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Estate & Probate Law Blog

Wishart Norris
Henninger & Pittman
6832 Morrison Blvd.
Charlotte, NC 28211
(704) 364-0010

Taxation of Employer Owned Life Insurance

A business client of mine recently implemented a deferred compensation arrangement (“Plan”) for a key person who was also a manager. The employee did not want to pick up any income until retirement. Thus split dollar was not advisable. So we looked to traditional deferred compensation where the employer enters into an agreement with the key employee promises to provide the set amount of $250,000 at retirement when the employee retires or sooner dies. The company could, but need not, own a life insurance policy that has significant cash value buildup potential on the life of employee. When the employee retires the cash value can be used to partially pay for the retirement funds owed. The Plan cannot mandate that life insurance be used, otherwise the Plan would be “funded” for IRS purposes, and the cash value buildup would be taxed each year to EE. The purchase of life insurance must be optional in order for the deferred compensation plan to make sense. But if life insurance is the tool chosen to provided potential funds for the Plan, INC would be able to defer income on the cash value buildup of the policy until cashed in. Any death proceeds would escape income tax (subject to the post Aug 17, 2006 new rules that partially taxes proceeds as described below). It is sometimes difficult to explain to the employer that life insurance is optional, because his life insurance agent has spent a good deal of time tying the purchase of a life insurance policy and its cash value to the retirement objectives of the Plan. If the Plan calls for $250,000 of retirement benefits, that does not mean there must be same amount of cash value available upon retirement.

Use life insurance as a potential funding mechanism for deferred compensation, but INC should not tie it dollar for dollar to the Plan obligations, or the Plan may be deemed “funded”. In our case, we clearly did not tie the policy to the Plan, but INC will be the owner and beneficiary of a $425,000 policy. The employee , having no rights to the policy, like the employer, is not taxed on cash value buildup. Premium payments are not deductible. Upon retirement (or whatever trigger dates are imbedded in the Plan), the insurance policy can be cash in, and the proceeds are used to satisfy the retirement obligation---income to the employee EE and deductible by the company, INC. Rev Rul. 72-25; If the EE dies, then the EE’s beneficiary of the Plan receives the retirement in lump sum (or could be payable over several years). The excess death benefit would be kept by the employer and received income tax free. Life insurance death proceeds derived from the death of an employee (including former employees) are generally received by INC tax free, and thereafter the payments made to the family of the deceased EE is taxed on the amount received.

However, the general rule for policies issued after August 17, 2006, is that proceeds received at death of EE are taxable to INC to the extent it exceeds total premiums paid by INC. Thus the deferred cash value buildup is then taxed to the employer. But this rule does not apply where 1) the insured was an employee within past 12 months of death or was a director or highly compensated employee or individual when the contract was entered into (These are definitions defined under Code Sec 101 (j) (2)(A).; or 2) if the beneficiary was a member of the insured’s family.

As a condition to 1) or2 ) above , prior to the insurance policy being issued, the EE must be notified in writing that INC intends to insure her life for INC’s benefit, AND EE must consent in writing to the policy, and to its continuation when her employment ends. Code Sec 101(j); Notice 2009-48; I.R.B. 1085;

There are other forms required to be presented –mostly addressed in Notice 2009-14, as well as Code Sec 60391. In addition a form 8925 must be attached to the owner’s income tax return Reg 1.6039-1; Again, these record keeping requirements of the employer- owner pertain to policies issued after August 17, 2006.

The notice on 101(j) filing and 409(a) requirements have to be met. It is important to make sure that your accountant files an 8925" Report of Employer Owned Life Insurance Contracts" under 101(j) of the Code.

Charlotte Estate Lawyer

Josh Henninger
NC Board Certified Specialist in Estate Planning & Probate Law
Charlotte Estate Law
Wishart, Norris, Henninger, and Pittman, P.A.
Tel: (704) 364-0010
Fax: (704) 364-0569
josh.henninger@wnhplaw.com
http://www.wnhplaw.com

Danica Little

NC Board Certified Specialist in Estate Planning & Probate Law
Charlotte Estate Law
Wishart, Norris, Henninger, and Pittman, P.A.
Tel: (704) 364-0010
Fax: (704) 364-0569
danica.little@wnhplaw.com
http://www.wnhplaw.com

Posted by Charlotte Estate Attorney at 5/14/2012 10:44 AM

Muses on Nonqualified Deferred Compensation

Each year an employee’s compensation amount used in determining allowable contributions to qualified plans (401K, 403b, etc) is limited. For 2012, the compensation limit is $250,000. A CEO that earns $350,000 is limited to contributing only $37,500 to a 401K plan (15% of $250,000). There is a way to augment the retirement of the CEO, however.

Through the use of nonqualified deferred compensation, an additional amount can be set aside for the employee, executive who will not be subject to immediate income tax. A deferred compensation agreement and an attendant “Rabbi Trust” (aptly named as a result of IRS ruling which essentially approved of the trust funded for a Rabbi by its congregation) can provide benefits in the future, without generating current income to the executive.

