Thursday, October 28, 2010

Hidden Financial Breaks for Caregiver Children

Hidden Financial Breaks for Caregiver Children
by Jeffrey A. Marshall, CELA*

Caring for an aging parent is a difficult road for a child. It’s hard to appreciate the potential emotional, physical, and financial toll until you have driven this road yourself. The financial costs for the caregiver child are hard to calculate. they can range from missed opportunities at work, through lost wages and the inability to work at all, to having to use up the child’s income and savings to pay for Mom or Dad’s care.  
I’m a certified elder law attorney. For the past 30 years I have helped my clients find ways to minimize these financial burdens. One approach is to try to shift the cost of care off of the family and on to a third party payor such as a long term care insurance provider or Medicaid or another government program.  

When I first started on the elder care law path in 1981 long term care insurance coverage was very limited, Medicaid was like the dark side of the moon, and the term elder law didn’t yet exist. I remember attending a conference in Arlington Virginia in the 1980’s and hearing the speaker talk about Medicaid benefits for long term care, and wondering how anyone could ever find their way through that maze. 

But over time, families and their elder care advisors have become better educated about complex programs like Medicare, Medicaid, and Veterans Pension that can provide critical financial support for a parent. And long term care insurance has been regulated and improved. Of course, relatively few care recipients have long term care insurance, or are Veterans (or spouse or widow or a Veteran), and it is difficult to qualify for Medicaid for numerous reasons. Most care giving in America continues to be provided gratuitously by family members at tremendous cost to the caregivers.
Medicaid and other third party benefits that are payable directly to the person in need of care have become much better understood over the three decades I have been practicing elder law. But, there continues to be an unfortunate lack of knowledge about a number of important tax and financial benefits that can accrued directly to the caregiver child rather than the care recipient. 

These financial breaks are relatively unknown even to tax and legal advisors. As a result they are woefully underutilized.  The purpose of this article is to shed light on 3 of these overlooked opportunities. Two of them are hidden gems that can provide many thousands of dollars in savings for the child who is a caregiver.  


Claiming a Dependency Exemption for your Parent


Probably the best known (though not the most significant) potential tax break for a caregiver child is the federal income tax dependent exemption (IRC § 151).   

An exemption reduces your taxable income. You can take an exemption for yourself and for your spouse if you are married.  You can also claim an exemption for other dependents such as children AND a parent who meets the dependency tests. In 2010 each exemption is worth $3,650, although the benefit is phased out for higher income taxpayers. 

Unfortunately, the rules make it difficult for a child to claim the exclusion for a dependent parent. You can only claim a federal income tax dependent exemption for a parent provided:
  1. Your parent is a citizen or resident of the U.S. or a resident of Canada or Mexico.
  2. Your parent did not file a joint income tax return with anyone else.
  3. You provided over half of his or her support.
  4. Your parent had gross income of less than $3,650 for the entire year (in 2010).
Since the taxable portion of Social Security payments are included in the parent’s income, the $3,650 gross income limit prevents many children from claiming the exemption for a parent they are supporting. 

Another issue may arise when a parent is receiving support from several children none of which have provided over half the support. A parent cannot be claimed as a dependent by more than one child. But, if several children combine to provide more than half of the parent’s support, they can agree on which sibling is going to get to claim the exemption.  The children do this through a multiple support agreement. Under this agreement two or more persons whose combined support exceeds 50% and each of whom would be allowed to take the exemption but for the 50% support test can agree that any one of them who individually provides more than 10% of the support can claim the exemption.  

Here is an example from IRS Publication 501

“You, your sister, and your two brothers provide the entire support of your mother for the year. You provide 45%, your sister 35%, and your two brothers each provide 10%. Either you or your sister can claim an exemption for your mother. The other must sign a statement agreeing not to take an exemption. The one who claims the exemption must attach Form 2120, or a similar declaration, to his or her return and must keep the statement signed by the other for his or her records. Because neither brother provides more than 10% of the support, neither can take the exemption and neither has to sign a statement.”

For more information on the dependency exemption, see IRS Publication 501: Exemptions, Standard Deductions and Filing Information. Publication 501 includes a worksheet you can use to figure out whether you have provided more than half of your parent’s support.   


Deducting your Parent’s Medical Expenses

Don’t be discouraged if your parent has income in excess of $3,650 and you can’t claim an exemption from them.  The exemption break is relatively insignificant in any event – it is worth only $3,650 times your marginal tax rate at best (e.g. $3,650 x .28 = $1,022).[1]  A much more valuable tax break may await – the potential for the caregiver child to deduct the medical and qualified long term care expenses paid for the parent. Fortunately, the medical expense dependency/deduction rules are easier to meet than those for claiming a dependency exemption because you can deduct medical expenses even if your parent has income in excess of $3,650. 

Section 213 of the Internal Revenue Code allows for the deduction of medical expenses paid by a taxpayer for himself, spouse, and dependents to the extent that the expenses exceed 7.5% of the taxpayer’s adjusted gross income.  For you to include your parent’s medical expenses on Schedule A of your tax return your parent must have been your dependent either at the time the medical services were provided or at the time you paid the expenses. (You can deduct the expenses in the year you pay them, even if your parent is now deceased). You can include any deductible medical expenses you paid for a parent who would have been your dependent except that:
1.     He or she received gross income of $3,650 or more in 2010,
2.     He or she filed a joint return for 2010, or
3.     You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2010 return.

