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Now that the House of Representatives is somewhat less busy with the passage of the Health Reform Bill, that Chamber may in the near future visit the estate tax issue. As we mentioned since January 1 of this year there is no estate tax which is the first time in 95 years and there is a modified adjustment to tax bases which may cause capital gains in some situations for heirs.

Some have suggested that the estate tax be enacted and be retroactive to January 1 of this year, but many constitutional experts comment that such retroactivity may be unconstitutional. In a previous blog we mentioned that Senator Kyl suggested to enact an estate tax and the heirs of the estates of decedents who died after January 1, 2010, when there was no estate tax, have theoption to choose either (1) the law at the time of death with no estate tax and a partial increase in basis, or (2) the step up in basis and be subject to the new estate tax exemption and rate. (See last week’s blog as an example of why an heir may want to option for an estate tax and step up in basis, depending on the facts). This would appear to eliminate the argument of retroactivity. The acting Chairman of the House Ways and Means Committee, Representative Levin, last week suggested the same option to avoid any constitutional attack on the retroactivity.

If no changes are made to the estate tax law, then automatically on January 1, 2011, the estate tax will be back with only a $1 million exemption per person and a 55% top tax rate. Senators Kyl and Lincoln hope to see Congress enact a $5 million exemption and a 35% tax on estates worth more than that amount. But lawmakers will be at task to find a way to offset the 2009 estate tax revenue which  law provided a 45% top bracket on estates worth more than $3.5 million.

Any such legislation may take awhile. In the meantime, we suggest you contact your counsel and adjust your estate planning documents to make sure they are in compliance with the current law regarding the modified capital gains rules.

Many comments are made such as “it’s great that we have no estate tax.”

That may be true for the very wealthy but lets look at the following example with no estate tax and with limited adjustment to basis which is the current law.

Example: A surviving spouse, or unmarried individual, dies with assets consisting of real estate and stocks worth $3.3 million and with a tax basis of $1.0 million. The Last Will provides that the assets will be given to decedent’s daughter and the daughter subsequently sells the assets.

If death occurred in December 2009, there would be no federal estate tax because the federal exemption of $3.5 million exceeded the worth of the estate. There would be no capital gain on the subsequent sale by the heir of of lets say a sales price of $3.3 million because the basis in the hands of the heir is adjusted to the date of death value of $3.3 million. Thus, no federal estate or capital gains tax. Nice.

Suppose death occurred a few days after January 2010. There would be no federal estate tax as it has been repealed. The basis in the hands of the heir would be adjusted only by $1.3 million (the new basis adjustment rule); therefore, the basis in the hands of the heir would be $2.3 million (decedent’s basis of $1 million plus adjustment allowed of $1.3 million). The result would be a capital gain of $1 million. Not very palatable.

Currently there is no estate tax and no adjustment to basis as we previously discussed. This is causing many planning problems and also has other implications. For example, along with increased capital gains on subsequent sales by heirs because of limited basis adjustment that could cause many taxpayers to incur the Alternate Minimum Tax because higher capital gains could decrease the Alternate Minimum Tax Exemption and cause an Alternate Minimum Tax liability.

This past Thursday the House approved a $15 billion jobs bill for stimulating private-sector job creation which bill needs Senate approval and it does not appear any estate tax proposals are contained in this bill. Two weeks ago Senate Minority Whip Jon Kyl stated that the estate tax issue need be addressed before the Senate takes up futher legislation. His position at that time was not to make any estate tax legislation retroactive but rather allow the taxpayers to have an option of either electing current tax law or be subject to whatever new estate tax law occurs later this year. Some commentators are very upset that some legislators are trying hold up any jobs bill because of estate tax legislation. Let’s wait and see what happens in the Senate.

Recently acting chairman of the House Ways and Means Committee Sander Levin stated regarding estate taxes, “I think the main point is that we have to act…I think this interval is not helpful, people need to be able to plan.” It would appear that if the chairman of the powerful tax policy committee is thinking in that direction there may be some estate tax legislation this year. Let’s see what happens but don’t hold your breath.

As mentioned elsewhere in our website, there is no federal estate tax since January 1, 2010. Consequently, many estate plans will cause unintended results. If death occurs with no estate tax, the mechanics of a married couple’s estate plan which includes a marital trust and a credit shelter trust may cause distribution of all assets to the credit shelter trust. In certain circumstances, that may not fulfill the couple’s estate plan objectives. There may also be lost a basis adjustment resulting in subsequent capital gain. People should meet with their estate planning lawyer to review this situation. 

Many estate planners have been expecting Congress to enact an estate tax and make it retroactive to January 1 , 2010. Nobody knows when and if that will happen. Recent commentary speculates that Congress may enact the estate tax as part of a jobs bill. However, since nothing is certain, you should not delay reviewing your estate plans to be certain that all is in order following the recent change in law.

