Q. I am wondering if I can still get deductions for charitable gifts under the new tax law? Do you have any thoughts on this?

A.  Yes. Under the Tax Cuts and Jobs Act, effective this year, the traditional method of making a gift and itemizing your deductions on your tax form, as in years past, may not work. This is because of the way the new Standard Deduction works: essentially, your charitable and other qualified itemized deductions would need to exceed the amount of the increased Standard Deduction before you would receive a tax benefit for your charitable gifts. Reason:you cannot claim both the Standard Deduction and itemized deductions; you must choose one or the other. Under the new tax law, the Standard Deduction has been almost doubled: it is now $12,000 per year for single individuals and $24,000 per year for a married couple filing jointly.

But, here’s the good news: there are some “workarounds” for those who are charitably minded, but also wish to also receive a tax benefit. Here are three:

1) Bunch Your Deductions and Make Them in Alternate Years.  For example, if you are single and normally make up to $10,000 per year in charitable deductions consider, instead, making $20,000 per year in charitable deductions in alternating years.

2) Consider a Donor Advised Fund (“DAF”) Offered By a Public Charity. Many charities offer DAF’s to their contributors. A DAF allows you to contribute what would normally be several years’ worth of charitable donations into the fund in one year, and receive a charitable deduction immediately. Your contribution would then typically be invested and grow tax-free. Meanwhile, you could make donations to charities from that account as time goes on, whether in the year of gift or in following years. Additional contributions to the DAF in later years would also be tax-deductible. However, you should first check with your financial advisor to choose an appropriate DAF, selecting one with a good management and investment record. Since the advent of the new law, DAF’s have increased in popularity.

3) Consider a Qualified Charitable Donation Through Your IRA. If you are at least 70.5 years of age, and already taking Minimum Required Distributions (“MRD’s”) as required by the IRS, you could arrange to allocate some of your MRD draws directly to a charity of your choice. The contribution would still count toward your required MRD’s, and the distribution will not be included in your gross income, which essentially lowers your overall income tax bill. However, there are special rules. Notably, the contribution must be made directly from the IRA to the charity; it cannot be made to you initially, with you later turning around and sending the funds off to the charity. Check with your IRA custodian to see if it offers this service. I understand that Fidelity, Vanguard, T. Rowe Price, and Charles Schwab offer this option to their customers. Note: the charity must receive the contribution and cash the check before the end of the tax year to make this work.  Although you will then receive a Form 1099-R, it is up to you – not your brokerage company – to properly report the contribution as a nontaxable Qualified Charitable Donation.

ReferenceIRS Publication 5307 “Tax Reform Basics for Individuals and Families”.

Q. I hear there is a new scam going around whereby seniors receive phone calls that appear to be from Social Security. Do you know anything about this?

A. Yes. There is a spoofing scam going around the entire country whereby seniors receive calls which appear to be coming from the Social Security Administration, but which in reality are scams. The recipient’s caller ID shows that the call is coming from 1-800-772-1213, which indeed is the phone number for the Social Security Administration, but the call itself is phony. Here is how you can tell:

The caller claims that he or she needs your Social Security number and other personal information in order to process an increase in your Social Security benefits, and may also go so far as to threaten that your benefits will be terminated if you do not provide that information. These are fraudulent calls! If you get one, hang up immediately, and in any event do not give out your Social Security number or other personal information.

The Federal Trade Commission (“FTC”) recently released a consumer advisory about this scam, urging recipients to hang up if they receive one. The FTC advises that the Social Security Administration (“SSA”) will never threaten, will never seek to get personal information over the telephone and will never promise to increase your benefits in exchange for that information. If the caller makes that claim, you can bet it’s a scam call.

If you have any doubt hang up and call SSA directly and inquire. Further, if you get a spoofed call of this nature report it to the SSA’s Office of Inspector General at 1-800-269-0271. Be alert and be safe.

References: FTC advisory issued October 29, 2018.

Q. My mother, who receives Social Security, SSI and Medi-Cal, is thinking of selling her home and either buying a smaller condo, or possibly moving into a spare room in our home. When she sells her home, will she lose her any of her benefits?

A.  She won’t lose her Social Security, because eligibility does not depend upon her income or other resources, but her Supplemental Security Income (“SSI”) and Medi-Cal are at risk unless she plans ahead.