To deduct the medical expenses you pay for your parent you must provide more than half of his or her support for the year.  However, you will be considered to have provided more than half of your parent’s support if you and your siblings combined to provide that level of support and entered into a multiple support agreement.  Any medical expenses paid by others who joined you in the agreement cannot be included as medical expenses by anyone. However, you can include the entire un­reimbursed amount you paid for medical expenses. Here is an example from IRS Publication 502:  
“You and your three brothers each provide one-fourth of your mother’s total support. Under a multiple support agreement, you treat your mother as your depen­dent. You paid all of her medical expenses. Your brothers repaid you for three-fourths of these expenses. In figuring your medical expense deduction, you can include only one-fourth of your mother’s medical expenses. Your broth­ers cannot include any part of the expenses. However, if you and your brothers share the nonmedical support items and you separately pay all of your mother’s medical ex­penses, you can include the unreimbursed amount you paid for her medical expenses in your medical expense.”
Amounts paid for qualified long-term care services are deductible as medical expenses under Tax Code Section 7702B. Qualified long-term care services are necessary diagnos­tic, preventive, therapeutic, curing, treating, mitigating, re­habilitative services, and maintenance and personal care services (defined later) that are:
Required by a chronically ill individual, and
Provided pursuant to a plan of care prescribed by a licensed health care practitioner.

An individual is “chronically ill” if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions.
(1) He or she is unable to perform at least two activities of daily living without substantial assistance from an­other individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eat­ing, toileting, transferring, bathing, dressing, and con­tinence. OR
(2) He or she requires substantial supervision to be pro­tected from threats to health and safety due to se­vere cognitive impairment.

“Mainte­nance or personal care services” is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (includ­ing protection from threats to health and safety due to severe cognitive impairment). Don’t forget to get the annual certification by a licensed health care practitioner if you (or your parent) intend to claim a medical expense deduction for qualified long-term care services.   A “licensed health care practitioner” includes any physician and any registered professional nurse or licensed social worker.

A recent US tax court case confirms the deductibility of caregiver expenses, even though the caregivers were not medical professionals. In Estate of Lillian Baral (U.S. Tax Ct., No. 3618-10, July 5, 2011), Lillian Baral suffered from dementia and her doctor recommended that she get 24-hour-a-day care. Her brother hired personal caregivers to assist her. The Tax Court agreed that the payments to the caregivers were deductible medical expenses, even though the caregivers were not medical personnel, because a doctor had found that the services provided to Ms. Baral were necessary. 

Given the high cost of long term care, whether at home or in an institution, the tax savings from the medical expense deduction may substantially reduce or even eliminate a child’s income tax liability. With planning, the deduction can be maximized. It is a shame that this tax break is so often overlooked.

Getting Paid for Caregiving Services

Most long-term care services are provided by family members. A parent may want to reward a caregiver child for otherwise uncompensated services. One way to achieve this is for the parent to make either a lifetime a testamentary gift to the caregiver child. 

Compensating a child for services via “gift” can raise some interesting income tax issues – (see United States v. Dieter, 2003-1 U.S.T.C. ¶ 50,439 (D.Minn. 2003)) which are beyond the scope of this article. In addition, the restrictions in Medicaid laws make it difficult to thank the child by using a gift because gifts can create an ineligibility period.  As a result, families have begun to use employment-based compensation to pay a child for personal care services rendered to a parent. This can be accomplished through the use of a Family Caregiver contract which an agreement under which a child agrees to provide personal care services to the parent for reasonable compensation. 

The term of the contract may be for the duration of the elder’s life but is typically for a shorter duration or at-will basis. The contract may be funded through use of the income and assets of the elder prior to asset exhaustion and Medicaid application. 

Payment of funds under a proper personal care agreement avoids Medicaid’s asset transfer restrictions because the elder is receiving fair market value—personal care services or the promise to be provided with care. Depending upon the amount of compensation there may be no uncompensated transfer and no period of ineligibility for Medicaid. On the downside, the benefit passed along to the child is reduced to the extent of the taxes that must be paid on the compensation. 

Family caregiving contracts raise numerous issues and need to be drafted with expert advice. As with gifts from the parent, issues related to competency and undue influence abound especially if the compensated child is not the sole heir of the parent. In terms of later eligibility for Medicaid, method of payment is a often disputed element of the care contract. The parties may choose lump sum, hourly fee-for-service, or some other form of payment. The lump sum offers the potential to retain assets within the family and is thus the most likely to be contested by the state Medicaid agency.  A major problem with hourly “pay as you go” contracts is that the funds of the person in need of care may eventually be exhausted in paying for other supplemental services. In addition, the retention of resources can delay eligibility for needed Medicaid services.

A care contract is an employment contract. The employer and employee must comply with federal, state, and local laws, regulations, and ordinances regarding household employees. These include income, Social Security, Medicare, and unemployment taxes and workers’ compensation. Withholding may be required for some of these. 

