to act.

The Court notes that Mr. Fett’s failure to give his client complete information could have subjected Richard to serious problems. He might be held liable to return all of Martin’s money, and perhaps even triple the amount transferred. He could even be criminally charged. Mr. Fett gave him none of that information. His failure to fully inform his client was also a failure to provide competent representation, and a violation of the ethics rules for lawyers.

Mr. Fett had been a lawyer for over thirty years, and had limited his practice to estate planning and elder law matters for about six years prior to his contact with Richard. Because of that experience in the practice, and particularly in elder law, the Court determined that the sanction could be higher than would otherwise be implemented. Mr. Fett also had a history of disciplinary actions, having appeared before the Office of Lawyers Professional Responsibility five times over two decades.

The Court also considered mitigating factors such as lack of harm to either Richard or Martin (Mr. Fett’s advice was not followed) and lack of improper motive or harmful intent on Mr. Fett’s behalf. Those were not sufficient to offset the recommendation for a public reprimand, however. In Re Petition for Disciplinary Action Against Fett, November 24, 2010.

Is there a larger message in Mr. Fett’s disciplinary proceeding? We think there is, and it is this: just because a legal strategy might work, it does not follow that it must be implemented, or even that it is a good strategy. Careful consideration of all the negatives is important, and complete information should be shared with the client.

Purchase of Life Interest Does Not Gain Medicaid Coverage

JULY 7, 2003 VOLUME 11, NUMBER 1

Qualifying a family member for Medicaid assistance with the cost of nursing home care can be complicated. When Pat Monroe’s mother went into a nursing home in Arkansas, Ms. Monroe had a clever idea: she had her mother buy an interest in her own home. Unfortunately for her it didn’t work as she intended.

Ms. Monroe’s mother, Berniece Groce, had moved into the Clay Cliff nursing home in July. Ms. Monroe held a power of attorney for her mother, and she used it to pay the nursing home expenses for nearly a year.

Ten months later Ms. Monroe took an unusual step. She bought a home for her mother—or at least an interest in a home. Using the last of her mother’s savings she paid $43, 953.13 for a “life estate” in Ms. Monroe’s own home.

The holder of a life estate is entitled to the use of the property for the rest of their lives, but their interest expires automatically on death. It is not uncommon for a property owner to transfer title to children or others, retaining a life estate. By this means the owner can dispose of the “remainder” interest during life while protecting his or her own right to use the property for life. But what Ms. Groce did (through her daughter) was different. She did not retain an interest in property she already owned, but instead purchased the life interest in property she had never owned before.

Because a Medicaid recipient is entitled to retain his or her home, Ms. Monroe reasoned that her mother’s life estate in the residence would be protected. Ms. Groce would qualify for Medicaid, Ms. Monroe could continue to live in the home (with her mother’s permission, of course), and her mother’s interest in the home would automatically disappear at her death.

Unfortunately for Ms. Monroe, the state Medicaid agency saw things differently. In its view, the purchase of the life estate was nothing more than Ms. Groce giving away over $40,000. She did not really purchase anything of value, reasoned the Medicaid agency, and she never actually resided in the home.

After Medicaid eligibility was denied Ms. Monroe appealed on her mother’s behalf. The Arkansas Court of Appeals agreed with the Medicaid agency and the trial court, and denied Ms. Groce’s Medicaid eligibility until the expiration of the disqualification period imposed by the $43,953.13 gift. Groce v. Director, Arkansas Dept. of Human Services, June 11, 2003.

Arizona Medicaid regulations require that the Medicaid applicant either actually resides in the home or “has resided” there. The result would probably be the same in Arizona.

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