Monday, February 20, 2012

Obama Budget Proposes to Close Estate and Gift Tax Loopholes

The 2013 Budget Proposal recently submitted by the Obama Administration would return federal estate, generation skipping (GST), and gift taxes to 2009 levels. The top tax rate would be 45 percent and the exclusion amount would be $3.5 million for estate and GST taxes, and only $1 million for gift taxes. In addition, the portability of unused estate and gift tax exclusion between spouses would be made permanent.

If adopted by Congress, the Obama proposals would be effective for the estates of decedents dying, and for transfers made, after December 31, 2012. 

Currently, the estate, GST and gift tax rate is only 35 percent, and each individual has a lifetime exclusion for all three types of taxes of $5 million (indexed for inflation). However, unless Congress and the President can agree, in 2013 the tax rate and tax brackets, the amount of the exclusions and the law governing these three types of taxes will revert to the law that was in effect in 2001 prior to the enactment of the Bush tax cuts of that year.

There will be tremendous pressure on lawmakers to prevent the default reversion of tax rates to 2001 levels. No action by Congress will mean a maximum tax rate next year of 55 percent, plus a 5-percent surcharge on the amount of the taxable estate between approximately $10 million and $17.2 million (designed to recapture the benefit of the lower rate brackets). The exclusion for estate and gift tax purposes would be reduced to $1 million, an 80% reduction from the current level. And there would be no portability of unused exclusions to a surviving spouse.

While most of the public attention will likely be focused on the tax threshold issue ($5 million vs. $3.5 million vs. $1 million), the Obama Administration’s budget  proposes a number of “loophole” closing measures that may be of even greater potential significance to the wealthy. In addition to the decrease from current exclusion thresholds and increase in tax rates, the Obama Administration proposes to put new limits on a number of estate tax reduction devices that are currently in wide use.  The proposals include:

Valuation Discounts.  Estate planners are able to utilize a number of techniques designed to reduce the value of the transferor’s taxable estate and discount the value of the taxable transfer to the beneficiaries of the transferor without reducing the economic benefit to the beneficiaries.

The Administration’s proposal would limit the availability of such valuation discounts by creating an additional category of restrictions (“disregarded restrictions”) that would be ignored in valuing an interest in a family-controlled entity transferred to a member of the family if, after the transfer, the restriction will lapse or may be removed by the transferor and/or the transferor’s family.

Require a Minimum Term of Ten Years for Grantor Retained Annuity Trusts (GRATS). GRATs are a popular technique for transferring wealth while minimizing the gift tax cost of transfers.  A GRAT is an irrevocable trust funded with assets expected to appreciate in value, in which the grantor retains an annuity interest for a term of years. At the end of that term, provided that the grantor has survived, the assets then remaining in the trust are transferred to (or held in further trust for) the beneficiaries. The greater the appreciation in the value of the assets held by the trust, the greater the transfer tax benefit achieved.

Taxpayers have become adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to two years, and by retaining annuity interests significant enough to reduce the gift tax value of the remainder interest to zero or to a number small enough to generate only a minimal gift tax liability.

This Administration’s proposal would require, in effect, some downside risk in the use of this technique by imposing the requirement that a GRAT have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years. The proposal also would include a requirement that the remainder interest have a value greater than zero at the time the interest is created and would prohibit any decrease in the annuity during the GRAT term. This proposal would apply to trusts created after the date of enactment.

Limit the Duration of the Generation-Skipping Transfer Tax Exemption. A generation-skipping transfer (GST) tax is imposed on gifts and bequests to transferees who are two or more generations younger than the transferor. The GST tax was enacted to prevent the avoidance of estate and gift taxes through the use of a trust that gives successive life interests to multiple generations of beneficiaries.

The GST tax is a flat tax on the value of the transfer at the highest estate tax bracket applicable in that year. Each person has a lifetime GST tax exemption ($5,120,000 in 2012) that can be allocated to transfers made, whether directly or in trust, by that person to a grandchild or other “skip person.”

The allocation of GST exemption to a transfer or to a trust excludes from the GST tax not only the amount of the transfer or trust assets equal to the amount of GST exemption allocated, but also all appreciation and income on that amount during the existence of the trust. Because many states, like Pennsylvania, have done away with any limits on the tenure of trusts, GST trusts can now continue, and avoid estate, gift and GST taxation, in perpetuity.