The employer parent and caregiver child should seek assistance from a qualified tax advisor to set up and maintain proper bookkeeping and to ensure that all required payments are made. These records will also help justify the expenditures and avoid transfer penalties.

While the child must pay tax on the compensation he or she receives from the parent, the cost of the personal care services may in some cases be deductible by the payer as a medical expense for qualified long-term care services. Since it is the parent who is paying the expense, any qualified medical expense deduction belongs to the parent and can be used to reduce the parent’s taxable income. However, a limitation applies to services provided by family caregivers. Payments for “qualified long-term care services” are not deductible if the person who was paid is the spouse or any relative of the person who is receiving the care in question. Thus payments to family caregivers do not generally provide any income tax deduction for the payer. There is an exception, however, if the family caregiver is a “licensed professional with respect to such service.”  See Internal Revenue Code Section 213(d)(11)(A)

Proper documentation is required for both tax and Medicaid qualification purposes. The parent should keep cancelled checks written to the caregiver child, together with an itemized statement, log, or invoice from the caregiver showing the date(s) or hour(s) worked. A doctor’s note describing the need for assistance from the caregivers might also be helpful.

Training and Support
Being a caregiver is stressful and physically demanding. The caregiver is at risk of injury. Knowing the right way to lift or transfer an individual can greatly reduce the dangers. Making arrangements for backup support and respite is critically important. Caregiving can be improved, and its dangers reduced through proper support and training. Families should consider obtaining training, assistance, and support from community resources including private duty nursing agencies and licensed therapists. Training caregivers can be an allowable Medicare Home Health skilled service.[2]

Hiring Family Members through Government Programs
A few government funded programs may allow for compensation of family members for personal assistance services provided to a consumer. The rules vary depending on the program. A child can contact his parent’s area agency on aging or state Medicaid agency or a certified elder law attorney to determine if any programs might be applicable.


Conclusion: Getting Paid for Caregiving Services

This article discusses three of the hidden financial breaks that may be available to the child who is caring for an aging parent.  To explore these and other possibilities, families should consult with an experienced elder law attorney.  Certification programs for elder law attorneys are recognized in many states and offer a means of ensuring you that your lawyer is a specialist in elder care matters. Families can locate a certified elder law attorney through the website of the National Elder Law Foundation

*Jeffrey A. Marshall is Certified as an Elder Law Attorney by the National Elder Law Foundation. This article is copyright 2010-2011 by Jeffrey A. Marshall, who is founding attorney of Marshall, Parker and Associates. It may be duplicated and distributed provided no changes are made to its content and full attribution is given to Jeffrey A. Marshall.  Short quotations from this article are also permitted with such attribution. This general information is not intended as and should not be relied upon as legal advice. Its dissemination does not create any attorney/client relationship. Its author is licensed to practice law in the Commonwealth of Pennsylvania. For specific advice about your particular situation, consult a lawyer who is licensed to practice in your jurisdiction. Pursuant to IRS regulations, any tax advice contained in this communication is not intended to be used and cannot be used for purposes of avoiding penalties imposed by the Internal Revenue Code or promoting, marketing, or recommending to another person any tax related matter. 

[1] A single child who is caring for a parent may also want to consider whether the child can qualify for more favorable tax rates as “head of household” under IRC 2(b).

Additional Resources:
Anne Tergesen, Should You Pay a Relative to Take Care of Mom?, W.S.J., Dec. 11, 2010.
Joseph Matthews, How to Get Paid for Being a Family Caregiver, AARP Caregiving Resource Center 

Saturday, October 16, 2010

Profile of Older Americans

The Department of Health and Human Services has published its extensive annual report on Older Americans for 2009 

The older population (persons 65 years or older) numbered 39.6 million in 2009 or 12.9% of the U.S. population. By 2030, it is expected that the number of older persons will grow to about 72.1 million or about 19% of the population. While this growth would appear to have staggering implications for the future of America, it doesn’t seem to be much discussed by candidates in the upcoming election.  
The 2009 statistical reports include wide ranging demographic information on subjects such as income, poverty, living arrangements, health care, disability and caregiving. Click on one of the links below to learn more. 

Friday, October 15, 2010

Paying for Assisted Living: Pennsylvania to follow Indiana model

Paying for Assisted Living: Pennsylvania to follow Indiana model


By Jeffrey A. Marshall, CELA*


Like most states, Pennsylvania provides a continuum of support services that allow frail seniors to remain in the community rather than a nursing home.  These services range from limited, such as home delivered meals, to much more intense in-home services for individuals needing higher levels of care.  


Providing seniors with home and community-based care has become accepted as a cost effective alternative to nursing facility care.  In addition to purportedly saving the Government money, providing care in the home and community is seen as promoting independence and self-reliance, and maximizing opportunities for family and community involvement.  It is also consistent with surveys of consumer preferences and with a 1999 United States Supreme Court decision in Olmstead v. LC which held that unnecessary institutionalization constitutes illegal discrimination based on disability. 


A major funding source states use to pay for long term care for seniors is the federal/state Medicaid program. Services for seniors who do not meet Medicaid’s strict financial and clinical eligibility requirements are funded through other revenue sources such as the lottery and state general revenues.  Individuals may be required to contribute towards the cost of these services.