The future triggering event to receive future income might be retirement, illness, or simply a set number of years. The payment of future retirement would be subject to a requirement that the executive remain employed with the company. The nonqualified plan of compensation is not subject to the various discrimination rules of qualified plans. Any amount can be added to the plan, regardless of rank and file employee compensation.

Rabbi Trusts are funded either with a life insurance policy or actual monetary or stock contributions and are subject to the claims of creditors of the employer. If the agreement complies with stringent regulation requirements (regarding distributions, acceleration of benefits, certain elections, etc), the employer’s contributions of benefits will result in deductions when the amounts are distributed to the employee.

Compliance with 409a under the Code is not easy, and any deferred compensation arrangement should be reviewed by counsel before the employer obligates itself to an employee regarding future payment of benefits.

Charlotte Estate Lawyer

Posted by Charlotte Estate Attorney at 3/6/2012 3:57 PM

Modification by Agreement, Court Order or Decanting?

There are numerous and varied reasons one might want to modify or terminate an irrevocable trust, but which allowable method is preferred—modification by agreement or decanting? Let us focus on one situation in particular. This is the case in which a trust was established in order to comply with governmental entitlement regulations, but is found to be non-qualifying for such purposes.

For instance, the assets of a d4A Special Needs Trust (“SNT”) can be theoretically used for the benefit of one disabled beneficiary, without affecting Medicaid benefits. This is because assets within a properly drafted SNT do not count as belonging to the beneficiary. However, the terms of the trust must strictly comply with government regulations. For instance there can be only one beneficiary, it must be irrevocable, and there must be a payback provision to Medicaid. If any of these requirements fail, then the beneficiary might find herself without Medicaid or SSI. and other entitlements. If you find yourself confronted with a defective SNT, life insurance trust, GST, family trust or other irrevocable trust, you might want to modify or simply terminate the trust and start over.

North Carolinas’s relatively new Uniform Trust Code, found in Chpt 36C allows for changes to be made to irrevocable trusts, without the necessity of trust litigation.

Assuming the state of North Carolina has jurisdiction (N.C.G.S. 36C-1-107), there are three situations in which changes can be easily implemented. First, an irrevocable trust may be terminated or modified at will, where the Settlor, and all beneficiaries of the trust consent. Even if the changes might modify a material purpose of the trust, so long as the Settlor and all beneficiaries (including contingent) consent, then the modification or termination can be made with a written agreement. They can even decide how to make the distributions. (N.C.G.S. 36C-4-411). This liberal statute is certainly a grand change from long standing statutory and common law, where it was very difficult to change an irrevocable trust.

Secondly, if the underlying assets of an irrevocable trust are less than $50,000, the Trustee, with little personal liability exposure, can terminate the uneconomical trust, and distribute the funds out to the beneficiary. No consent is necessary from anyone. N.C.G.S. 36C-4-414

Lastly, North Carolina has adopted a very liberal “decanting statute” that allows the Trustee of one trust to appoint, or decant, assets into a second, newly created, trust, so long as the beneficiaries are the same. The Settlor need not be the one who creates the second trust, or even be alive for that matter. The trustee can establish the second trust, and appoint as much of the assets of the first trust to the second as he so chooses. N.C.G.S. 36C-8-8-816.1

Outside these three fact patterns, a Superior Court judge (not the Clerk of Court) will be required to order approval of all terminations or modifications of irrevocable trust. He will want to be sure that the purposes of the trust are upheld, that if changes are made, the Settlor most likely would have wanted it, and that the beneficiaries will be notified and protected. In addition the judge can modify a trust to further the purposes originally intended by the Settlor, to reform or correct scrivener’s mistakes, to modify to satisfy Settlor’s tax objectives, and for various reasons that further promote or protect interests of beneficiaries N.C.G.S. 36C-412 et seq.

Which brings me to a critical question, and that is whether is best to modify a defective trust, using a Court Order, using an agreement and consent of all beneficiaries, or should a decanting be instituted in which the old trust assets are moved into a new trust that complies with Medicaid qualification. (e.g. d4A trust)? Personally my thoughts are to use either a Court Order, or use decanting. Here is why. Just because one can modify under state law defective irrevocable trust with a written agreement among beneficiaries, does not necessarily equate to it being recognized as a valid modification by Social Services or VA or Medicaid. Arguably they should as trust substantive law is generally a state and not federal issue. However, it is not too far out of the realm of legal possibility that Medicaid could argue differently. A comparison can be drawn with a recent ruling by VA that the principal of a income only trust benefiting a VA beneficiary, still counts as his asset. The assets are deemed “available” to the beneficiary, thus jeopardizing Aid and Attendance. Note that in that case the principal was not appointable by the trustee or beneficiary under state law, but the federal agency interpreted and defined the trust operative language in VA’s own manner. The point being, for Medicaid purposes, the irrevocable trust as modified, in full compliance with North Carolina law, might be viewed as a revocable trust. Furthermore, Social Services or VA most likely would be reviewing an instrument entitled “Amendment to Trust”, which could at the very least cause scrutiny.

Compare such a modification with that of Decanting. The Trustee can create (as Settlor) a new and second trust that contains the proper language needed to comply with Medicaid regulations. In such a case, Social Services or VA would be reviewing a new, stand alone trust, perhaps entitled, “Special Needs Trust”. There should be no reason to view the old, non-complying trust instrument.