As you probably know, eligibility for both SSI and Medi-Cal depends upon her having very modest resources. For a single individual, one cannot have more than $2,000 in savings or other nonexempt resources in order to maintain eligibility.  The problem: upon sale of her home, she will receive sales proceeds which will inflate her savings to an amount far in excess of that $2,000 resource ceiling. She would then be “over resourced” and would be legally required to immediately notify both the SSI and Medi-Cal programs. Benefits would normally terminate by the following month.   However, if she plans ahead, there may be steps she can take to avoid losing her benefits:

Repurchase “Grace Periods”:  If she plans to repurchase another home, say a smaller condo, she could take advantage of grace periods under each program to temporarily exempt the home sale proceeds, pending repurchase of a replacement home.  During those grace periods, she would maintain eligibility.  There is a three-month grace period to do so under the SSI program and a six-month grace period under the Medi-Cal program. The key is to proactively advise her eligibility workers of her plans, keep the home sale proceeds segregated until the repurchase, and fully complete the repurchase within the grace periods. Unfortunately, the grace period under the SSI program is shorter than it is under the Medi-Cal program, so she would be best advised to complete her repurchase within the shorter grace period.

If she does not plan to repurchase a replacement home, or if she anticipates having excess sales proceeds after she does so, then the planning becomes a bit more complicated.  Yet doing so is still essential to maintaining benefit eligibility, at least under the Medi-Cal program.  Here are some planning options that would protect her Medi-Cal eligibility, even though there is some question as to whether they would also protect her SSI.

Irrevocable “House” Trust:  Before selling her home, she could create an irrevocable house trust, designate you as trustee, and sell it inside that trust. The sales proceeds would then be paid to you, as trustee, rather than to your mother. If handled properly, the sales proceeds would then not increase her countable resources under the Medi-Cal program. After sale, the trustee could use the proceeds to assist mother with her ongoing expenses.

Join Pooled SNT:  Another option would be for mom to join an existing Pooled Special Needs Trust (“P-SNT”) and, upon sale, immediately transfer the proceeds (or the excess proceeds) to the P-SNT. The P-SNT is a trust managed by a nonprofit organization for the benefit of its members on public benefits.  Its professional trustee would oversee management of mother’s funds and would use funds in her account to pay her expenses, albeit in a manner which would not undermine her continuing eligibility for Medi-Cal.

The key for your mother’s situation is to plan ahead.  If she does so, then the prospects of her retaining at least her Medi-Cal are excellent.

References:  Three months grace to sell and repurchase another home under the SSI Program:  20 CFR 416.1212(e), and the six month grace period to do so under the Medi-Cal Prorgram is found at 22 CCR 50426.

 

Q.  I am thinking about just gifting my home to my son now, in order to minimize estate administration after I’m gone. Of course, I would continue to live here as long as possible.  Do you see any downside to this plan?

A.  Yes, there may be a big one, depending upon how you do it. Consider the following:

Taxes: Assuming that your home has appreciated substantially in value since you purchased it years ago, a simple gift of the home during your lifetimes would not be “tax smart”.  An example may illustrate why:

Let’s suppose you bought the home years ago at a price of $75,000, but that it is now worth $775,000.  To keep it simple, let’s also assume that you have not made any substantial improvements to the home. From a tax viewpoint, your tax basis in the home would be $75K, i.e. its cost.  So, if you sold it now for $775 K, you would realize roughly $700K in gain.  Even assuming you are eligible to exclude $250K of gain under the ‘sale of home residence’ exclusion, you would still realize $450K in capital gain upon which you would be taxed.

Likewise, if you gifted the home to your son during your lifetime, he would step into your shoes and would also then have a tax basis of $75K. If he later chose to sell, the home would generate a large potential tax liability for him. Whether he, too, would have the ‘home residence exclusion’ available to exclude some of the capital gain would depend upon whether he met the home residency tests before sale; if he used the home as a rental, that exclusion would likely not be available. In any event, his potential tax liability would be very substantial, and would likely increase over time as the home’s value increased, because it would continue to carry your older, low cost basis.

