Actions Speak Louder Than Words

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It’s time to start giving veterans and their families equal rights to plan for their loved ones.

By Patricia E. Kefalas Dudek, CAP

During this past Memorial Day weekend, I found it ironic to be working on materials in support of legislation to improve estate planning options for the families of United States armed services members that include children with permanent disabilities. Why ironic? Because in the middle of a weekend filled with ceremonies, parades, pomp and circumstance honoring our fallen service members, a simple and necessary improvement for these families remains on hold.

America’s Veterans Deserve the Same Estate Planning Choices Other Americans Enjoy
I refer to the fact that, unlike most citizens, service members are not permitted to roll their survivor benefits into a special needs trust for the benefit of their child with a disability. This means that the loved one with special needs must be the direct beneficiary of the benefits (annuity) the military member earned in service. The unfortunate result is that the loved one will likely lose eligibility for means-tested government benefits that are central to her or his survival and independence.

The benefit of the special needs trust is that it allows the individual with disabilities to have supplemental funds to pay for their living needs not covered by their government benefits, such as extra support services, equipment, clothing, co-payments, transportation, recreation, and the like. Because these funds are in the special needs trust, they do not disqualify the individual for government benefits.

There Is a Way to Fix This Inequity
On May 23, 2103, Sen. Kay Hagan (D-NC) introduced S.1076, the Disabled Military Child Protection Act of 2013, which provides for the payment of monthly annuities under the Survivor Benefit Plan to a special needs trust for a veteran’s child with a disability. Congressman Jim Moran (D-8th, VA) introduced the same bill in the U.S. House of Representatives on June 4, 2013. Many members of the National Academy of Elder Law Attorneys (NAELA) and the Special Needs Alliance lobbied for support of this legislation during a joint “Hill Day” event in April 2013. Sen. Kirsten Gillibrand (D-NY) added the Disabled Military Child Protection Act language to the markup package for the National Defense Authorization Act (NDAA) (S.1197). The Senate Armed Services Committee voted and approved the NDAA with the Disabled Military Child Protection Act language. This language was not included in the House version of the National Defense Authorization Act (H.R. 1960), so once the full Senate approves the bill and this provision, it will need to be addressed during the conference committee.

The legislation amends the rules for beneficiary payments of military annuities for deceased veterans to allow the annuity to go into a disabled child’s special needs trust. As appropriate, simple, and cost effective as this bill is, there will need to be bipartisan support for this bill to become law. Thus far, I am pleased to say that has been the case, but more cosponsors of the bills can help build momentum.

Take Action Now
Please contact your congressional representatives and urge their support of this legislation. Make sure that they understand that this one small action will speak volumes and allow military families to plan for their loved ones just like any other citizen of our great nation.

This legislation has broad support from many groups and coalitions such as NAELAAmerican Bar AssociationSpecial Needs Alliance, the Military CoalitionEaster SealsMilitary Officers Association of America (MOAA), and the Consortium for Citizens with Disabilities.

Read more about the Disabled Military Child Protection Act on the NAELA website.

If we are going to treat our veterans and their families differently than the rest of our citizens, I suggest they should be treated better. Our actions must be consistent with our words, so let’s make this happen!

About the Author
Patricia E. Kefalas Dudek, CAP, is a member of the NAELA Board of Directors. She is the principal of Patricia E. Kefalas Dudek & Associates, Farmington Hills, Mich., and the Past Chair of the Elder Law and Disability Rights Section of the State Bar of Michigan. Her practice concentrates in Elder Law, Medicaid, estate planning, estates/trust administration, probate, administrative law, and disability advocacy.

Wiggen Law Group PLLC
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Proposed Change to North Carolina Divorce

On March 28, the North Carolina legislature proposed the “Healthy Marriage Act,” a change to the statue governing divorce. Currently, North Carolina couples seeking divorce must show a one year physical separation.  This amendment would change that statute to require a two year separation.  The separation does not need to be a physical separation.  Couples seeking a divorce would be permitted to live together.  Instead of separation, the two year period begins after one spouse delivers a written notice of intent to divorce to the other spouse.  Additionally, both spouses must attend courses on communication and conflict resolution.  If they have children, they must attend additional classes on the impact of divorce on children.

These changes, supposedly promoting “healthy marriages,” will likely have the opposite effect.  Delivery of a notice of intent to divorce may become a common event in a happy marriage.  Having this notice delivered would allow the clock to start ticking on the two year waiting period.  There is an indication that any sexual intimacy during the waiting period may trigger an revocation of that notice.  But the couple may just swear that nothing happened during the two years and get the divorce.