A second reason to favor decanting is that the only statutory restriction for decanting is that the beneficiary of the two trusts must be the same. Other than that one requirement, one can draft a totally new trust with new language that will comply with your needs. Being cautious I would change the trust terms only as necessary.

No discussion of the modification of an irrevocable trust can be undertaken without understanding new N.C.G.S. 36C subchapter 3 which deals with how beneficiaries may be represented in the transaction. “Virtual representation” will be a useful tool under N.C.G.S. 36C-3-303 where the beneficiary is a minor, whether or not mentally competent.. A parent can represent the minor’s interests and sign the consent on her behalf, provided there ;is no conflict of interest. Otherwise, a guardian ad litem must be appointed. If the disabled beneficiary is over age 18 then the parent cannot represent the beneficiary unless appointed as Guardian or attorney in fact. This subchapter is detailed but must be referenced prior to making any decisions regarding methodology.

In conclusion, to be on the side of caution, I think it best to effectuate a modification or termination of a Special Needs Trust, or other irrevocable trust, especially if drafted for entitlement purposes, by obtaining a Superior Court judge’s Order, or the use of Decanting into a new trust.

Charlotte Estate Lawyer

Posted by Charlotte Estate Attorney at 3/2/2012 5:35 PM

Gifts by Guardian: Different Considerations From Sale of Assets?

Gifts by a guardian of assets belonging to the estate of a ward are statutorily sanctioned and regulated in North Carolina under N.C.G.S. 35A (N.C.G.S. 35A -1335 through N.C.G.S. 35A -1341). Before gifts would even be contemplated, most likely the value of the ward’s estate would be far in excess of what would be required to care for the lifestyle or needs of the ward. Perhaps the ward is elderly and does not have long to live, or maybe the estate is quite large and growing exponentially relative to any possible use or need. The guardian might feel it appropriate in that situation to ask the court for gifting approval. Perhaps the guardian is trying to preserve assets and qualify the ward for Medicaid.

While the Clerk of Court generally approves all distributions from a guardianship, gifts of a ward’s property must be ordered by the resident superior court judge of the district in which the guardianship is established. N.C.G.S. 35A-1335, et seq. Gifts are divided between individuals and charities, and each have their own rules.

Gifts to individuals are allowed under the premises of N.C.G.S. 35A-1341.1 which sets forth the prerequisites the judge must find in order to allow for the gift. These are: : a) the gift will not imperil the health and welfare of the incompetent, nor impinge on his lifestyle. b) rights of his creditors will not be jeopardized; c) that the gifts will not jeopardize any specific legacies or devises in the ward’s will or trust, or if no will, that the intestate heirs of the incompetent are the donees; and any potential heirs and devisees MUST be given notice of the intended gifts (10days prior to the hearing), so that the judge may consider their opinions or concerns. Note that they, the expectant heirs, are not necessary parties—only the Guardian and Ward are necessary parties, but the expectant heirs are persons of interest and entitled to be heard. In order to avoid possible estate litigation, one would want to be liberal with granting invitations to the hearing.. Any gifts allowed will obviously affect what heirs will take under a will or trust of the ward.

Gifts to charity are similarly allowed under N.C.G.S. 35A-1341, provided the judge finds:

a) the gifts willl not unreasonable impinge on the care, health or lifestyle of the ward.

b) there will be no gift tax liability (ie the charities are qualified under the IRS Code)

c) no creditor rights of the ward are impinged.

d) sufficient evidence exists to indicate the ward would have approved the gift to charity.

While it would apparently be both competent and relevant if evidence showed a past history of charitable giving, 35A-1337 does not require such a finding by the judge.

An interesting parallel concerns the sale of specific assets of the ward’s estate. N.C.G.S. 35A allows the guardian to petition the Clerk of Court to sell real property if the Clerk finds that it is in the best interest of the estate (and the ward) This is by Special Proceeding. Suppose the ward left a will which specifically devised his home to his son. Daughter receives the residuary in his will. Elderly incompetent’s home is approved for sale, and the proceeds are added to $500,000 of stock held in the guardianship’s estate. The ward soon thereafter dies.. There is no home to go to the son (it is said to be “adeemed by extinction” see previous blog) It would seem unfair that the daughter now receives all, and son nothing. Especially if the daughter had been the guardian who brought the special proceeding. Unlike the gifting provisions of Chpt 35A, there does not appear to be any requirement for notice to the son or any potential heir of the Special Proceeding, or that the Clerk has to give any weight to their opinion at all. Yet the dangers of gerrymandering assets to upset the intent of the ward upon his death is all to real in such a case Perhaps there are equitable arguments that can be raised such as inequitable marshalling of assets…..