The Administration’s proposal would provide that, on the 90th anniversary of the creation of a trust, the GST exclusion allocated to the trust would terminate.

Place new limits on the use of Grantor Trusts. A grantor trust is a trust of which an individual is treated as the owner for income tax purposes. For income tax purposes, a grantor trust is taxed as if the grantor or another person owns the trust assets directly, and the deemed owner and the trust are treated as the same person. Thus, transactions between the trust and the deemed owner are ignored. For transfer (estate and GST and gift) tax purposes, however, the trust and the deemed owner are separate persons, and under certain circumstances the trust is not included in the deemed owner’s gross estate for estate tax purposes at the death of the deemed owner.

Estate planning attorneys exploit the lack of coordination between the income and transfer tax rules applicable to a grantor trust through techniques like the “intentionally defective grantor trust” that can transfer significant wealth to children or others without gift or estate taxation.   

To the extent that the income tax rules treat a grantor of a trust as an owner of the trust, the Administration’s proposal would (1) include the assets of that trust in the gross estate of that grantor for estate tax purposes, (2) subject to gift tax any distribution from the trust to one or more beneficiaries during the grantor’s life, and (3) subject to gift tax the remaining trust assets at any time during the grantor’s life if the grantor ceases to be treated as an owner of the trust for income tax purposes.

Basis Consistency Requirements. This proposal would help ensure that the basis of the property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). 

In order that taxpayers are aware of and use the appropriate basis, a reporting requirement would be imposed on the executor of the decedent’s estate and on the donor of a lifetime gift to provide the necessary valuation and basis information to both the recipient and the Internal Revenue Service.


Of course, taxes are a contentious issue on Capitol Hill and it is quite possible that none of the “loophole” reforms proposed by the Obama Administration will be enacted. However, to the extent that loophole closures can be viewed as distinct from tax increases, we could well see one or more of the above provisions become law.  Depending on what happens politically, we could someday look back on 2012 as the last golden year for wealth transfer opportunities.    

Further Reading

Friday, February 17, 2012

IRS Extends Deadline for Estates to Make Portability Election for Surviving Spouse

On February 17, 2012 the Internal Revenue Service issued guidance that it will allow certain estates of married individuals who died during the first six months of 2011 an extension of the deadline to make the portability election. The extension applies to estates where the fair market value of the decedent’s gross estate does not exceed $5,000,000.

The portability election passes along a decedent’s unused estate and gift tax exclusion amount to a surviving spouse. An extension is available to estates of married individuals with assets of $5 million or less, but only if the decedent died in the first six months of 2011, and the executor files Form 4768 requesting an extension no later than 15 months after the decedent's date of death.

The extra time is available to an estate even if the estate did not request an automatic six-month filing extension on Form 4768 prior to the regular nine-month filing deadline. As a result, these estates will now have until 15 months after the date of death, rather than the usual nine months, to make the election by filing an estate tax return on Form 706. Thus, the first estate tax returns for estates eligible to make the portability election (because the date of death is after Dec. 31, 2010) are now due on Monday, April 2, 2012.

Affected estates should submit both a properly-prepared Form 4768 and Form 706 to the IRS no later than 15 months after the decedent’s date of death. Further details are in Notice 2012-21, posted on

For more information about the portability election see: 

IRS publishes new Estate Tax Return Form (706) and Instructions

Estate and Gift Tax Portability Law Creates some Unconventional Planning Opportunities

Portability Provision of Estate Tax law may be "Wolf in Sheep's Clothing"

Sunday, February 12, 2012

No shocks for seniors in Governor’s Regulatory Agenda

Each year Pennsylvania regulatory agencies are required to publish an agenda of regulations that are under development or consideration. The agendas are intended to provide members of the regulated community with advance notice of regulatory activity and to increase public participation in the regulatory process.

The Governor’s Regulatory Agenda published on Saturday February 12, 2012 shows that Pennsylvania’s Departments of Aging and Welfare are considering some important regulatory changes. However, regulatory changes by these agencies are being constrained by the maintenance-of-effort (MOE) requirements in the federal health reform law (the Patient Protection and Affordable Care Act).

The MOE provisions prohibit states from making it more difficult for people to become eligible for Medicaid until the major components of health reform go into effect no later than January 1, 2014. The idea is to prevent budget strapped states from trying to save money by imposing new eligibility limitations on Medicaid.