But there is a serious gap in the continuum of care that Pennsylvania has been providing to keep frail seniors out of the nursing home. In Pennsylvania, Medicaid funding cannot be used to pay for the cost of care in an assisted living facility. This means that some individuals who could have been accommodated in an assisted living setting if they received some limited financial assistance from Medicaid have been forced into higher cost skilled nursing facilities. The Government pays more each month and the senior is institutionalized.  Not a good result, but one that is sometimes required because currently Medicaid pays for care in a skilled nursing home but not in assisted living.  


Overcoming this “institutional bias” has been a stated goal of the Rendell Administration and I anticipate it will receive continued support from whoever becomes Pennsylvania’s next Governor.  Pennsylvania is moving slowly but steadily towards providing Medicaid funding for some assisted living residents with higher needs.  It appears that funding may begin in 2011.  We are now beginning to get some idea of the criteria that will be used to determine whether a resident of an assisted living residence can qualify for Medicaid. 


First a little background. Currently assisted living facilities in Pennsylvania are classified as personal care homes. They are barred from accepting residents who need the more intense level of care required for Medicaid to pay for that care. 


In 2007 Pennsylvania enacted a law, Act 56, to create a new classification of assisted living providers that will be able to accept individuals with higher care needs and who can thus meet Medicaid’s clinical eligibility standards. Unlike personal care homes, this new Assisted Living Residence (ALR) provider class will be able to deliver some health care services to their residents. ALRs are intended to have more of a private home-like feel than a nursing facility, including such amenities as separate bedrooms and baths and kitchen facilities and provide consumers will more direct control over their care.


Act 56 directed the Department of Public Welfare (DPW) to develop regulations for ALRs. This complex and contentious task required DPW to regulate in a manner that would entice facilities to apply for the designation while providing reasonable protections of consumer interests.  Earlier this year, DPW promulgated final regulations and the Department is moving forward to seek a waiver from the federal government so that Medicaid funding can be used to help pay the cost of care for some ALR residents. Much more information on these controversial regulations, including comments from stakeholders, is available through the Pennsylvania Independent Regulatory Review Commission website.


A federal waiver is required because most of the money comes from the federal government. In 1981, Congress enacted section 1915(c) of the Social Security Act, which provides states with a Medicaid financed alternative to institution-based care. Congress recognized that many individuals who would otherwise be institutionalized could be cared for in their own homes and communities at lower cost. In 1981 it authorized the creation of Home and Community-based Services Waiver programs. One requirement is that waiver services costs are no higher than that of institutional care. In the intervening years, Pennsylvania has utilized Medicaid Waiver funding to cover a range of services and supports needed by people to remain in the community.


Currently, DPW is in the process of preparing a Waiver application for filing with the federal government to cover ALR services.  There is every reason to assume that this application will be approved, although the feds often require changes to Pennsylvania’s waiver proposals. Once approved, federal dollars will become available to support qualified residents of Pennsylvania’s new class of Assisted Living Residences.


At its Medical Assistance Advisory Committee Long Term Care Subcommittee meeting last week DPW announced that it is using the Indiana Assisted Living Assisted Living Waiver as a model for Pennsylvania’s application.  Potential Assisted Living Residence providers and their residents may wish to review the Indiana regulations to get a preview of how Pennsylvania’s program will work.  It remains to be seen how successful this new program will be in serving frail seniors.  Once the Waiver is approved, consumers should discuss qualification with a certified elder law attorney.


Many thanks to Marielle Hazen, CELA,* for updating me on the discussions at the recent MAAC subcommittee meeting on this issue. 


*Certified as an Elder Law Attorney by the National Elder Law Foundation

Wednesday, October 13, 2010

Power of Attorney: The most Important AND Dangerous Estate Planning Document

A Power of Attorney may be the most important AND the most dangerous document a lawyer drafts for a client. In the event of the client’s incapacity, a power of attorney can help ensure that the desired decisions will be made for the client by the desired people at the desired time. A well-drafted power of attorney will increase the likelihood that the client’s values will be respected and his or her intentions and goals will be pursued despite any future incapacity.

The power of attorney document can be the key that opens the door to effective asset protection planning and the preservation of the family’s financial security. On the other hand, a power of attorney can be used as a tool for elder abuse or to thwart a client’s established estate plan.

Despite its importance and potential for abuse, the power of attorney may be perceived as a standard commodity both by the client and the lawyer. A standard “one-size-fits-all” form may be prepared with little thought or discussion.

To provide quality service, the lawyer must finely tailor the document to meet the client’s goals, given the client’s unique circumstances, concerns, and needs, while protecting the client from the potential for abuse. Frequently, this legal planning is provided to clients with diminished capacity and who may be subject to family influence. And the lawyer must be careful to comply with complicated and somewhat illogical statutory requirements governing powers of attorney.

Contrary to the perception of most clients and some lawyers, this is not a simple document. Here are some of the issues the lawyer should address when a power of attorney is prepared.
1.         Clients need wise and practical counsel about the risks inherent in granting power to an agent and the importance of exercising due care and prudence when selecting an agent.