With respect to gifts from a guardianship reference should be made to a good read in In re Trusteeship of Sarah Graham Kenan 262 NC 627, 138 SE2nd 547 (1964) There the judge (under earlier similar statutes requiring judge’s approval) allowed for gifts proposed by the guardian to both individuals and charities. The estate of the incompetent 88yr old heiress to the Kenan fortune consisted of stock in excess of $130,000,000; her income was $3,600,000 per annum and her total needs for her care was only $45,000 per annum.; Her assets were funded into her revocable trust, and the trustees disagreed with any gifting prior to her death. The guardian of her estate and person was her nephew, Frank H. Kenan (died in 1996 CEO of Kenan Oil). The judge considered as competent evidence the size of the estate (which was growing exponentially); Sarah’s limited needs, the fact that the ultimate heirs would be her nephews (who approved of the gifts) and certain charities, statements from her 92 year old competent brother, William, that she had always respected his financial advice, and usually agreed with his proposals. The court did find that notice should be given to the two nephews (Frank Kenan and James Kenan), not because they were necessary parties, but because they were potential heirs and interested parties in her estate documents. Interestingly in the ten years prior to her incompetency in 1962, she had never given more than $8,000 in any one year to charity. The gifts approved were $13,000,000 for 1964! The court found that she most likely would have approved the gifts.

Don’t blame the Clerk! These restrictions on gifts, especially to individuals from a Ward’s estate accentuate why the Clerk of Court will not, and cannot, approve gifting in order to qualify the ward for Medicaid, which restricts the total countable assets to $2000. Only the resident superior court judge can approve gifts, and then only if the gift does not infringe on creditors of the ward. The State of North Carolina is a creditor of a Medicaid recipient. Thus, once a guardianship is established, there is very little the ward can do to preserve assets and still qualify for Medicaid, assuming the estate assets are nonexempt in nature.

I opine that there are similar concerns when asking for court approval of gifts of an incompetent’s estate , and whether certain assets should be sold prior to his death, both of which may affect the incompetent’s estate plan. In one case, notice of the right to be heard is given, and yet, in the other, not.

Charlotte Estate Lawyer

Josh Henninger
NC Board Certified Specialist in Estate Planning & Probate Law

Wishart, Norris, Henninger, and Pittman, P.A.
Tel: (704) 364-0010
Fax: (704) 364-0569
josh.henninger@wnhplaw.com
http://www.wnhplaw.com

Danica Little

NC Board Certified Specialist in Estate Planning & Probate Law
Wishart, Norris, Henninger, and Pittman, P.A.
Tel: (704) 364-0010
Fax: (704) 364-0569
josh.henninger@wnhplaw.com
http://www.wnhplaw.com

Posted by Charlotte Estate Attorney at 2/13/2012 10:48 AM

Judicial proceedings and Clerks of Court

Not all controverted issues in trust law involves litigation before a judge; most issues can be resolved by the clerks of courts of the counties of North Carolina.

In 2005, the North Carolina legislature passed extensive new trust law, largely adopting the Uniform Trust Code as promulgated and passed by most states albeit with considerable variations among the states. Prior to passage, jurisdiction over trust matters largely rested with Superior court judges. Orders to remove trustees or simply get new trustees approved and appointed were handled by judges. NCGS 36C-2-203 now provides the the clerks of superior court have original jurisdiction over all proceedings concerning the internal affairs of trusts, and such jurisdiction is exclusive. There are a few exceptions as noted below. "Internal affairs" of a trust that are determined by clerks include the administration and distribution of assets, the declaration of rights and other matters involving trustees and beneficiaries not covered under the terms of the instrument. These matters encompass appointing and removing a trustee, review of trustees' fees; settlement of accounts, conversion of an income trust to a total return trust and vice versa; orders with respect to pets, orders with respect to various other trust related affairs that involve asset protection and income taxes.

Nevertheless, any party to a proceeding before the clerk may appeal a clerk's finding to a Superior Court judge.

Where there is a contested proceedings brought before the Clerk, NCGS 36C-2-205 provides that the action shall be commenced as is prescribed for civil actions. Upon the filing of the petition or complaint the clerk of superior court shall docket the cause as an estate matter. The rules of service, answer, etc are the same as special proceedings, but the action clearly is to be established as an estate matter--not a special proceeding or civil action. Rule 4 service does apply. With respect to uncontested proceedings in which all parties join in the proceeding a petition initiates the matter before the Clerk, setting forth the facts entitling the petitioner to relief and the nature of the relief. In these proceedings the Clerk may decide the case summarily.

NCGS 36C-4-401(4) allows a court by judgment, order or decree to establish a trust pursuant to sec 1396p(d)(4) of Title 42 of the US Code. (This is a trust used to preserve Medicaid benefits for disabled individuals who come into either some type of monetary award through litigation, or perhaps inheritance). Federal POMS allows that the trust can be established by court order--it does not require necessarily a superior court judge; The jurisdiction of the clerk of court is nonexclusive with regard to the creation of trusts pursuant to the powers of NCGS 36C-2-203a (9); Thus the creation of a d4a trust can either be with a judge or the clerk. If the clerk approves the creation via petition, it will be established as an estate matter, and the attendant civil procedural rules apply.

Actions against a creditor of the decedent, as well as issues dealing with modifications of trusts for tax purposes, and anything dealing with charitable trusts, all must be originally brought in Superior Court before a judge, as the Clerk does not have jurisdiction. NCGS 36C-2-203(f). A clerk also has nonexclusive jurisdicition to determine the identity of beneficiaries. But again, all contested matters heard by the clerk, can be appealed to a superior court judge, after the clerk makes written findings of fact and law.