Additionally, I would be concerned about one party blocking a divorce by refusing to take the required classes.

The current one year separation is already a significant detriment and barrier to divorce.  Many couples remain unhappily married for many years because of this requirement.  Most attorneys who work in this field would advocate for a shorter period of separation.  Neither lengthening the time period prior to divorce or complicating the divorce statute are the solutions to advocate for “healthy marriage.”

Jack Wiggen is a Partner and Co-Founder of Wiggen Law Group PLLC.  His practice focuses on helping families resolve issues related to divorce, child custody, child support and adoption.  

Understanding The Fiscal Cliff Legislation

man-cliff-illustrationLegislators were very busy New Year’s Eve and into the early morning hours of New Year’s Day to draft and ultimately pass legislation to avoid what was commonly referred to as “The Fiscal Cliff.” But what really happened? In summary, not much new was passed, but rather the legislation in large part made permanent the system of estate and income tax that has been in effect for the past two years. The new law did put off for two months some important spending cuts that must take place due to a process called “sequestration.” It is these additional cuts that could have a significant impact on our senior population and their loved ones.

The Bottom Line on What Was Passed
This newsletter provides a summary of the legislation that was passed and what remains to be decided. If you have questions or need additional information, please contact us directly.

Estate taxes. An estate tax is a federal tax (and in some states also includes a state tax) on the transfer of a deceased person’s assets to his heirs and beneficiaries, and can include prior transfers made to those heirs and beneficiaries. However, under federal law, there is a certain amount that can be transferred without incurring any tax liability. In 2010, every individual could transfer (gift) up to $5 million tax-free during life or at death to avoid paying estate taxes on that amount. This amount is called the “basic exclusion amount” and is adjusted for inflation (usually on an annual basis). In 2012 it was raised to $5.12 million per person.

This year’s new “fiscal cliff legislation” did not change how much an individual could transfer during life or at death to avoid paying federal estate taxes on that amount. And, on January 11, 2013, the IRS announced that the estate tax exclusion amount for individuals who die in 2013 is now $5.25 million, as the prior figure has now been adjusted for inflation.

What if no action had been taken with regard to estate taxes?
Without the new legislation, the $5.12 figure would have automatically reverted to $1 million per person, and the rate for most estates would have gone up to 55%. Instead, the only thing the new legislation changed was the gift and estate tax rate, which has gone up to a top rate of 40%, from a maximum of 35% in 2012.

Married couples.The new legislation did not change prior law that stated that spouses do not have to pay estate tax when they inherit from the other spouse. Rather, when the first spouse dies, the other spouse can inherit the entire estate and any estate tax due would be postponed until the second spouse dies. This is called the “marital deduction.” If the surviving spouse is not a U.S. citizen, then there are restrictions on how much can be passed to the surviving spouse tax-free. It is also important to remember that this type of tax benefit between spouses is not always automatic – any married couple who may be subject to estate tax should seek the advice of an attorney to make sure their estate plan is properly set up to take advantage of this particular tax incentive.

What about lifetime gifts? The current basic exclusion amount of $5.25 million per individual is an exclusion for both lifetime gifts and gifts at death. This is often referred to as the “unified credit” amount. For example, an individual could transfer assets of $2 million during their lifetime and an additional $3.25 million at death, and the total, $5.25 million, would not be subject to either gift or estate tax. However, if an individual transferred more than the $5.25 limit, that individual (or the heirs) will owe a tax of up to 40%.

The donor should report any gifts made during their lifetime to the IRS so a proper calculation can be made at the donor’s death. Using the above example, the $2 million lifetime gift would have been reported to the IRS even though no gift tax would be due. And, the IRS would then know that individual had $2.25 remaining to pass at death free of estate taxes.

There are additional gifting advantages available to married couples during their lifetime, and advice should be sought from an attorney versed in this area to determine what, if any, gifting incentives may be available.

Lifetime gifts that do not count toward the $5.25 million exclusion amount. There is an amount each year that can be transferred without counting toward the $5.25 exclusion amount. In 2013, that amount is $14,000 per year, per person (called an “annual exclusion amount”). For example, an individual can give three different people $14,000 in 2013, and it will not count toward the $5.25 lifetime exemption amount. Couples can double this amount and give $28,000 per person per year.

