Arizona Elder Lawyer

Federal Tax Effect of Real Estate Gifts

The Wall Street Journal reported in its May 26, 2011 Personal Finance section that the IRS has embarked upon a “low-profile but sweeping effort” to uncover gifts of real estate that have not been reported.  This effort is generally going to uncover transfers made by do it yourselfers who think they are capable of creating their own estate plans.  Indeed, lawyers involved in these mechanisms for transferring wealth would either counsel against it or ensure that the proper tax forms were timely filed.  The middle class will bear the brunt of this effort by the IRS in large part because they do not realize that their actions are “gifts.”

The issue generally arises when a parent decides to “make things easier” by transferring title to real property to a child during the life of the parent.  In their minds, the transferor is not actually making a gift, rather, they are just “putting their children on title with them” to avoid legal fees later.  Individuals generally transfer title to real estate from themselves to them and others in joint tenancy.  The presumption is that the transferor will die first and that no problems could arise during their life.  This transfer is a gift upon the date the joint tenancy deed is created. 

I won’t get into the multitude of legal issues that can arise from these ill advised transfers other than the immediate issue which was raised in the WSJ article: gift taxes.  As the law stands today, a person may generally give property worth $5 million without paying gift tax.  The lifetime exclusion per person was $1 million through 2010.  However, any time a gift exceeds $13,000 to any person, the transferor is required to file a federal form 709.  Such form is generally filed at the time their income tax return is due.

Why is this important?  There are penalties for not filing the tax return timely, for valuation understatements that cause an underpayment of tax, and for willful attempt to evade or defeat payments of taxes.  See IRS 2010 Instructions for Form 709.

How is the IRS going about this quest?  In California, the IRS requested a “John Doe summons” be issued by a federal judge to the State Board of Equalization, a taxing agency.  The judge declined to issue the summons because the IRS had not demonstrated that the IRS could not get the data requested in a different way.  Apparently, court records indicate that Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin have willingly handed over the information.  The report indicates that the data showed “an extremely high failure-to-report rate.” 

The best approach to address these issues is to actually file the requisite returns, even if they are late.  There are many capable tax and estate planning attorneys who can assist.  It is well worth the time and effort to hire one to do just that.

Estate Tax Planning - Today

If there is no legislation passed in Congress related to the rules for 2010 and 2011, the Wealth Transfer Rules, as established, are as follows:

• Estate Tax Exemption:  in 2009: $3,500,000;  in 2010: unlimited;  in 2011: $1,000,000
• Maximum Estate Tax Rate:  in 2009: 45%;  in 2010: none;  in 2011: 55% + 5% surcharge
• Gift Tax Exemption:  in 2009: $1,000,000;  in 2010: $1,000,000;  in 2011: $1,000,000
• Maximum Gift Tax Rate: in 2009: 45%;  in 2010: 35%;  in 2011: 55% + 5% surcharge
• Generation Skipping Transfer Tax Exemption:  in 2009: $3,500,000;  in 2010: unlimited;  in 2011: $1,000,000 (indexed)
• Maximum Generation Skipping Transfer Tax Rate:  in 2009: 45%;  in 2010: none;  in 2011: 55% 

Why are there vast differences in amounts and percentages?  Simply put: politics. 

There are many extraordinary consequences which will come to light upon the death of loved ones as things stand now if Congress fails to act and people fail to update their written plans.  

For instance, Marital Deduction Formula Clauses, including very hard fought clauses during Pre-Nuptial and Post-Nuptial negotiations and planning, applied to different tax laws than originally intended can result in unintended results.  The effects might result in beneficiaries receiving unintended shares or unanticipated estate tax burdens, with others receiving nothing; none of which was the intent of the Trustor or Testator.  This might affect many spouses who are not the first spouse as well as children from prior marriages.  One can anticipate an upswing in litigation as a result. 

While it might be expensive to review legal documents for updates, particularly in troubled economic times and so much legislative uncertainty, it might be less expensive in the long run to go through a document review and update now.  When Congress affirmatively acts in this area of law, the documents will need further review. 

Individuals who take it upon themselves not to act are personally responsible for their choice.  No-one could legitimately blame their former estate planning or family law attorney for failing to advise them of information which has been so well publicized.  Such individual choices might impose unfortunate and unconscionable results on loved ones when they are already dealing with a death.  These consequences are already occurring.  Lives are being devastated, emotionally and financially, as a result.

State law might be used as a tool to correct these problems.  But those with a windfall might be inclined to litigate.  Those without their expected financial support might find themselves financially unable to participate in protracted litigation.  Prudence dictates specific, written plans to be reviewed, without delay.

Annual Federal Gift Tax Exclusion During 2010 – Update

The Internal Revenue Service just announced “Guidance For Persons Making Transfers In Trust After December 31, 2009” in Notice 2010-19. 