Josh Henninger
Wishart, Norris, Henninger, and Pittman, P.A.
Tel: (704) 364-0010
Fax: (704) 364-0569
josh.henninger@wnhplaw.com
http://www.wnhplaw.com

Posted by Charlotte Estate Attorney at 1/17/2012 10:47 AM

706 Return Required for Portability

Notice 2011-82 makes it absolutely clear that a timely filed estate tax return is a prerequisite for claiming portability. Only decedents who die after 12/31/10 can elect portability. There is no extra form or box to check, it is the filing of the 706 return itself that satisfies the claim for spousal portability. There has been much discussion and chatter on the internet that the IRS could and should give some break to those executors who failed to timely file for decedents who died early in 2011, and now want to take advantage of the deceased spouse's unused exclusion amount, through portability. However this Notice states unequivocally that in order for the executor to make a portability election, the executor is required to file a Form 706 for the decedent's estate, even if the executor is not otherwise obligated to file. The return must be timely filed in accordance with the instructions for 706, that is within 9 months of death, or (up to 6months more if extension applied for). An election, once made is irrevocable. However, no election may be made if the Form 706 is not timely filed.

It has been asked why the rush? Why does the IRS need to know the amount of assets being subjected to portability within 9 months--why not when the second spouse dies, years later? The IRS wants to have a ready valuation reference when the first spouse dies; they claim it would be impossible to verify values years later. While they are reviewing the issue of "timely', do not expect relief for those who have failed to file a timely return. The requirement is statutory and there is little wiggle room for relief assuming the IRS would agree to give some flexibility. The IRS expects many more 706 returns to be filed just to elect portability, even when estates are relatively small (under $3MM). It would seem not too heavy a burden, especially in light of little likelihood that smaller estates would be audited. But there appears to be some effort to further address this issue by years end, as the Notice did ask for comments. But the comments they seek does not deal with the "timely filed" issue. Rather they seek comments regarding the scope of the Service's right to examine a return of the first spouse to die without regard to any period of limitation, and how to best determine the available exclusion amount that applies to portability. These comments were due Oct 31, 2011, and will be used to implement regulations for Code 2010 (c). At least the IRS needs to revise the 706 return form to accomodate both the election and nonelection of portability.

In summary, counsel would be wise to file estate tax returns, where there is a surviving spouse, even for estates under $2MM, unless the client, after being informed of the risk of not electing portability, chooses to forego the return, and save the added expense. But let the client make that decision.

Josh Henninger
Wishart, Norris, Henninger, and Pittman, P.A.
Tel: (704) 364-0010
Fax: (704) 364-0569
josh.henninger@wnhplaw.com
http://www.wnhplaw.com

Posted by Charlotte Estate Attorney at 11/21/2011 7:07 AM

Deductibility of Fiduciary Expenses

Fiduciary expenses, such as executor commissions, investor advisor fees, attorney and accountant fees, are generally deemed miscellaneous itemized deductions, some of which are deductible in full and others subject to deductibility under Code section 67(a) only above 2% of AGI. For a number of years there was controversy as to exactly which and to what degree miscellaneous itemized deductions would be subject to the 2% floor test. Finally the Supreme Court in Michael J. Knight, Trustee or the Wiliam L. Rudkin Testamentary Trust v Comm, 552 U.. S. 181 (2008) (referred to as the "knight case") set forth definitive considerations, which differed somewhat from then existing regulations of sec 67 (e). The Knight case holds that fees paid to an investment advisor by a nongrantor trust or estate are generally subject to the 2-percent floor under sec 67 (a), because after an inquiry as to whether a hypothetical individual who held the same property outside of a trust "customarily " or "commonly" would incur such expenses, the answer will almost always be yes. And if so, then the expenses are subject to the 2-percent floor. In effect sec 67 (e)1 of the Code excepts from the 2-percent floor only those costs that it would be uncommon for such a hypothetical individual holding the same property to incur; thus investment fees will normally be subject to the floor, unless it can be shown that a trust (or estate) may have an unusual investment objective or may require a specialized balancing of the interest of various parties. But the court found that even in that case it is only the incremental extra costs that are exempt from the 2-percent rule.

In September of 2011, the IRS promulgated new proposed rules (withdrawing previous rules) to conform with the Knight decision.Federal Reg Vol 76, No 173; 26 CFR Part 1 "Section 67 Limitatitons on Estates or Trusts." In an attempt to simplify a detemination as to what and how much is subject to the 2-percent floor, the Service fairly well repeated the findings from Knight---if the investment advice is different or greater than what a hypothetical investor would need, then to that degree (which exceeds the norm), then it is exempt. As a practical matter almost all payment for investment fees will be subject to the 2-percent floor. When it comes to bundled services, where there is a set fee that includes fiduciary services outside the investment arena (eg, analysis of distributions), the new proposed rules allow any reasonable allocation between the efforts that are investment advice and others. For example if a trustee charges flat percentage fee based on the value of assets under management, and his services included investment advice, it would be permissible to use a percentage allocated to investment advice, with the balance to general non investment fiduciary work (which would not be subject to the 2-percent floor).