By contrast, if you passed the home to him as a result of your death, then under current tax law he would receive an adjusted tax basis equal to the home’s fair market value at the time of your death.  Let’s suppose by then the home’s value has increased to $One Million. That would then be his new tax basis, and this adjusted basis would potentially save him tens of thousands of dollars in taxes if he later chose to sell the property.

So, trying to keep things simple now would potentially be very costly for your son down the road.  That said, there are ways to ‘have your cake and eat it, too’:  If you create a lifetime transfer now, but which is only complete at death, then you can both minimize estate hassle and achieve favorable tax treatment. One technique: use a Life Estate Deed, which preserves your right to occupy the home for your lifetime but gives him the ‘remainder interest’ after your demise.

Medi-Cal Subsidy for Long Term Care:  If you believe that you may need long term care in the future, the home transfer should be handled in a manner that complies with the Medi-Cal rules, so as to preserve eligibility and to avoid a post-death reimbursement claim.

Child’s Credit Issues: If your son has unpaid creditors, you may wish to re-think your plan, as the home might then be exposed to his creditors’ claims.

Borrowing Unavailable:  You would not be able to take out a conventional or Reverse Mortgage on your home to help with your expenses.

In your situation, it would be wise to consult with an attorney experienced in these matters before embarking upon your plan.

Q. My wife and I set up a Living Trust back in 2001, but we have never updated it. In view of the recent change in the tax law, is that something that we should consider?

A. Yes, by all means! At the time you created your trust, the estate tax exemption was only $675,000 per person, and the first spouse’s exemption died with that spouse unless the couple’s trust directed a “trust-split” upon the first death compliant with relevant tax rules.

Under that technique, the deceased spouse’s share would go into an irrevocable Exemption Sub-Trust, and the balance would be allocated into the Survivor’s Sub-Trust. To make this work, the survivor would typically have only restricted access to the funds in the Exemption Sub-Trust.  This arrangement would preserve the first spouse’s exemption so that – at the survivor’s later death – the couple’s two exemptions could be combined for use following the death of the survivor, thereby doubling the assets the couple could pass estate tax free to their children or other beneficiaries.

Under former law, this “trust-split” upon the first death was essential to preserving the first spouse’s exemption for later use following the death of the surviving spouse. Very likely, this is the structure of your own trust.

But with the passage of the Tax Cuts & Jobs Act of 2017 (“TCJA”), the estate tax exemption has been increased to $11.18 million per person, at least through the year 2025. Further, the trust-split technique is no longer required to preserve the first spouse’s exemption; now, it can now be preserved for later use by the survivor merely making a timely election on a federal estate tax return. In “tax speak”, the decedent’s unused portion is now “portable” to the survivor.

This dramatic change in the exemption rules has made these older trusts quite problematic in the current tax climate. Here’s why:

Let’s say that you and your wife have an estate worth $3 million, that $2.5 million of that is your own separate property acquired prior to your current marriage, that $500K is community property. and that the value of these assets remains the same over time.  Let’s further assume that your trust directs a trust split upon the first death, requiring the exemption amount to be fully funded (to the extent of the value of your estate) into an irrevocable Exemption Sub-Trust over which the survivor has only restricted access.

First Example: Let’s pretend you died back in 2001, after your trust was signed. Your estate would have been allocated as follows: $675,000 to the irrevocable Exemption Sub-Trust, and the balance of $2,325,000 to your surviving spouse. Under old law, even after fully funding the Exemption Sub-Trust, the survivor would still be left with unrestricted access to substantial assets, both of your individual exemptions would have been preserved, and the plan would have made good tax sense.

Second Example: Now let’s say you die in 2018, when the maximum exemption is now $11.18 Million per person. Your trust has not been changed and therefore still directs that the Exemption Sub-Trust be “fully funded” to the extent of your assets. The allocation would now be as follows: $2.5 Million + $250,000 = $2,750,000 into the irrevocable Exemption Sub-Trust with its provisions for restricted access, and only $250,000 into the Survivor’s Sub-Trust. Big difference.

Note:  Even if your estate is comprised entirely of community property, the difference under the tax law then, and now, is still significant.  If you and your spouse wish to leave the survivor with unrestricted access to your entire estate after the first death, you should have your trust reviewed and updated to meet current tax law. Very likely, your attorney may advise dispensing with the “trust-split” requirement entirely.