As a result, the Department of Welfare’s ability to make regulatory changes is limited in a majority of the areas of its budget. On the other hand, the Department is relatively free to implement regulatory changes that it feels will reduce costs in areas that are completely state-funded programs and in provider rates.   

The Governor’s Agenda represents the Administration's present intentions regarding future regulations. Things may change (and often do). Here is a list of some of the regulatory matters under consideration which might significantly impact seniors.


Protective Services for Older Adults (PA Code Title VI Chapter 15). The Older Adults Protective Services Act is under review in light of current interest in enhancing protections for vulnerable Pennsylvanians, the decision of the PA Supreme Court in Nixon et al. v. Commonwealth, et al. (which found the current protective services law to be unconstitutional) and numerous technical and administrative provisions that need to be revised. Regulations are routinely being reviewed as numerous pieces of pending legislation are being considered in addition to this omnibus proposal. Estimated for December 2012.

Long-Term Care Ombudsman Program (PA Code Title VI Chapter 23). The Department wishes to promulgate regulations for the Long-Term Care Ombudsman program in order to bring it into conformity with national standards. Estimated for June 2012.


Pharmacy Benefit Package Change (55 Pa. Code Chapter 1121).  Act 22 of 2011 requires the Department to establish benefit packages for pharmacy services for medical assistance recipients 21 years of age or older, and any exceptions to such benefit packages as the Department determines are appropriate during state fiscal year 2011-2012. This regulation package is codifying the pharmacy benefit package changes which were published in the Pharmacy Benefit Package notice at 41 Pa.B. 6455 (December 3, 2011). Estimated for June 2012.

 State Supplementary Payment Levels (55 Pa. Code Chapter 299). The purpose of this final-omitted rulemaking is to codify the SSP levels in the text of 55 Pa. Code § 299.37 and to rescind Appendix A (relating to SSP payment levels). This regulation is being promulgated under the authority of Act 2011-22. Estimated for April 2012

Long Term Living Home and Community Based Services (55 Pa. Code Chapter 52). The regulation will establish provider qualifications and payment provisions for providers rendering services under the Aging, Attendant Care, COMMCARE, Independence and OBRA Home and Community Based Service waivers and the Act 150 program. This regulation is being promulgated under the authority of Act 2011-22. Estimated for April 2012.

Appeal and Fair Hearing and Administrative Disqualification Hearings (55 Pa. Code Chapter 275). This regulation will update definitions, streamline administrative practices, and incorporate hearing procedures that will support efficiency in the hearing and appeals process. Estimated for July 2012.

In addition to the above, the Department of Revenue is proposing to codify its policy for taxation of estates and trusts and to amend existing regulations in regard to realty transfer taxes. Both actions may have implications for planning for seniors.

Amendments to Estates and Trusts—Personal Income Tax Regulations (61 Pa. Code Chapters 101, 103, 105, and 117). The Department is promulgating this regulation to codify the Department's policy for the taxation of estates and trusts in the Commonwealth and to provide clear instructions for taxpayers regarding reporting requirements. Estimated for July 2012.

Amendments to Realty Transfer Tax Regulations (61 Pa. Code Chapter 91).  Proposed Regulation published at 41 Pa.B. 6220 (November 19, 2011). Final Amendments to the Realty Transfer Tax regulations are being proposed to improve the clarity and effectiveness of the regulations. Estimated for December 2012.

For More information
The Governor’s Regulatory Agenda as published in the Pennsylvania Bulletin on Saturday February 12, 2012.

Thursday, February 9, 2012

Community Spouse Minimum Income Allowance will Increase to $1,891.25 on July 1, 2012

  If a married nursing home resident receives Medicaid long-term care benefits, his or her community spouse is entitled to retain a certain minimum level of income called the Minimum Monthly Maintenance Needs Allowance (MMMNA).  If the community spouse's own income is insufficient to provide this income allowance, income can be diverted from the institutionalized spouse.

The minimum MMMNA is set by federal law and is adjusted each year to keep up with inflation.  Pennsylvania makes the MMMNA adjustment on July 1st of each year.

The spousal income allowance is based on the federal poverty level. The MMMNA must be at least 150% of the federal poverty level for a family of two plus an excess shelter allowance. On January 26th, the federal poverty guidelines for 2012 were published in the Federal Register.  The rates are available on the website of the Department of Health and Human Services.