 

The Notice states that the Internal Revenue Service intends to issue guidance under Section 2511(c) of the Internal Revenue Code.  The Code Section was enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and amended by the Job Creation and Worker Assistance Act of 2002.  Section 2511(c) is effective for transfers made after December 31, 2009, and before January 1, 2011.

 

“Section 2511(a) generally provides that the gift tax shall apply to transfers in trust or otherwise, whether direct or indirect. Under § 25.2511-2(b) of the Gift Tax Regulations, a gift is complete when the donor parts with sufficient dominion and control as to leave in the donor no power to change its disposition.

 

"Section 2511(c) provides that, notwithstanding any other provision of section 2511 and except as provided in regulations, a transfer in trust shall be treated as a transfer of property by gift unless the trust is treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1.

 

"The Joint Committee on Taxation’s explanation of 2 section 2511(c) provides that certain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would not have been treated as transfers under the gift tax provisions in effect prior to 2010. Joint Committee on Taxation, Technical Explanation of the “Job Creation and Worker Assistance Act of 2002” (JCX-12-02), March 6, 2002.”

 

The Notice provides the following Interim Provisions:

 

“Some taxpayers may have inaccurately interpreted section 2511(c) as excluding from the gift tax transfers to a trust treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1, even though those transfers would otherwise be taxable under Chapter 12. The provisions of Chapter 12 regarding the substantive law applicable to the gift tax were not amended by EGTRRA, and those provisions continue to apply to all transfers made by donors during 2010.

 

“Section 2511(c) is an addition to those substantive law provisions and is applicable to transfers made in 2010. Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.

 

“Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1 is considered to be a transfer by gift of the entire interest in the property under section 2511(c). The provisions of Chapter 12 as in effect on December 31, 2009, continue to apply (both before and during 2010) to all transfers made to any other trust to determine whether the transfer is subject to gift tax.”

 

Regulations are expected to be forthcoming which confirm the conclusions set forth in the Notice.

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – Arizona Transfer Issue – Example Four

The American Bar Association Commission on Law and Aging compiled and published in June 2009 a list of stories it purports to support the need for national passage of the UAGPPJA.  See my post from January 25, 2010 for an introduction of the Act.

An issue which arises often is when siblings litigate over custody of a parent.  Sometimes, a sister and a brother will have protracted litigation in one state over who is to be appointed conservator over their mother or father.  Then, sometime after the sister wins, she wants to move both her mother or her father and herself to another state.  Will the sister have to be put through protracted litigation by her brother all over again in the second state?

The Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act purports to provide transfer procedures which would allow the sister to transfer the conservatorship from the first state to the second state without the need to re-litigate the case.  Proper Notice would be given to the brother and he could participate in the transfer proceedings.  The American Bar Association Commission on Law and Aging purports that there would be a preservation of resources by both the family and the court.  Because these are legal issues which are not unusual, residents in Arizona will be exposed to issues such as the one herein and adoption of the Act in whole or in part by the State of Arizona may be prudent.

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – Arizona Jurisdiction / Transfer Issue - Example Three

The American Bar Association Commission on Law and Aging compiled and published in June 2009 a list of stories it purports to support the need for national passage of the UAGPPJA.  See my post from January 25, 2010 for an introduction of the Act.

An issue which will arise more frequently as the Baby Boomer population ages is one where both parents have dementia and are living in a nursing home in one state and there are no family members that are close by who are either willing or able to check in on the parents.  In this case, an adult child and her family may want to move her parents from the first nursing home in her parent’s home state to a nursing home in the state where the daughter lives that is close to her.  What happens if the daughter cannot get her parents to voluntarily agree to move?

Under the Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act, the daughter could file for guardianship in the Probate Court of the home state.  The parents would have the opportunity to object to the petitioned for guardianship and have access to evidence and contacts in the home state.  If the daughter has success with her petition to be appointed guardian, the Act provides procedures for the second state to recognize the legal authority granted to her while continuing to give the parents the right to object to the move into the second state.  In this scenario, there would be order to the process which everyone could agree to.

The Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act purports to give both order to the legal procedures and cost-saving measures for both the family and the courts.  Arizona should give thoughtful consideration to adopting this Act either in whole or in part as it is being adopted throughout the country.  Arizona’s population is made up of people who have generally moved to Arizona from elsewhere.  It does not hold true that the entire family moved to the State of Arizona altogether, therefore, this set of facts can be anticipated to occur fairly often with Arizona being either the home state of the second state.

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – Arizona Jurisdiction Issue - Example Two

The American Bar Association Commission on Law and Aging compiled and published in June 2009 a list of stories it purports to support the need for national passage of the UAGPPJA.  See my post from January 25, 2010 for an introduction of the Act.