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Q. Has the Veterans Administration announced new rules about qualifying for an Aid & Attendance Pension to help Vets with long term care expenses? I recall that they were in the planning.

A.  Yes! The VA just announced final rules for those Veterans and their surviving spouses who seek to qualify for a pension to help with long term care expenses. One of the new rules adds clarity to the asset limit question, while another imposes severe penalties for Vets who transfer away assets in an effort to meet the threshold asset test. These rules were three years in the making and were initiated, in substantial part, to protect Veterans from aggressive marketers selling annuities and other financial products to Veterans, which promoted the divestment of assets just to qualify for pension.

But the new rules will also make it much more difficult for veterans’ advocates to legitimately assist them accelerate eligibility for pension, often known as an Aid and Attendance Pension, which can pay a benefit of up to $2,169 for a married Vet (in 2018). Here are some highlights of the new rules:

1) Net Worth: Under the old rules, a Vet could only qualify for pension if his Net Worth met VA regulations, which were vague and uncertain, resulting in inconsistent awards and denials by VA adjudicators. By contrast, the new rules adopt a “bright line” test to improve consistency.  A qualifying Net Worth will now be the same as for a married couple under the Medi-Cal program, currently $123,600 (in 2018), and this will be the rule whether the Vet is married or single. The Medi-Cal program refers to this amount as the Community Spouse Resource Allowance (“CSRA”), and it will adjust annually by an inflation factor. However, unlike the Medi-Cal program, the VA will include in this number both non-exempt assets as well as the Vet’s annual income (after adjusting out qualifying medical expenses).  This bright line test is considered a vast improvement over the previous vague standard.

2) Transfer Penalties: Under the old rules, a Vet could transfer away assets to adult children, or purchase an irrevocable immediate annuity, and immediately bring down his Net Worth to qualifying levels. There was no transfer penalty.  This planning option has now been gutted. Now, any excess Net Worth transferred away within three years of application will trigger a penalty period of as much as five years, depending upon the value of the transferred assets, during which time the Vet or Surviving Spouse will be ineligible for Pension. The penalty period will only start running in the month of the last such transfer, heavily penalizing serial transfers. The penalty divisor will be the Maximum Pension Rate for a Married Vet, currently $2,169 /month (in 2018).   The transfer penalty provisions are a major development and will all but eliminate crisis planning.

3) Purchase of Annuities Now Eliminated: Once the new rules become effective, a Vet will no longer be able to purchase an irrevocable annuity to convert excess net worth into a stream of income.  Such a purchase will be considered a transfer of assets and will trigger a transfer penalty.

4) Medical Expense Deduction More Liberal: Some good news: the new rules expand the definition of medical expenses that will be allowed as a deduction from the Vet’s income, for purposes of both reducing his Net Worth and increasing his Pension Award. It should now be easier to qualify expenses incurred for home care, even if provided by an adult child, as well as care in assisted living facilities.

Alert: The new rules become effective on October 18, 2018. Until then, the old rules apply.  If a Veteran is considering applying for a VA Pension down the road, and believes he may need to divest himself of assets in order to qualify, he should consider doing so before October 18, because there will then be no transfer penalty even if the application is made long after that date.  Many advocates are therefore urging Veterans in this situation to become proactive about transfers, and to consider making them before the new rules and their transfer penalties become effective.

References:  Federal Register of September 18, 2018, announcing the new rules.

Q. I recently heard the term “Springing” Power of Attorney, but I am not sure what that is. Can you shed any light on this?

A.. Sure. Broadly speaking, there are two general categories of financial Powers of Attorney: (1) those that are immediately effective upon signing by the principal, and (2) those that are only effective upon the happening of a future event, typically the incapacity of the principal.  Attorneys generally call the latter a “Springing” Power Of Attorney, because they do not become effective, or “spring into life,” until the happening of that future event. Which form a client might choose will depend upon the client’s circumstances.

Typically, a client who is healthy and younger would usually prefer a power of attorney that only springs into life in the future, when, and if, he or she is no longer able to manage his or her own financial affairs. Until that event, the client – whom we often call the “principal”— calls his own shots and only he, himself, can enter into transactions that legally bind him.