As a result of the new guidelines, on July 1, 2012, the minimum MMMNA will be increased from $1,838.75 to $1,891.25 per month.  This should be "rounded up" to a working figure of $1,892.00 per month. The actual MMMNA can be higher depending upon the monthly shelter related expenses incurred by the community spouse. The maximum income allowance during 2012 is $2,841. 
Federal law also protects the resources of the community spouse. The protected resource amounts for 2012 (which are not linked to the new federal poverty level) are a minimum resource allowance of $22,728 and a maximum resource allowance of $113,640. It is important to note that a community spouse can usually protect resources in excess of the specified maximum through the purchase of a DRA compliant annuity.   

Other programs with eligibility levels that are reliant on the federal poverty level (FPL) include the following programs that can help pay Medicare premiums for low income beneficiaries:

Qualified Medicare Beneficiaries (QMBs):  Medicaid will pay all Medicare cost sharing (including Part B and any Medicare Part A premiums) for Medicare Beneficiaries with incomes up to 100% FPL and limited resources:  The income limits for 2012 are $930.83/month for an individual; $1,260.83/month for a couple. 

Specified Low-income Medicare Beneficiaries (SLMBs):  Medicaid will pay the Medicare Part B premiums for Medicare beneficiaries with incomes between 100% FPL and 120% FPL and limited resources: The income limits for 2012 are $1,117/month for an individual; $1,513/month for a couple.

Qualified Individual (QI): States may pay (based on funds available) Medicare Part B premiums for Medicare beneficiaries with incomes between 120% FPL and 135% FPL and limited resources: The income limits for 2012 are $1,256.63/month for an individual; $1,702.13/month for a couple.

Medicare Part D Low-Income Subsidy:
Medicare Part D is Medicare’s prescription drug coverage. Low income beneficiaries with limited resources may receive either a full or partial subsidy. A full subsidy is available for those who otherwise qualify and have incomes of $1,256.63/month for an individual and $1,702.13/month for a couple. A partial subsidy is available for those who otherwise qualify and have incomes of $1,396.25/month for an individual and $1,891.25/month for a couple.

The methods of calculating an applicants income can vary with the program. Some receipts that you might personally consider to be income may not counted in determining whether you qualify and a limited amount of your countable income may be disregarded. And the size of your family unit may impact your eligibility level for some programs. If you are in doubt as to whether you qualify for any of these benefits contact your state Medicaid agency.  In Pennsylvania, interested persons can get further information and apply for benefits through their local County Assistance Office.

For further information you may wish to visit:

Pennsylvania Department of Public Welfare website (note that the figures on this page have not been updated from the 2009 figures). 

The MedicaidLong Term Care Eligibility Fact Sheet, Marshall, Parker and Associates.

Wednesday, February 8, 2012

Elder Law in Pennsylvania Third Edition is Published

I am pleased to announce that a new edition of Elder Law in Pennsylvania has just been published by the Pennsylvania Bar Institute (PBI). Elder Law in Pennsylvania, Third Edition is now available for purchase from PBI Press. The book is a comprehensive reference source for lawyers and other professionals who advise older Pennsylvania residents and their families.
I wrote the first edition of Elder Law in Pennsylvania in 2005.  It became one of PBI’s most popular titles and was the 2006 recipient of the international Association for Continuing Legal Education (ACLEA) Book Award for Outstanding Achievement. A second edition followed in 2008. But the area of elder law is constantly evolving and the time has come for a new publication.
Last year I asked a wonderful group of experts in elder law to help me put together a completely updated new edition of Elder Law in Pennsylvania. Elder law lawyers have always been generous in sharing their best ideas, forms, and practice tips with other lawyers. We seem to have a sense of common purpose and understand that by pooling our knowledge, energies, and talents we can better protect our clients. The 2012 update of the book benefits from the accumulated knowledge of the wonderful group of lawyers who agreed to help. I’ve listed their names below.

To be able to meet the needs of our older clients, lawyers must be able to move beyond the traditional legal realms of estate and tax planning, and provide advice on Medicare, Medicaid, Social Security, estate recovery, powers of attorney and health care decision making, elder abuse, veterans benefits, and the network of public and private services and programs that can help families who are struggling to cope with a long term illness.  These are the topics presented in ElderLaw in Pennsylvania, Third Edition.