Attorney fees and accountant fees are generally not going to be subject to the 2-percent floor as those professionals are not going to be giving investment advice (or at least not charging for it); However, where they hire third party advisors to handle investments, then to that extent, those outside fees are subject to the 2-percent floor. A public hearing to consider comments is scheduled for December 19 in Washington DC. The comments solicited involve ideas as to what constitutes permissible methodologies to determine reasonable unbundling or allocation of investment advice fees from the fiduciary , non investment work.

Finally, with respect to trust ownership of property, the rules provide that most ownership costs are subject to the 2-percent floor. These are costs that are chargeable to or incurred by an owner of property simply by reason of being the owner. These would include condo fees, real estate taxes, insurance premiums, and lawn services. These costs are commonly or customarily incurred by a hypothetical individual owner.

Deductibility of tax preparation fees depend on the type of return. Estate and GST returns, fiduciary income tax returns, as well as the decedent's final individual income tax returns are not subject to the 2-percent floor. Gift tax returns and other individual income tax returns are subject to the 2-percent floor.

In consideration of these new rules, it would be advisable to tailor your legal and accountant fee agreements to ensure that as much of the fees charged as possible are not subjected to the 2-percent floor. For instance, would it not be advisable to include in the billing statement a breakdown as to how much is being charged for investment advice, ownership costs, etc.; that is set out exactly the costs for those services you know are subject to the 2-percent floor. This will make the preparer of the fiduciary income tax returns job much simpler (and probably more accurate).

Josh Henninger
NC Board Certified Specialist in Estate Planning and Probate Law
Wishart, Norris, Henninger, and Pittman, P.A.
Charlotte Estate Attorney
Tel: (704) 364-0010
Fax: (704) 364-0569
josh.henninger@wnhplaw.com
www.charlotteestatelaw.com

Danica Little
NC Board Certified Specialist in Estate Planning and Probate Law
Wishart, Norris, Henninger, and Pittman, P.A.
Charlotte Estate Attorney
Tel: (704) 364-0010
Fax: (704) 364-0569
danica.little@wnhplaw.com
www.charlotteestatelaw.com

Posted by Charlotte Estate Attorney at 11/18/2011 3:07 PM

Deductibility of Long Term Care

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") enacted new rules regarding the available income tax deductions for long term care expenses. The issue usually comes up with expenses paid to caregivers. Medical bills paid to hospitals or physcians are more obvious. But simply paying $35,000 to caregivers who genuinely provide services for one's parent, either at home or in an adult care facility does not mean that any of the expenses will be deductible. First under sec 213 of the Code, only medical expenses which exceed 7.5% of AGI are deductible. Long term care expenses usually do exceed this amount in any one year. So the real problem is determining whether the expenses paid by the patient or on behalf of the patient are deductible, even if they obviously are incurred because of the patient's needs.

Payments to caregivers qualify if they meet the definition and restrictions set forth in Code sec 7702B (c). The term "qualified long-term care services" means necessary diagnostic, preventive, therapeutic, curing, treating mitigating and rehab services, and maintenance or personal care services which are required by a chronically ill person, and are provided pursuant to a plan of care prescribed by a licensed health care practitioner. A chronically ill individual means any individual who has been certified by a licensed health care practitioner as being unable to perform at least 2 activities of daily living for a period of at least 90 days; or the individual requires substantial supervision to protect her from threats to health and safety due to severe cognitive impairment. This latter condition is frequently used to assert deductibility for expenses of dementia related patients who cannot take or manage their own medicines. Activities of daily living include: eating, toileting, transferring, bathing dressing and continence.

Note the statute does require a plan of care for the chronically ill patient. It does not require the plan to be in writing, but if I am intending to feel comfortable with something like a $50,000 deduction, I would definitely get from a licensed practioner some type of writing. A licensed practioner does not have to be a doctor---it can be a licensed registered nurse, or licensed social worker. I would recommend you set up a meeting with a social worker assigned to the case early after your loved one is admitted to a facility or begins treatment at home, to establish a proper plan of care, minimally in at least a written summary.

In addition a taxpayer can deduct as a medical expense the costs of medical care received by a dependent in an adult care home. This expense can include meals if the reason for the patient being in the facility is medical in nature, but if not, then that part of the cost allocable to medical or nursing care is deductible, but not the cost of meals and lodging.

Under sec 213(d), there is no deduction if the caregiver is a spouse, descendent or sibling. I guess that duty is to be expected as a loving family member. Actually it probably relates to obvious fraud enforceablity .

The taxpayer can include as part of the medical expense deduction all social security taxes, FUTA, Medicare tax and other withholdings which is paid the nurse or attendant who provides medical care.

Josh Henninger
NC Board Certified Specialist in Estate Planning & Probate Law
Wishart, Norris, Henninger, and Pittman, P.A.
Charlotte Estate Law
Tel: (704) 364-0010
Fax: (704) 364-0569
josh.henninger@wnhplaw.com
http://www.wnhplaw.com

Posted by Charlotte Estate Attorney at 11/9/2011 8:07 AM

"Come get your father, we can no longer tolerate his behavior toward staff and other residents..."