Planning Note: It is important to remember that any gift (unless designated as an exempt transfer under the federal and state Medicaid rules) will cause a penalty for Medicaid purposes. Individuals often believe that because they can transfer $14,000 per year per person under the tax rules, the same applies to Medicaid. The rules are very different for Medicaid, and a penalty will apply if that type of gift is made.

Changes to the income tax rules. This newsletter highlights the main points of the income tax rules that could directly affect seniors and their loved ones. For additional information on the alternative minimum tax or charitable gifting, please contact us directly.

In prior years, everyone enjoyed a 2% Social Security tax reduction as a stimulus measure. Under the 2013 legislation, this “tax holiday” was not extended; therefore, everyone will see a decrease in their net pay.

Ordinary income tax rates increase from 35% to 39.6% for singles earning more than $400,000 a year ($450,000 a year for married couples). All other ordinary income tax rates effective in 2012 were made permanent.

For those individuals earning over $200,000, and for married couples who earn over $250,000, there is a new Medicare 0.9% surtax on ordinary income and a new 3.8% surtax on investment income. These additional taxes were part of the 2010 health care legislation, much of which begins implementation in 2013.

The top capital gains and dividend rate increased to 20% for those earning more than $400,000 a year ($450,000 for married couples).

Additional Cuts Are on the Way
The current fiscal cliff legislation did not address the automatic spending cuts that were to take place on January 1, 2013. Instead, the automatic cuts, known as sequestration, were pushed back two months to March 1, 2013. Sequestration was one portion of the spending cuts included in the Budget Control Act, passed and signed in August 2011.

The Budget Control Act of 2011 allowed the president to raise the debt ceiling by $2.1 trillion, and it instituted two rounds of significant spending cuts. One round of cuts involved government programs like defense spending, education funding, the FBI and other government agencies that would receive automatic budget cuts relative to their scheduled growth over the next 10 years.

The second half of the spending cuts was supposed to be decided on by Congress through a Joint Select Committee on Deficit Reduction. This Committee (referred to as the “supercommittee”) was to come up with a list of cuts that would then be put to Congress for a full vote. If the committee couldn’t agree on the cuts, $1.2 trillion in further spending reductions over 10 years would be implemented starting Jan. 1, called the “sequester.” No cuts have yet been agreed upon, and the automatic spending reductions have been moved back to March 1, 2013, to allow Congress time to come to an agreement.

Programs like Medicare, Medicaid and Social Security have been the topic of discussion for the second portion of the spending cuts. We will continue to monitor and report on the progress of Congress as it pertains to these spending cuts and how they will impact our senior population and their families.

The fiscal cliff legislation is in place; however, there is more legislation to occur that could have a significant impact on those affected by programs like Medicare, Medicaid and Social Security. While many families may not be affected by the current estate and income tax rules, there are many who could have their life savings consumed by long term care costs. We help seniors and their families plan ahead to avoid a financial crisis, even if a health care crisis occurs. If you would like to learn more or if we can help someone you know, please give us a call.

Free Estate Planning for Same-Sex Couples

The story below broke my heart.  I’m saddened by the passage of Amendment One in North Carolina.  We should be seeking to protect all family units in our state, not further restrict the rights of some of our citizens.

No one should have to go through what this man went through when his partner passed away.  Unfortunately, since the law does not offer the same protections to unmarried couples, this is the reality for those couples who haven’t prepared a basic estate plan.

As our small way of helping, Wiggen Law Group is offering free estate planning for same-sex couples who call in the month of May.  We only ask that participants make a donation in the amount of their choosing to Equality NC or other similar organization.

Call (919) 680-0000 to schedule an appointment.

New North Carolina Laws Effective October 1, 2011

The North Carolina General Assembly enacted more than 50 new laws during 2011, which became effective October 1, 2011.  You can view summaries of these laws in the Legislative Bulletin provided by the North Carolina Bar Association Office of Governmental Affairs.  Click here to view the bulletin.

New Estate and Gift Tax Rules Might Cause Some Families to Rethink How They Transfer Wealth

The ElderCounselor: 2010: A Year of Many Changes in Elder Law and Special Needs Planning

The year 2010 was a busy one with many changes in the elder law, estate planning and special needs planning areas. We began the year with little congressional action and ended it with a flurry of activity. In this issue of The ElderCounselorTM, we will review some of the most important changes that took place, and consider what may happen in the years to come.

Tax Code Changes
Interestingly, the year 2010 began with Congress failing to act, which resulted in no estate tax for decedents dying in 2010. The collateral effect of this failure to act was the return of carryover basis rather than stepped-up basis for assets owned by a decedent. (A prior issue of The ElderCounselorTM analyzed these changes in detail.)