TO TAX….OR NOT TO TAX………THAT IS THE QUESTION!!! The Federal Estate Tax was repealed on January 1, 2010 for a one-year period pursuant to the tax law revisions made in 2001. The 2001 legislation also scheduled the Federal Estate Tax to be reinstated on January 1, 2011. However, it appears as though congress may reinstate the Federal Estate Tax early in the 2010 session. Over the last few weeks, many commentators have discussed whether federal estate tax legislation, when passed, should be applied retroactively to January 1, 2010. Retroactive application seems to be logical and fair. However, House Ways and Means Chairman Rangel seems to shy away from retroactivity. While Senate Finance Chairman Bacus promotes retroactive legislation. In order to avoid uncertainty, all are advised not to die until Washington makes up its mind whether or not to impose a tax on your estate.

This is the first time our country has not had a Federal Estate Tax since 1915. Legislation that was expected during the last few months of 2009 never occurred, and as a result…we have no estate tax for 2010.

 Several concerns remain:

• Inheritances are now subject to much higher capital gains when sold because the basis of assets inherited are  the same as in the hands of the decedent as there is no basis adjustment to date of death value with certain exceptions;
• Congress is intending to make a change this year which would install an estate tax and make it retroactive to January 1 and have an exemption from $2 million to $5million (or agree to 3.5million) and probably a 45% tax rate;
• If there is no change or new law this year then , under current law, 12 months from now, on January 1, 2011, the estate tax is reinstated with only a $1 million exemption and a 55% tax rate;
• Also affect to January 1, 2010, there is no generation skipping tax. But if you give a gift to a grandchild and they pass a law during 2010 installing the generation skipping tax and make it retroactive to January 1, 2010, a tax will have to be paid.

Somewhat confusing to plan for, but definitely don’t cash in your life insurance policies yet.

POWER OF ATTORNEY CAN CHANGE RETIREMENT PLAN BENEFICIARY. In a case decided on December 28, 2009, the Pennsylvania Supreme Court held that the principal’s Power of Attorney granting the agent the power to engage in retirement plan transactions authorized his agent to change the beneficiary of the principal’s retirement plan. (IN RE: ESTATE OF RONALD SLOMSKI v.THE THERMOCLAD COMPANY, et.al.J-68A-2009; J-68B-2009, DECEMBER 28, 2009). The principal in Slomski named his mother as agent in his power of attorney. Sixteen days before the death of the principal, the agent changed the beneficiaries of principal’s retirement account from his children to the principal’s siblings. The PA Supreme Court reversed the PA Superior Court noting that a principal can give authority to an agent to engage in retirement plan transactions by including the simple language “to engage in retirement plan transactions” in the power of Attorney (20 Pa.C.S. § 5602(a)(18)). 20 Pa.C.S. § 5603(q) provides that a power to “engage in retirement plan transactions” shall include, inter. alia., the power to exercise all powers with respect to retirement plans that the principal could if present. Since the principal in Slomski retained the right to change the beneficiaries of his retirement plan, the agent named in his power of attorney held the same power.

Listed below are important estate planning elder law figures for 2010.   Santa Clause apparently forgot to visit Washington DC this year………..at least where the average American is concerned:

• The Annual Gift Tax Exclusion will remain at $13,000.
• The Medicaid Spousal Impoverishment figures remain unchanged for 2010.  
• The minimum community spouse resource allowances (CSRA) remains $21,912.  
• The maximum community spouse resource allowances (CSRA) remains at $109,560.  
• The maximum monthly maintenance needs allowance remains at $2,739.  
• The minimum monthly maintenance needs allowance remains at $1,821.25 until July 1, 2010.  
• The income cap for 2010 applicable in “income cap” states should remain at $2,022 a month since the SSI federal benefit rate did not change.  

• If you are age 40 or less before the close of the taxable year, your maximum deduction is $330.00.  
• If you are over age 40 and not more than 50 before the close of the taxable year, your maximum deduction is $620.00. 
• If you are over age 50 and not more than 60 before the close of the taxable year, your maximum deduction is $1,230.00.  
• If you are over age 60 and not more than 70 before the close of the taxable year, your maximum deduction is $3,290.00.  
• If you are over age 70 before the close of the taxable year, your maximum deduction is $4,110.00.  

The Medicare Basic Part B premium increased from $96.40 to $110.50 per month for 2010. However, a “hold-harmless” provision in the Medicare law prohibits Part B premiums from rising more than that year’s cost of living increase in Social Security benefits. Therefore, most Medicare beneficiaries should be unaffected by this increase.  