2.         Clients need to consider options that can limit the potential for exploitation by the agent—e.g., limiting the agent’s power to make gifts, naming co-agents, requiring reporting by the agent to a third party.

3.         Agents need to be educated about their responsibilities. The lawyer may want to consider including separate explanatory information as an accompaniment to the power-of-attorney document. The lawyer does not want to create a lawyer/client relationship with the agent and needs to be careful to avoid this; but the lawyer can provide some general information to the agent about his or her responsibilities and suggest that the agent seek legal advice when embarking upon his or her duties. Some elder law attorneys accompany copies of the power of attorney with a booklet explaining the nature and use of the power of attorney. The booklet can cover issues such as the need for the acknowledgment to be signed by the agent, and the fiduciary duties of an agent. The agent receives the booklet when the agent receives a copy of the power of attorney. 

4.         A nominated agent should seriously consider whether or not to accept the responsibilities of agency before commencing down this perilous road. Family dynamics should be considered before the first action is taken. Legal and accounting help from the outset may be advisable.

5.         Lawyers should not merely grab a convenient “standard” power of attorney form from the shelf or computer. The lawyer must consider with care the client’s circumstances, needs, and goals and draft a document particularly suited to that client.

6.         The lawyer should have an in-depth discussion with the client about gifting. Failure to have the appropriate gifting provisions in the document is one of the most frequently encountered problems with powers of attorney. This failure can result in the need for guardianship or other court involvement, the potential for litigation between family members, and difficulty and embarrassment for the lawyer. In addition, the lawyer may have the ethical obligation to discuss gifting with the power of attorney client:
(a)                    In Pennsylvania, the Lawyer's Rule of Professional Conduct 1.4(b) provides that “A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Other states have a similar rule. It is difficult to imagine that a senior client who is concerned with protection of assets and long-term care issues can make an informed decision about a power of attorney if gifting has not been discussed.
(b)                    Rule of Professional Conduct 1.1 provides that “A lawyer shall provide competent representation to a client.” Given the importance and complexity of the gifting issue, drafting of a power of attorney without consideration of the gifting issue may not be competent representation and may violate Rule 1.1.

7.         Consider incorporating language into the power of attorney that provides for the fiduciary investment standards to which the agent will be bound.

8.         Consider whether to waive fiduciary duties for trusted family members. In many family situations, the principal will not want the agent to be burdened with the record-keeping mandated by the laws of Pennsylvania and many other states. In Pennsylvania, the record-keeping requirement, prohibition against self-dealing, and other fiduciary duties can be waived by the principal when creating the power of attorney, but the waiver must be explicit.

9.         Where the agent does not have clear authority to make gifts, consider advising the agent to seek court authorization. Put this advice in writing. Remember the admonition of Pennsylvania Rule of Professional Conduct 1.2(d) that “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent[.]” To protect yourself from a later claim by the agent that “the lawyer said I could do it,” put your advice in writing.

10.       Be careful during your consultation with the principal that there is no undue influence being exerted by a family member interested in gaining the power to make gifts. If other family members are present during your meeting, your client may be reluctant to speak candidly with you. Try to create an opportunity for the client to talk with you alone. Some elder law attorneys follow a rule that they always must meet with the client alone at some point. However, this can be difficult to accomplish and may sometimes be counter-produc_tive. Other elder law attorneys do not always insist on a private meeting. Recognize that a private meeting with the client may be particularly important in situations where the family member will be appointed as agent or otherwise stands to benefit from the decisions being made by the elder.  In any event, try to avoid putting the onus on the client to ask other family members to leave the room. Some possibilities:
(a)                    You can ask to speak with the client alone at some point as part of the session—sometimes this works best at the outset, especially if you have a prior relationship with the client and the client feels comfortable with you. On the other hand, a new client may be reluctant to meet with the attorney alone; in such cases it may be best to wait until you have established some trust with the client (but beware: if you wait, critical decisions may have already been made). Frequently, however, the client will want the family to take part in the entire consultation. Forcing the client to meet with you alone may impair your relationship with the client.
(b)                    Advise the client that he or she can call you at any time after the appointment to discuss any additional matters that may have been missed.
(c)                   The lawyer may need to be proactive and call the client after the appointment, especially if there is any concern about undue influence. The client may provide the lawyer with additional information during this call. The call also gives the lawyer the opportunity to repeat the major decisions that were made and confirm the client’s desires, without the influence of other family members.

11.       Protect the client from inappropriate use of gifting powers by the agent. You can build in protections against abuse of gifting power by:
(a)        requiring that all gifts be approved by persons other than the agent;
(b)        limiting the persons to whom unlimited gifts can be made (e.g., allowing gifts to be made only to the principal’s spouse);
(c)        requiring equality among donees;
(d)        requiring that the agent report all gifts made by the agent (e.g., to another family member);       
(e)        creating an Irrevocable Grantor Trust and permitting gifting only to the trust (if the client’s primary goal in permitting gifting is to protect assets from nursing home costs).

Monday, October 4, 2010

Veterans: Federal law limits your lawyer’s ability to help you get VA benefits.