Aging can present overwhelming problems for our older clients and their families.  As lawyers, we can’t make mom or dad young again, or cure them if they are sick, but if we are willing and knowledgeable and committed we can guide our clients through the maze of issues confronting them, lift a lot of burdens off of them, and do a lot of good for people who may be particularly powerless and dependent. 

The challenges for the lawyer are great, but so are the opportunities and satisfactions.  The new Elder Law in Pennsylvania, Third Edition, is dedicated to helping the Pennsylvania lawyer meet these challenges.

The co-authors of the Third Edition are:
Janet Colliton, Esq., Colliton Law Associates, West Chester
Brian Scott Dietrich, Esq., Law Office of Brian Scott Dietrich, P.C., Blue Bell
Martin J. Hagan, Esq., Law Firm of Martin J. Hagan LLC, Pittsburgh
Marielle F. Hazen, Esq., Law Office of Marielle Hazen, Harrisburg
David R. Lipka, Esq., Law Offices of David R. Lipka, Plymouth
Dionysios C. Pappas, Esq., Vasiliadis & Associates, Bethlehem
Professor Katherine C. Pearson, Dickinson School of Law of the PA State University, Carlisle
Sanford L. Pfeffer, Esq., Philadelphia Corporation for Aging, Philadelphia
Jennifer K. Roche, Esq., Heckscher, Teillon, Terrill & Sager, West Conshohocken
Margaret E.W. Sager, Esq., Heckscher Teillon Terrill & Sager, P.C., West Conshohocken
Sally L. Schoffstall, Esq., Schoffstall & Focht, Orefield
Jacqueline J. Shafer, Esq., Elliott Magee & Shafer, L.L.P., Doylestown
Ellen R. Wase, Esq., Wase & Wase, Philadelphia
Jeffrey A. Marshall, JD, CELA, Editor & Author, Elder Law Firm of Marshall, Parker & Associates, LLC, Williamsport

Wednesday, February 1, 2012

Tax Refunds don’t impact eligibility for Medicaid and SSI

As we enter tax season, many Americans will begin receiving tax refunds. Some refund recipients will be receiving public benefits from the SSI and/or Medicaid programs. 

It’s important to remember that tax refunds received in 2012 are disregarded for 12 months for purposes of determining eligibility for federally funded assistance programs like Medicaid or SSI. This rule is positive for beneficiaries of these programs.

As a result of The Tax Relief Act of 2010, tax refunds may not be treated as countable income for SSI or Medicaid purposes. As noted in an Informational Bulletin issued by the government’s Centers for Medicare and Medicaid Services (CMS):

“[t]ax refunds and advance payments are not to be counted as income when determining eligibility under Medicaid or CHIP for the recipient of the payment, or for any other individual. Therefore, in addition to not counting the refund or payment as income to the individual, any payment made is not countable as income when determining Medicaid or CHIP eligibility for a spouse or other family members. Tax refunds and advance payments may not be counted as income to someone else even if they are given to that person.”

Any money received through a tax refund will not be a countable resource for 12 month following receipt of the funds. SSI and Medicaid recipients are under no obligation to segregate the funds from their other resources. The same rule applies to tax refunds received prior to an application for SSI or Medicaid, which means that so long as an applicant can point to funds in his account that are traceable to a tax refund during the previous year, those funds will not be a countable resource until the year has passed.

The CMS' Informational Bulletin addresses what happens when an applicant seeking Medicaid long-term care benefits places a tax refund into a trust. According to the bulletin, the Tax Relief Act
"effectively precludes applying penalties under section 1917(c) of the Social Security Act to individuals who, in applying for long term care benefits under the Medicaid program during the period in which tax refunds or advance payments are not countable either as income or resources . . . dispose of part or all of the refunds or advance payments in a manner that normally would be considered a transfer of assets for less than fair market value."

The new treatment applies to any refunds or credits received after December 31, 2009 through December 31, 2012. The relevant statutory provisions are found in Section 728 of the Tax Relief Act of 2010. That section reads:

`(a) In General- Notwithstanding any other provision of law, any refund (or advance payment with respect to a refundable credit) made to any individual under this title shall not be taken into account as income, and shall not be taken into account as resources for a period of 12 months from receipt, for purposes of determining the eligibility of such individual (or any other individual) for benefits or assistance (or the amount or extent of benefits or assistance) under any Federal program or under any State or local program financed in whole or in part with Federal funds.
`(b) Termination- Subsection (a) shall not apply to any amount received after December 31, 2012.'