A very common issue that comes up is that while an adult is living in a nursing home in one state, she may have no relatives in that state and want to move to another nursing home in a state where she does have family.  What happens if the nursing home in the first state refuses to release her to her family living in the second state?  This does happen.

Generally, in this situation, a Probate Case would be filed either by the adult living in the nursing home or her family in the first state which is considered the home state.  The Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act purports to give clear guidance regarding which state to file a Probate Case in given these factors, which would preserve both the family’s resources and judicial resources.  Because this scenario is common and Arizona could either be the home state or the second state, it would be prudent for the Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act to be considered for adoption, either in whole or in part, in Arizona.

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – Arizona Jurisdiction Issue - Example One

The American Bar Association Commission on Law and Aging compiled and published in June 2009 a list of stories it purports to support the need for national passage of the UAGPPJA.  See my post from January 25, 2010 for an introduction of the Act.

Jurisdiction issues pertain to which state has the right or duty to hear a matter or issue a court order which affects the rights of an individual. 

An example of an issue which might arise related to which state should a Probate Case be filed in when an incapacitated adult who has traveled across state lines into Arizona to visit his adult child, then wants to go back home to Alabama and boards a flight.  During a layover in Georgia the incapacitated adult gets lost both in and out of the airport and ends up in a psychiatric ward in Georgia.  What state should the adult child file a Probate Petition in order to establish either a guardianship or conservatorship over the incapacitated adult?

The Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act purports to provide clear guidance to lawyers and judges for circumstances such as this.  With clear guidance, both financial and court resources could be preserved.  In this circumstance, the Act would provide that Alabama would be the “home state” in which a Probate Petition could be filed, unless there was an emergency.  In the case of an emergency, if the incapacitated parent ended up back in Arizona with the adult child, the Probate Case could be filed in Arizona.  Apparently the Act provides for many differing circumstances and possible outcomes.  At any rate, this scenario could easily play out and this Act should be given consideration in Arizona.   

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – An Introduction

The name says a lot.  This Act was approved by the American Bar Association in December 2007 and is supported by the Alzheimer’s Association, the Conference of Chief Justices, the National Association of Elder Law Attorneys, the National College of Probate Attorneys, and the National Guardianship Association. In other words, there are a great many smart people across the United States who embrace and support this Act in an effort to make these issues more streamlined.

The State of Arizona has neither adopted the UAGPPJA, nor is a bill expected to be introduced for passage in Arizona at this time.  The States that have adopted this Act include Alaska, Colorado, Delaware, the District of Columbia, Illinois, Minnesota, Montana, Nevada, North Dakota, Oregon, Utah, Washington and West Virginia.  The States giving the Act consideration include Arkansas, Connecticut, Florida, Indiana, Iowa, Kentucky, Maryland, New Mexico, Tennessee and Texas. 

The Act is an attempt to provide an effective mechanism for resolving multi-state jurisdictional disputes.  The objective is that only one state will have jurisdiction at any given time for matters of adult guardianships, conservatorships, and other protective proceedings.

Over the next few days, I will post specific examples of issues presented by the American Bar Association Commission on Law and Aging compiled and published in June 2009.  The Act is one which the Arizona Legislative Branch might want to consider studying and either adopting in full or in part after substantial input from attorneys and others who have expertise in the field.

2010 Senior Expo In Chandler, Arizona

The 20^th annual Chandler Senior Expo is scheduled for Wednesday, March 10, 2010.  The hours are from 9 a.m. to Noon.  The Expo is open to the public and is free.  It is expected that sixty to seventy vendors will be present.  Such vendors will represent agencies, non-profits and businesses that offer a variety of services and products generally geared for seniors. 

It is a fun event with quite a bit of information available in one location.  The chairperson of the event is expecting free blood pressure checks to be back this year.  The Expo will be at the Chandler Community Center located at 125 E. Commonwealth Avenue in Downtown Chandler, Arizona.  See you there.

Estate Tax Update

While the Estate Tax has effectively been repealed for 2010, some elected Democrats have declared that the Estate Tax, otherwise known as the Death Tax, will be retroactively reenacted. 

Without Congressional action, the Estate Tax will automatically revive itself in 2011.  The highest Estate Tax rate will be fifty-five percent.  The exemption will be only $1 million dollars. 

An notable difference is that carryover basis rules will apply rather than the step-up basis rules that have been in place for many years.  This change will be a rude awakening for the heirs of those who were told that they did not have to save old records if they planned to die with certain assets.  The old records no longer exist as they were purged years ago.  If you can’t prove something was paid for or be able to prove the amount paid then the IRS may take the position that there is a zero basis. 

There is likely going to be some change in this arena during 2010.  Or not.