Three distinct areas of benefits may be of significant value to older veterans: Health benefits; Compensation benefits, and Pension benefits. The receipt of VA benefits may be crucial to allowing a veteran with long term care needs to get needed care in the most appropriate setting, and to  preserving some limited financial security. The surviving spouse of a veteran may also qualify for VA benefits. However, federal law limits the ability of lawyers to help a veteran or surviving spouse obtain those benefits.  

The general rule is that no one is permitted to charge a veteran for assistance in filing an application for benefits. While a VA accredited attorney may assist a veteran with filing an application VA Benefits the lawyer may not charge for doing so. This is an obvious disincentive to lawyer involvement.

A lawyer is not allowed to charge a veteran for assistance in obtaining VA benefits until after the veteran has received a partial or complete denial from the VA Regional Office and filed a notice of disagreement (NOD). After the NOD has been filed a VA accredited lawyer is allowed to charge a fee for representing a veteran at hearings and during the stage of developing the evidence and preparing for and presenting Board of Veterans Appeals testimony. 

In addition to limiting the services for which a lawyer may charge to the post NOD time frame, VA regulations dictate the terms of the fee arrangement. The fee agreement must be in writing and be filed with the VA. It must be signed by both the claimant and the lawyer, include the name and relationship to the claimant of any disinterested third-party payer, the applicable VA file number, the terms of payment, and a direct payment clause (if applicable).
VA must approve the amount of the fee. A lawyer may not “enter into an agreement for, charge, solicit, or receive a fee that is clearly unreasonable or otherwise prohibited by law or regulation." (38 C.F.R. 14.632(c)(5)). Fees can be based on a fixed fee arrangement, hourly rates, a percentage of benefits recovered, or a combination of these.
Fees which do not exceed 20 percent of any past due benefits awarded are presumed to be reasonable. Fees which exceed 33 1/3rd percent of any past due benefits awarded are presumed to be unreasonable. If the fee agreements provides for payment of fees by VA directly out of past-due benefits awarded, total fees (excluding expenses) may not exceed 20 percent of past due benefits and the amount of the fee must be contingent on the favorable resolution of the claim.

VA requires that a lawyer be "accredited:" in order to lawfully assist a claimant in the preparation of a claim for Veterans benefits regardless of whether fees are charged. This means that a lawyer who charges a flat (fixed) fee for elder-law services such as estate, incapacity, and Medicaid planning, must be accredited by the VA if the services include the preparation of an application for VA benefits.  And the lawyer cannot charge for the VA application portion of the services.  

Since lawyers must be accredited and cannot charge for assisting a claimant in regard to the initial filing of a claim, most veterans rely on the free assistance available to them from County Veterans Affairs offices[1] or accredited veteran services organizations.[2] Because of the accreditation and fee restrictions most elder law attorneys do not handle the filing of veteran’s claims for their clients but refer their clients to these free services.

Nevertheless, Veterans benefits are an important factor in planning for long term care, financial, and estate planning for veterans and their surviving spouses. An elder law attorney needs to be  familiar with all the important benefits that may be available to the client. But, the limitations on lawyer representation in Veterans benefit matters make it less likely that the lawyer will have the knowledge required to provide the most comprehensive planning for the client who is a veteran.  

[1] A listing of County Veterans Affairs offices is available at
[2] A listing of Veterans Service Organizations recognized by the VA is available online at


Friday, October 1, 2010

New Gas Wealth Complicates Estate Planning for Landowners

New Gas Wealth Complicates Estate Planning
By Jeffrey A. Marshall, Attorney, and the Gas Planning team at Marshall, Parker & Associates©
Updated January 17, 2011
These are interesting times for landowners in the northern and western  mountains of Pennsylvania. The amount of gas produced from new wells being drilled into Pennsylvania shale formations may create more wealth for Pennsylvania landowners than earlier anticipated. Regrettably, many landowners are not taking the steps needed to protect their developing wealth from avoidable loss.   

In the Beginning
Underlying much of northern and western Pennsylvania are layers of sedimentary rock formed long ago during periods when the area was covered by a shallow sea. These rocks contain abundant organic matter – the remains of dead plants and animals that were compressed with the muddy bottom of the sea and hardened to form layers of petroleum rich shale. 
Pennsylvania residents have long known that a lot of natural gas is trapped under our feet. I’m old enough to remember an earlier gas rush that took place when I was growing up in Clinton County and the excitement that was caused when a gas well blew up. The legendary Red Adair was called in to battle the fire that raged. I was five at the time, and fires were a big deal to me. When a fire whistle went off, my dad would pack the family into the car and off we would go to watch the fireman work. That was the state of entertainment in Clinton County in the pre-TV days.  And, it was actually pretty cool.  
Red Adair was eventually able to put out the fire. (John Wayne portrayed Red Adair in the film “Hellfighters.”) If you are interested, the story of the gas boom in Clinton County in the 1950s has been recounted with enjoyable relish by the Lock Haven Express
Some of Pennsylvania’s gas pooled in easily-tapped pockets referred to as conventional reservoirs which could be accessed with 1950’s technology. However, in the shale layers the gas is locked in the shale rock. This low permeability meant that it was difficult and uneconomical to extract the natural gas from the shale. But recently, advances in horizontal drilling and hydrofracing have opened up this previously inaccessible treasure and created unanticipated wealth for landowners.  
The layer known as the Marcellus is receiving the most attention right now. The black shale of the Marcellus formed from rich organic matter laid down approximately 365 million years ago. About 300 million years ago, the pressure of the gas caused fractures to form in the shale. Drillers can now take advantage of these natural fractures to recover large amounts of gas.
It looks like the Marcellus play is going to be even more significant than earlier estimates. Production rates on new Pennsylvania shale wells are higher than initially expected – and substantially exceed the rate of comparable wells in the Barnett Shale play in Texas according to Penn State Cooperative Extension educator Tom Murphy. In September 2010, Seneca Resources announced that its new gas well in Lycoming County - where I live - had an eye-popping initial production rate of 15.8 million cubic feet per day.