Can the nursing home (now referred to as "adult care homes") force children to come and pick up a parent who is unruly, or maybe fails to pay for the 45 days waiting on Medicaid to come through? Unfortunately, I hear these horror stories way too often in North Carolina. But there is help on the way with recent state legislation.

Attempts to discharge or transfer residents usually are a result of either too many complaints by family members or perhaps the resident himself, the fact that the resident is behind in his private pay, or that the facility claims it is not capable of caring for him any longer. But the resident and his family do have rights. All nursing homes in North Carolina must be licensed through the Department of Health and Human Service's Division of Facility Services. In addition, if the nursing home accepts Medicare or Medicaid, there are federal protections as well. Almost all nursing facilities in fact do accept at least Medicare payments. Licensing regulations contain detailed requirements with regard to administration, dental, pharmacy and dietary services, safety, nursing and physician services and design of the facility.

The federal law governing nursing homes primarily emerged from the 1987 Nursing Home Reform Act (actually part of OBRA), and subsequent amendments. This act reformed and enhanced residents' rights, improved care planning, required certain training standards for staff, and in general provide services that offer residents "the highest practicable physical, mental and psychosocial well being." These requirements are nationwide, and have been legislated by the states as well in almost all states. A resident is deemed discharged or transferred "involuntarily" if initiated by the adult care home, even if agreed to by the resident. Under federal law, a nursing home resident has the right to remain in the nursing home, and can only be involuntarily transferred or discharged under one of five circumstances. The five reasons are as follows:

. The transfer or discharge is necessaary to meet the resident's welfare and the resident needs services that cannot be provided in the current nursing home.

. The transfer or discharge is appropriate because the resident's health has improved so that her or she no longer needs the sercies being provided.

. The resident's presence in th home endangers the health or safety of other residents

. The resident has failed, after reasonable and appropriate notice to pay for his stay.

. The nursing home ceases to operate.

For the first three reasons, the nursing facility and the resident's doctor must document the assessments done, and what attempts to address any problems through proper care planning. The nursing home must provide proper preparation and orientation to ensure safe and orderly transfer or discharge. The nursing home must notify the resident and family members that the resident is being transferred or dischared. The notice of transfer must include the reason for the tansfer or discharge, the effective date; the location to which the resident will be transfered ; a statement of the resident's appeal reights; and the name and contact information of the local Long Term Care Ombudsman. Hearing are held through the Division of Medical Assistance Hearing Unit ("DMA").

Before transfering or Discharging a resident, the nursing home must attempt reasonably to meet the resident's indvividual medical, nursing and psychosocial needs, by implementing a specific and individualized care plan. It will be a rare time that the nursing facility could not meet the needs of the problem resident through use of reasonable staff attention, medical aids, medicine and other means to offer a safe stay.

Session Law 2011-272 (House Bill 677) North Carolina, makes substantive changes to previous discharge procedures . This new law that becomes effective October 1, 2011, provides adult care homes with greater flexibility in the transfer and discharge of residents, and creates adult care home resident discharge teams within every county which has an adult care home licensed under Chpt 131D. The team shall include at least one member of the local management home, one member of the county department of social sercies (DSS), and other members the DSS deems necessary, including the regional Long Term Care Ombudsman. The facility will request that the resident discharge team convene to assist with finding placement if the destination is unknown or inappropriate. Thus it will no longer be the sole responsibility of the facility to find suitable alternatives. This should help with family/facility communication and understanding. The local managment teams will take the lead role for the discharge destination when it relates to mental health or substance abuse. DSS shall take the lead role for those residents who have health, Alzheimer's, and other forms of dementia. Residents shall be given at least 30 days advance notice to ensure an orderly transfer or discharge . The resident has a right to appeal, in accordance with state and federal law. The details of how these teams will work will continue to evolve over time, but one goal is to limit the conflicts between residents and the adult care facility.

What about discharge for failure to pay? A nursing home cannot evict residents covered by Medicaid if the facilty drops out of the Medicaid program. If the claim of discharge is for nonpayment, one needs to consider how the claim arose. If the resident or his guardian simply refuses to pay for no reason, then at some point the facility will prevail, even after all appeals, provided there is not some logical reason. If there is a month or two of nonpayment, due to waiting for Medicaid to come through, the discharge should be denied on appeal, assuming the assets of the resident were not simply transferred to children at the last minute (in which case Medicaid would be delayed due to sanctions).

It should be clear however, that even the most egrecious conduct, including volatile behavior, does not often justify an involuntary discharge... It is only when the behavior is a safety or health issue to others that such behavior may warrant involuntary discharge. It is incumbent upon the facility to create an appropriate assessment or comprehensive care plan which would identify options geared for the resident's particular needs, and the protection of others. Medication, behavior modification, counseling and other means must be first applied in earnest.

If a resident's behavior does not rise to the level of a safety threat to others, the facility has failed to exhaust available means to treat and address the behavior problem, and has not met its burden that the discharge is warranted.