• The Medicare Part B deductible: increased to $155 from $135.  
• The Medicare Part A deductible increased to $1,100 from $1,068.  
• The co-payment for hospital stay days 61-90 increased to $275/day vs. $267/day in 2009.  
• The co-payment for hospital stay days 91 and beyond increased to $550/day vs. $534/day in 2009.  
• Likewise, the skilled nursing facility co-payment for days 21 through 100 increased to 137.50/day from the 2009 co-pay of $133.50.   

• 2010 monthly premium of $154.70 for individuals with annual income between $85,000 and $107,000 and married couples with annual incomes between $170,000 and $214,000;  
• 2010 monthly premium of $221.00 for individuals with annual incomes between $107,000 and $160,000 and married couples with annual incomes between $214,000 and $320,000;  
• 2010 monthly premium of $287.30 for individuals with annual incomes between $160,000 and $214,000 and married couples with annual incomes between $320,000 and $428,000;  
• 2010 monthly premium of $353.60 for individuals with annual incomes of $214,000 or more and married couples with annual incomes of $428,000 or more. 
• For beneficiaries who are married but file separate tax returns, the 2010 monthly premium will be: $287.30 for annual income between $85,000 and $128,000; and 353.60 for beneficiaries with annual incomes greater than $128,000.

Since there was no increase in the Consumer Price Index (CPI-W) from the third quarter of 2008 through the third quarter of 2009, monthly Social Security and Supplemental Security Income (SSI) benefits will not automatically increase in 2010.

Oh well……..maybe things will be better for 2011 !!!!

Happy Holidays to all !!!!

The Senate Democrats agreed on redefining the nations health care system Saturday and hope to have legislation in the very near future. The Bill includes a new national insurance plan including a government run long term care insurance program. This could have a significant effect on elder law planning. Let’s see if this provision survives in the conference bill.

Regarding the estate tax expected legislation we note that the provisions as contained in the McDermott Bill and the Baucas Bill introduced earlier this year as discussed in our Updates were not part of the Bill passed earlier this month by the House; some of the items include: portability of estate tax exemptions between spouses, re-coupling of the gift tax exemption with the estate tax exemption, and re-instituting the state death tax credit. Will these items be in the Senate version? The more significant question in the couple weeks before New Years is…. will there even be a Senate Bill passed this year?

Medicare’s Open Enrollment Season Has Begun

It is that time of year again — time to reassess whether your Medicare plan is working for you. Medicare’s open enrollment period began November 15 and continues until midnight December 31. During this period, you may enroll in a Medicare Part D (prescription drug) plan or, if you currently have a plan, you may change plans. In addition, during this period you can return to traditional Medicare from a Medicare Advantage (managed care) plan, enroll in a Medicare Advantage plan, or change Medicare Advantage plans. Beneficiaries can go to www.medicare.gov or call 1-800-MEDICARE (1-800-633-4227) to make changes in their Medicare prescription drug and health plan coverage. If you take no action, you will remain in your current plan unless your Medicare Advantage or drug plan is terminating its Medicare contract. Also, if you receive the Low-Income Subsidy (LIS) to help pay for some or most of your Part D drug costs, you may be randomly reassigned to a different plan. (For more on the LIS program, also known as “Extra Help,” click here.) But even beneficiaries who were satisfied with their plan in 2009 need to review their options for 2010. Prescription drug plans can change their premiums, deductibles, the list of drugs they cover, and their plan rules for covered drugs, exceptions and appeals. Medicare Advantage plans can change their entire benefit package and as well as their provider network. Average premiums for prescription drug plans will rise 11 percent from $35 in 2009 to nearly $39 per month in 2010, which is a 50 percent increase from $25.93 in 2006, the first year of the Medicare Part D drug benefit. Also, more drug plans will charge a deductible in 2010. Sixty percent of plans will charge a deductible, up 15 percent from 2009. The number of plans that offer enrollees some coverage in the doughnut hole — the coverage gap when consumers pay the full price for their prescriptions — continues to shrink as well. At www.medicare.gov/MPDPF you can evaluate drug plans. The Web site allows you to enter the list of medications you currently take to determine the amount that each prescription drug plan available in your area charges for premiums, copayments, and deductibles. It also allows you to compare Medicare prescription drug plans based on customer service and other criteria. You can compare Medicare Advantage and Original Medicare plans at www.medicare.gov/MPPF/. If you are enrolled in a Medicare Advantage plan, chances are it offers its own prescription drug coverage.

Some factors to look at when evaluating your drug plan include:

• What is the monthly premium?

• Does the plan continue to cover necessary drugs?

• Does the plan provide coverage for drugs in the “doughnut hole” or coverage gap?

• What pharmacies are covered under the plan?

Some factors to look at when comparing Medicare Advantage plans include:

• What is the monthly premium?

• What is the cost sharing for doctor visits?

• Which doctors and hospitals are covered?

• Are any extra benefits included and will they be useful to you?