By contrast, a principal who is up in years and/or sees illness or incapacity on the near horizon, may opt to sign a Power of Attorney (“POA”) that is immediately effective, so as to dispense with the procedural requirement and corresponding delay necessary to establish the requisite incapacity that would make the POA effective, and thereby empower the designated Agent to act for the Principal.

How is incapacity determined?  Many Springing POA’s recite that incapacity is determined when two (2) physicians who have examined the principal write a letter reciting that the principal is incapable of managing his or her own financial affairs, usually due to cognitive decline, dementia or similar maladies.  Note: Notwithstanding that common requirement, I prefer to recite in POA’s that I prepare that only one (1) physician need so opine, and here’s why: Very often the need to establish incapacity in this context arises when the principal is residing in a nursing home.  Typically, in the nursing home setting, only one physician makes the rounds to check on each patient. To secure an evaluation and letter by a second physician in those circumstances can be difficult.

Another option for some clients is to begin with a Springing POA, but as the years pass and they decide they no longer wish to manage their own financial affairs, to sign a simple form reciting that the POA is now immediately effective. That signed form would then be kept together with the POA and handled as a single document, so that it is apparent to all who review it that the principal has opted to make the POA immediately effective. The other alternative, of course, is to rewrite the POA entirely so as to render it immediately effective going forward.

Know that, whichever form you choose initially, you are not forever bound by that decision. So long as you are competent, you can always revoke and revise your POA to make it fit your changing life circumstances.

Q.  I hear that Medicare is proposing a new payment arrangement for doctors that may dramatically impact access to care by seniors and other beneficiaries. Do you know anything about that?

A.  You heard correctly. Medicare is proposing a new flat rate reimbursement system for doctors who treat Medicare patients. Some worry that the plan may reduce payments to specialists and cause fewer doctors to accept Medicare patients.

The Centers for Medicare and Medicaid Services (“CMS”) claims that the proposed changes are designed to reduce paperwork by combining four levels of forms required for reimbursement into one form and one fee paid to doctors. However, under the new system, doctors who see generally healthy patients and doctors who see more complicated patients would receive the same flat fee. According to a report by National Public Radio (“NPR”)”, the flat fee would mean doctors who specialize in complex medical areas would receive a smaller reimbursement than under the current system. Doctors would receive the same amount regardless of whether they spent 15 minutes with a patient complaining of a head cold or an hour with a patient with stage 4 cancer.

As NPR reports, doctors are worried the new payment system will cause more specialists to refuse to see Medicare patients. In addition, doctors who do see Medicare patients may spend less time with them. And the implications extend beyond Medicare because private insurers often follow Medicare’s lead.

Due to the possible implications of the flat fee, advocates are asking CMS to start with a demonstration project rather than changing the entire reimbursement system for all physicians at once.

CMS is accepting public comments until September 10, 2018. The new fee structure would go into effect in January 2019.

References: To learn more about the proposed changes go to to the NPR article,  and the New York Times article of July 22, 2018.  For those who wish to go directly to the source, here is the link to the CMS proposed rule change.

 

 

 

Q.  A few years ago, our mother signed a Joint Tenancy Deed adding our brother to the title on her home. More recently, she signed a Last Will leaving the home equally to all three of her children. She passed away last month and we are now conflicted about who owns her home. Does the Will override the Deed?

A. Sadly, your situation is all too common. Parents sometimes forget their prior transactions, or mistakenly assume that their Last Will is controlling. Unfortunately for you and your other siblings, the Will generally does not override the Deed. Rather, the general rule is that the Deed controls.

Background:  A key feature of the Joint Tenancy Deed is that, upon death of a joint tenant, it passes full ownership by automatic succession to the survivor without probate and with a minimum of paperwork. Absent a successful court challenge, this means that your brother, as the survivor, became the owner of the home immediately upon your mother’s death.  This result is usually what people intend, and many use the JT Deed as a device to avoid probate and simplify the transfer of ownership after death.

Exceptions:  There are, however, situations where the general rule does not apply.  They include the following:

1) Where the Deed was procured by duress or undue influence.

2) Where the formalities of preparing and signing the Deed were not fully observed.