An Economic Game-Changer for Landowners
The Marcellus Shale is proving to be an economic game-changer for many of my law office’s landowner clients. The estimated value of this reserve has been conservatively estimated over two trillion dollars at current natural gas prices, which are very low.
Leasing and drilling in the Pennsylvania portion of the Marcellus Shale resulted in over $1.75 billion dollars in lease bonus and royalty payments to landowners in 2009 alone. Royalty payments will continue for decades as the gas of the Marcellus and other shale formations are brought to the surface. (Landowners can get a free royalty calculation estimate of their gas interests at 
For many of my clients, the Marcellus Shale marks the single biggest economic opportunity of a lifetime. But the development of our natural gas using the new technologically-advanced drilling methods has added great complexity to the estate planning needed by landowners in the areas of Pennsylvania where my law firm’s 4 offices are located.

Uncertainty Creates Opportunity
With effective planning, the wealth created can limit future financial concerns for landowners and their children and grandchildren. But this opportunity can easily be squandered. Poor or delayed planning can result in loss due to otherwise avoidable taxation, poor management, family disputes, divorces, and other problems.
Estate planning for this new source of wealth is complicated by a number of current uncertainties, among them:
          When, if ever, will any particular lease begin producing royalties?
          How many wells will be placed on the property?
          Will shale layers other than the Marcellus be tapped?
          How much gas will ultimately be produced? and
          Where will gas prices be in the future?
In addition, uncertainty over the future of Federal Estate and Gift Taxes makes it difficult to predict which landowners will be subject to potentially confiscatory transfer taxes.  For 2011 and 2012 the estate and gift tax thresholds are temporarily set at $ 5 million dollars. But, the current law terminates on December 31, 2012. Congress and the President must agree on new tax rules or else the exemptions will revert to only $ 1 million.

No one knows whether the estate and gift tax exclusions will revert to $ 1 million dollars on January 1, 2013 or whether some other threshold will be established. But we do know that the current temporary high levels of tax exemption create an opportunity for tax savings that may never be repeated. This is especially true for anyone who would like to make  tax free lifetime gifts of royalty interests or other assets to younger generations. And for those with more substantial wealth current rules allow the $5 million dollar exemptions  to be leveraged  further to protect even greater amounts from being subjected to death taxes, at least if planning is completed by the end of 2012.

The current uncertainties turn out to be quite beneficial for the potential royalty owner. They provide the landowner with an unlikely to be repeated opportunity to reduce taxes. One benefit of uncertainty is that it lowers appraisal valuations. This means that landowners who act early can transfer future gas royalties to the next generation at low valuations and reduced gift tax cost. 

In this complicated environment, some landowners with royalty interests may be receiving questionable estate planning guidance. It is obvious to everyone that failing to plan is a mistake. And it has become customary to recommend that a gas landowner establish a family limited partnership (FLP) or LLC to hold gas interests.
But while creation of a FLP or LLC is often appropriate planning, it  may not be sufficient planning. It does not protect a family’s potential gas wealth from confiscatory estate and gift taxes. The creation of a business entity is just one step in planning. If a goal is to protect the family from inter-generational transfer taxes, lawyers need to move the process forward and guide the landowner through a number of critically important but much more complicated additional steps that will remove the FLP/LLC interests from the landowner’s taxable estate.
Setting up a FLP or LLC is relatively easy. Transferring interests in these entities to children and grandchildren is where things get confusing and mistakes can be costly. Planning that involves gift and generation skipping taxes, discounts, grantor trusts, and the like, while critical to effective planning is not within the skill set of all lawyers. And a lawyer without these skills may be unable to help the landowner develop and implement the comprehensive planning needed in order to reduce or eliminate wealth transfer taxes.     
Whatever the reason, landowners are frequently advised to set up a partnership or LLC and then just “wait and see.” But this will not help the landowner's family save on death taxes.  Waiting until the drill rig shows up at the property means that the landowner has forever lost an opportunity to transfer gas interests to future generations at greatly reduced transfer tax costs. Planning becomes much more difficult and taxes are harder to avoid once the property is developed. With the potential that federal estate taxes could rise in future years missing that early pre-development planning opportunity can be a devastating mistake.  