Josh Henninger
josh.henninger@wnhplaw.com
Charlotte Attorney
www.CharlotteEstateLaw.com
Wishart, Norris, Henninger, and Pittman, P.A.
NC Board Certified Specialist in Estate Planning and Probate Law
Tel: (704) 364-0010

Posted by Charlotte Estate Attorney at 11/4/2011 3:27 PM

Advancements in North Carolina

One problem that sometimes occurs after one dies, is determining how much of a setoff for lifetime gifts should be made in determining the final share of a beneficiary's share. The issue almost always comes up when a parent dies intestate, leaving surviving children as heirs. The parent has made lifetime gifts to one child, and the other child wants those gifts treated as an advancement to be deducted from his or her share. In North Carolina an advancement is applied only when the decedent dies wholly intestate. N.C.G.S. sec 29-23 states that "if a person dies intestate as to all his estate, property which he gave in his lifetime as an advancement shall be counted toward the advancee's intestate share...."

For example, if father deeds his house to one of two daughters during his lifetime, and thereafter dies intestate, the issue of advancement must be settled. NCGS sec 29-24 states that a "gratuitous inter vivos transfer is presumed to be an absolute gift, and not an advancement.." If the father states in a writing that the transfer is to be an advancement or orally tells competent witnesses same, then probably the burden of proof can be met to show an advancement. But there needs to be some competent evidence presented in order for a judge or jury to find an advancement. After one dies, obtaining and getting such evidence admitted into a court hearing may be difficult.

Whether the gift is an advancement depends on the intention of the parent at the time the gift is made. Bradsher v. Cannady, 76 NC 445; The nature of the gift, the consideration expressed, and the circumstances under which it is made are material in determining the intention. Harper v Harper, 92 NC 300.

If father tells each daughter that he wants to treat them both equally, and thereafter writes a will leaving his estate equally, does the Executor, treat the value of the gift of the home, now treat such gift as an advancement? No. He would not have died intestate (wholly) and therefore advancements are not applicable. The daughter who received the home by gift, will share equally with her sister in the father's testate estate.

Does life insurance count as an advancement? I do not think it does, unless the gift was of the policy itself, and then only as to the cash value; looking at our valuation of the advancement, merely designating a beneficiary would have no value, only the cash value portion of the policy would carry value at the time of gift. So if father on January 1 gifted the home to daughter 1 worth $100,000, and on that same day designated daughter 2 as beneficiary of a life insurance policy on his life for $100,000, retaining ownership himself, stating that each transaction represented an advancement, only the gift of the home would count as an advancement. Even if the life policy did count as an advancement the value would be zero.

Would it matter how old the gift was as affecting its status as an advancement? No case or statute in North Carolina addresses whether the gift at some point becomes so old as to become inapplicable (or "stale") So if the transfer of the home occurred 42 years before the donor dies, it still could be considered an advancement, provided sufficient and competent evidence can be produced to overcome the gift presumption..

Another interesting issue is that of valuation. How much of an offset is applied? NCGS sec 29-26 states "The value of the property given as an advancemnt shall be determined as of the time when the advancee came into possession.....However, if the value is stated by the intestate donor in a writing signed by him and designating the gift as an advancement, such value shall be deemed the value of the advancement. So if father deeds the home to daughter 1 stating that the home is worth $20,000 in a writing, then that becomes the value of the advancement, even if the home was actually worth $90,000. Again, this assumes father dies intestate. Note this statute deals with valuation and requires a writing.There does not appear to be a statutory requirement that there be a writing in order for an advancement to be valid, although the difficulty in proving an advancement over a gift is apparent. In Harrelson v Gooden 50 SE2nd 901 (1948), evidence was deemed competent when it consisted of a witness who verified the father's verbal statement that he wanted the deed of real property in Bladen County to his sons to be considered an advancement. Later the donor died wholly intestate. The advancement was applied and the son's prior gift exceeded their remaining intestate interest, so they took nothing from the estate.

The problem with planning for advancements, is that if one is that determined to make sure the gift counts as an advancement, would they not usually go to the next step and write a will? Then advancements do not apply.

Finally, one needs to be careful in proceeding to intestacy when there is actually a will. For example a child possesses a will which leaves all equally to children, and is made out of state, perhaps not self proved, and thinks that it will be inconvenient to go through testacy, especially since all passes equally in accordance with intestacy laws of the decedent anyway; thus he proceeds as though there is no will. He (and his attorney) needs to consider the potent effect intestacy has on advancements..

Joseph B. Henninger, Jr.
josh.henninger@wnhplaw.com
Wishart Norris Henninger & Pittman, P.A.
Charlotte Estate Attorney
Board Certified Specialist in Estate Planning & Probate Law
www.charlotteestatelaw.com
Charlotte, North Carolina

Danica L. Little
danica.little@wnhplaw.com
Wishart Norris Henninger & Pittman, P.A.
Charlotte Estate Attorney, CPA
Board Certified Specialist in Estate Planning & Probate Law
www.charlotteestatelaw.com
Charlotte, North Carolina

Posted by Charlotte Estate Attorney at 10/14/2011 11:28 AM

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