3) Where your mother later severed the joint tenancy by, for example, signing a new deed conveying all or part of the home to someone else, or by conveying the home into a trust with provisions which conflict with the JT Deed. A severance eliminates the right of survivorship, which means that at least a one-half interest in the home would then be preserved for her to convey by Will or Trust.

4) In other situations, where a homeowner adds his/her caregiver (who is not a family member) to title without observing certain necessary formalities (such as a review of the transaction by an independent attorney).  Here, there is a legal presumption that the deed was the product of undue influence and therefore voidable by a court.

Question:  Are there any facts known to you to suggest that the JT Deed was the result of your brother exercising undue influence over your mother?

Another question:  At the time of creating the later Will, did anyone check the status of title to her home?  If they had, the problem might then have then been discovered and suitably addressed.

In sum, the general rule is that the Joint Tenancy Deed overrides the Last Will. However, there are exceptions to that general rule. Where those exceptions apply, a court, asked to rule upon them, may find the Joint Tenancy deed to be entirely voidable or, alternatively, may deem the survivorship aspect as terminated.  In such cases, the right to ownership would depend upon the directions in your mother’s Last Will or her Trust, at least to the extent of a one-half interest in the property. In your situation, the full facts surrounding the preparation of both the Deed and your mother’s Last Will should be fully explored before you come to a final decision on ownership.

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References:  CA Civil Code §683 (creation of joint tenancy); CA Civil Code § 683.2 (severance of joint tenancy); CA Civil Code §1575 (Undue Influence); CA Civil Code § 39 (Rescission of conveyance made by person of unsound mind).

Q.  As a grandparent, I keep hearing about CUTMA accounts, usually in discussions about gifts to grandchildren. What are they, actually?

A. CUTMA is an abbreviation for “California Uniform Transfers to Minors Act” and, as you surmise, it refers to gifts made to minors. Minors cannot own property in their own name, as the law presumes they are incapable of managing it. As a result, the law came up with a solution, and that is to permit gifts to be made to an adult for the benefit of a minor. The gift document must specify the age at which the custodian must release the asset to the minor, which is usually age 18, but may be up to age 25, if a testamentary gift.

This form of gift is usually much simpler and less expensive than creating a formal minor’s trust, which is another option under Internal Revenue Code section 2503(c).  It is also an alternative to creating a “529 Plan”, which is reserved for gifts to fund a child’s college education.

Here are some significant features about CUTMA accounts:

1) The custodian must be named in the gift instrument, and a successor custodian may also be named. It is usually best for the transferor not to name himself, so that any income earned by the gift is taxable to the minor rather than to the transferor.

2) Each gift transfer may be made only for one minor, and only one person may be the custodian.

3) Special language must be used in the transfer, such as the following:

            “ I hereby transfer the sum of $30,000 to Jerry Jones, as Custodian for Barney Smith, a minor, until age 18, under the “California Uniform Transfers to Minors Act”.

If the donor wishes to delay receipt until Barney becomes 21, the following words must be added:

           “…. until age 21 pursuant to California Probate Code section 3909.”

Note: if the gift is to be made by Will or Trust, the donor may extend to age 25. However, a gift which defers ownership until the minor is over age 21 will generally not qualify for the Gift Tax Annual Exclusion Amount (currently, $15,000 per year in 2018). Thus, it is often best to defer possession only to age 21, especially as to gifts made during the donor’s lifetime.

4) Assuming the Custodian is not the minor’s parent, any income earned by the gift is taxed as follows:  for children or students under age 24, income below $1050/year is not taxed, income from $1,050 through $2,100 is taxed at the child’s rate, but income over $2,100 is taxed at the higher rates applicable to trusts and estates (which begin at 24% in 2018).

5) The custodian has a fiduciary duty to manage the gifted asset for the benefit of the minor, but may use the funds for the minor’s benefit without court order and without the need to take into account the parent’s duty to support the minor or the minor’s other available income or property.

6) If the minor dies before the time designated for him to receive the property, it then goes to his estate.  But this may not be what the donor wanted, especially if the minor has other siblings whom the donor would then prefer to receive that gift. In that case, a gift to a trust for the minor, with provisions for successor beneficiaries in the trust instrument, may be preferable, especially in the case of a very significant gift.