A Partnership is Not Enough   
What should the typical estate plan for a gas landowner look like? Well, there is no typical plan. When you are talking about the future of land that may have been in a family for generations, each planning situation is unique. It requires that the lawyer have an intimate familiarity with gas production, the ability to foresee and prevent pitfalls that lead to family disputes, and a thorough knowledge of relatively sophisticated estate planning and tax avoidance techniques. This is an unusual combination of skills but landowners need to search carefully for a law firm that can provide them all.  
Common estate planning tools include: 
A Will and/or Revocable Living Trust. The revocable trust, despite popular misconceptions, does not lower taxes of any kind, but may be appropriate for other reasons. But, whether the royalty owner’s estate plan is based on a Will or a revocable trust or both, it is critical that the plan ensures a means of using each spouse’s federal estate tax exemption equivalent (for married couples) and provides for a smooth distribution of your assets after your death.
Powers of Attorney for both health and financial matters. Powers of attorney can allow your named agent(s) to act for you in the event of your incapacity and may provide guidance as to your health care and other preferences. Including appropriate gifting provisions in a financial power of attorney is crucial if the implementation of a landowner’s tax wise gifting plan is to be continued in the event of the landowner’s incapacity.
A Family Limited Partnership (FLP) and/or Limited Liability Company (LLC). An FLP and LLC can provide many benefits to the royalty owner’s family.  They provide a vehicle for management of the royalties and can reduce liability risk. These family business vehicles can also serve as the platform for reducing taxes if they are combined with effective and timely lifetime transfers.
• Lifetime Transfers. Removing assets from the royalty owner’s estate through lifetime gifting is crucial to the goal of reducing federal and state death taxes.  But this may be the most complicated and difficult step in implementing the estate plan. Lifetime gifting involves perplexing tax laws including gift taxes and generation skipping taxes that are often misunderstood by both the landowner and his and her advisors. As a result, royalty owners may fail to obtain tax savings from their planning. The financial consequences of this failure can be catastrophic for the royalty owner’s family.  
Appropriate Beneficiary Designations. Beneficiary designations on retirement accounts, annuities, and life insurance policies are an integral part of any estate plan since these legal designations direct how these assets are distributed after the owner’s death. Reviewing and updating beneficiary designations is an often overlooked but critically important part of the planning needed to achieve the goals of the planning.  

Planning Goals go beyond Tax Savings 
If the complications of gas leases and royalties and taxes weren’t enough to befuddle the landowner, there are usually many other interests and goals that need to be addressed to create the right estate plan. Here are just a few examples: 
  1. Landowners often want to control the property and any related farming or other operations and maintain income for themselves until death.
  2. There may be a need to provide income to younger family members who participate in the operation of the farm or other property, or who have other financial needs.
  3. A landowner may want to recognize and reward the contributions of children who stayed on a farm and worked with the senior generation to maintain it as a viable economic unit—or provided other support to the family.
  4. A Landowner may have children who did not participate in the farming operation who need to be treated fairly (which may be quite different than treating them equally).
  5. Landowners usually want to limit their risk in the event that the gas operations create liabilities.
  6. The Landowner and family may want to provide for management of the property’s gas resources in a manner that minimizes the potential for future family disputes.
  7. Landowners often are concerned with protecting the wealth that they pass on from future loss resulting from the three D’s: Divorce, Death or Disability of the recipient. 
  8. Landowners may want to limit the future taxation that will be imposed when the royalty wealth ultimately passes from their children to their grandchildren.
Gas royalties can allow a landowner to build a lasting legacy that was not possible (or even contemplated) only five years ago. That legacy can be one of financial security and loving memories. Or it can be one of large death tax payments and years of bitter family struggle over money and control of gas rights. Effective planning now can help ensure the former and avoid the latter.
Right now, gas royalty owners in Pennsylvania need to sift through the confusing information that is circulating regarding what is and what is not effective gas royalty estate planning. The reality is that the wealth produced from gas royalty interests has the potential  to push many landowners into whatever federal estate tax brackets finally emerge in 2013. 

The loss of this new family wealth to federal and state inheritance, estate, gift ,generation skipping, and other taxes and costs can be minimized through sophisticated estate planning that is fully implemented.  Unfortunately, many landowners who set up family limited partnerships and LLCs are failing to follow through with the additional steps that are required to reduce taxes. They may even be advised to “wait and see” when the more cautious and prudent approach is to move forward with planning and turn current uncertainties into an advantage.    
The best strategy is for the landowner to work with the most knowledgeable estate planning law firm they can find in the gas estate planning field in order to develop a strategy that custom fits the family’s circumstances and needs. This is not a good time to choose the cheapest planning around – that is penny wise and dollar foolish, and the dollars lost to incomplete or improvident planning may end up in the millions. 
IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
© 2011 by Jeffrey A. Marshall and Marshall, Parker & Associates. This article may be duplicated and distributed provided no changes are made to its content and attribution is given to Jeffrey A. Marshall, Marshall, Parker & Associates, Williamsport, Pennsylvania. Short quotations from this article are also permitted with such attribution. This general information is not intended, and should not be construed as legal advice. Its dissemination does not create any attorney client relationship. Its authors are licensed to practice law in Pennsylvania. For specific advice about your particular situation, consult a lawyer who is licensed to practice in your jurisdiction.