While assets in a wholly owned grantor trust were eligible for the modified carry-over basis (up to $1.3 million for a single decedent and $3 million for a married spouse), life estate interests did not receive the same favorable treatment and would have been ineligible for a step-up in basis at the death of the life estate holder. In late 2010 Congress finally acted, passing new laws that provided in part for a $5 million estate tax exemption, a $5 million lifetime exemption for gifts, a 35% tax rate for both estate and gift taxes, and full basis adjustment to date of death value.

However, executors for those who died in 2010 have the option of electing no estate tax with a modified carryover basis (unlimited step-down for loss assets and a limited step-up of $1.3 million plus $3 million for assets passing to a spouse). Executors have an additional nine months after the enactment date to decide, file an estate tax return, pay taxes and make disclaimers.

Planning Note: The executor of an estate in 2010 with less than $5 million can elect to administer the estate under the new laws that provide full step-up in basis for all property, including property in which a life estate was reserved by the decedent or property held in a wholly owned irrevocable grantor trust.

Additional income tax provisions. Individual tax rates will remain at 2010 levels (10, 15, 28, 33 and 35%) for two more years. If no action had been taken, all of those tax rates would have increased.

Tax on long-term capital gains remains at 15% for two more years, and would have increased to 20% without the 2010 changes. In addition, taxpayers will not see their itemized deductions or personal exemptions limited due to income levels in 2011 or 2012.

The above changes expire in two years. On January 1, 2013, if Congress does not act again, the gift, estate and GST exemptions will be $1 million (adjusted for inflation) and the top tax rate will be 55%.

Health Care Reform
In March 2010, the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Affordability Reconciliation Act of 2010 (“The Act”) were signed into law making sweeping changes to health care as we currently know it, including the introduction of new programs aimed to assist older Americans with long term care.

A number of changes were made to the Medicare program. For example, older adults will no longer have to pay out of pocket for preventive care services such as cancer and diabetes screenings. Effective January 1, 2011, all deductibles and co-insurance for preventive benefits will be eliminated. Medicare recipients will also receive one free annual wellness visit.

Other notable Medicare changes include closing coverage gap in the Medicare Part D prescription drug benefit, often called the “doughnut hole,” by 2020. Beneficiaries who fell into the doughnut hole in 2010 were scheduled to receive a $250 rebate, followed by increasing discounts on certain prescription drugs in the years to follow.

The Act also included changes to Medicaid, including a plan to offer incentives to states that implement or increase home and community based services.

Finally, the Act included offering government-operated long term care insurance plans to working adults whose paychecks would be deducted unless they opted out.

The Act will most likely come under fire in 2011 with some leaders in Congress vowing to pursue repeal.

Planning Note: An attempt to repeal heath care reform could take place in 2011.

New Requirements for Self-Settled Special Needs Trusts
Due to a change in the Program Operations Manual System (“POMS”), beginning October 1, 2010, the assets in a self-settled special needs trust drafted on or after January 1, 2000, will be considered available for SSI or Medicaid purposes if the trust contains early termination language (language that provides for termination during the life of the special needs beneficiary). However, the new rule also provides a safe haven for those trusts that do contain early termination language.

To fall within the safe haven, the trust must contain language providing for repayment to the state (with other allowable expenses either prior to or subsequent to reimbursement) upon termination of the trust. Normally, repayment to the state occurs at the death of the special needs beneficiary.

Pooled trusts that only allow payment into another pooled trust upon early termination are acceptable under the new POMS.

Trustees of any self-settled special needs trust must act quickly, as a trust that does not comply with the new POMS must be amended within 60 days of discovering the problem, otherwise the trust assets will be deemed available for Medicaid or SSI benefits and those benefits could be lost.

Planning Note: All self-settled special needs trusts drafted on or after January 1, 2000, should be reviewed to ensure compliance with the new POMS.

2010 held many changes in the elder law, estate planning and special needs planning areas. With new leadership in Congress it is probable that the next few years will also be filled with additional changes that could significantly impact both our senior population and anyone living with a disability. Great care must be taken when planning for individuals and married couples to take advantage of opportunities that have been presented and to avoid pitfalls created by the numerous law changes.

Please contact us if you would like additional information on any of the topics addressed in this newsletter or if you would like to discuss a specific issue.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

Estate Tax Will Return Next Year, But Few Will Pay It – New York Times

Tax Cut Package Unveiled by Senate

Tax Deal Offers Enticements At All Income Levels – Associated Press