Noteworthy Changes to Coverdell Accounts Demand Consideration

Families interested in opening a Coverdell Education Savings Account this year for college savings should consider doing so before April 15. That would allow them to invest as much as $4,000 in one of these tax-advantaged accounts this year—twice the maximum for annual contributions—since money deposited before April 15 can be counted against the previous year's limit.

But families planning to use a Coverdell account to pay for pre-college education expenses should think twice about opening or contributing to an account this year. Starting next year, withdrawals from Coverdells to pay expenses from kindergarten through 12th grade will no longer be tax-free, unless Congress acts to extend that benefit, which is far from certain.

Another prospective rule change would lower the limit on annual contributions to $500 starting next year, making Coverdells less useful for college savings. Already, the $2,000 limit has made Coverdells much less popular than 529 college-savings plans, which offer similar tax benefits for college costs and a roughly $300,000 limit on contributions overall. But even some people who are putting away more than $2,000 a year for college have included Coverdells in their savings plans, because Coverdells offer a greater range of investment options than 529 plans, and more freedom to switch investments.

Another benefit that could expire at year's end is the ability of an investor to claim a Hope or Lifetime Learning tax credit for education in the same year they use Coverdell funds, as long as the tax credit and Coverdell money aren't used for the same expense. For example, an investor can take a tax credit for tuition in the same year s/he is using Coverdell money for books.  This benefit is scheduled to sunset at the end of this year,  resulting in the two tax benefits becoming mutually exclusive. 

Avoiding Sham Trusts and Trust Scams: Part I - Sham Trusts

Legitimate trusts are tools used by qualified estate planners and their clients to achieve certain objectives, including, but certainly not limited to, controlling the disposition of assets, avoiding probate, reducing administration costs, saving estate taxes, and preserving family wealth for future generations. Unfortunately, trusts are often used for improper purposes. Lurking in the shadows are con artists who promote sham trusts and trust scams for their own gain. These con artists rely on the ignorance of the public, and only education and information can prepare you for their pitch.

Sham trusts and trust scams are usually sold at high pressure seminars, by door-to-door salesmen, and on the internet. In some cases, they are recommended by well meaning but poorly informed CPA's, financial advisors, friends, or business acquaintances. The marketing techniques can be persuasive, and are aimed at all classes of people.

What is a Sham Trust?

A sham trust is any trust created for an improper or illegal purpose. For example, "trusts" or "contracts" which purport to avoid, or significantly reduce, all taxes, including all income taxes, for individuals and, in some cases, businesses, are almost always sham trusts. These often use a complex structure that involves the "irrevocable" transfer of your assets to one or more business or trust entities which you control. The promoters claim that the arrangement will significantly reduce or eliminate state and federal income taxes.

Although there are legitimate estate tax objectives that may be accomplished with trust planning, income tax planning is quite a different matter. Generally speaking, someone is going to have to report taxable income, as well as pay income taxes thereon. While there are legitimate credits, deductions, and exemptions available under state and federal law, there is no trust or business entity into which you can convey all of your property and thereby avoid all income taxes. These trusts sometimes come with seductive names. Moreover, when the justification for the trust somehow involves the unconstitutionality of the IRS or of income taxes, you are best advised to seek additional or alternate legal counsel.

Avoiding Sham Trusts and Trust Scams - Part II - Trust Scams

Although trusts are excellent tools used by legitimate professionals to accomplish a variety of worthwhile objectives, there are a wide variety of con artists who prey upon the public using the lure of trust planning. These con artists rely on the ignorance of the public. They generally provide poorly conceived and implemented estate plans, poor service, and often do more harm than good to their customers. These schemes are usually encountered at high pressure seminars.

What is a Trust Scheme?

Several years ago, the Supreme Court for the State of Ohio fined a company and a group of individuals including several attorneys one million dollars for selling unnecessary and potentially damaging legal services to seniors. Several years later, the State of Ohio fined a pre-paid insurance company and a group of attorneys for similarly cheating seniors. The State of Texas is currently investigating a Ponzi scheme in which seniors are alleged to have lost tens of millions of dollars. What these schemes have in common is that each involved the marketing and sale of living trusts.

Living trusts are so advantageous and so readily accepted by the general public that scam artist will often sell a living trust as a front for selling some other illegitimate scheme or investment. Once confidence of the public is attained, the sham artist will sell the client stock in companies that do no exist, unregistered and risky securities, poorly capitalized limited partnership interests, and just about any fraudulent investment or business scheme imaginable. Promising returns that are usually too good to be true, the scam artist assures their clients that the investment is safe. The scam artist is almost never an attorney, and the trust is almost always incidental to their "product." Moreover, the investments that they offer are almost always unwise.

Most Do Not Have Advanced Directives

"Five years after the court fight over allowing Terri Schiavo to die, most Americans still don't draft the legal documents that spell out how far caregivers should go to keep them alive artificially."  This according to an Associated Press article published in the Washington Post.  According to the article:

"Schiavo's life and death captivated the country and fueled conversations about the necessity of the documents, known as advance directives or living wills. Even though millions witnessed a worse-case scenario, there's no indication it had a lasting impact on getting more people to make their wishes known."

"The gap is so big," Paul Malley, president of Aging With Dignity, is quoted as saying.  Aging With Dignity  advocates advance directives and saw an increase in interest during the Schiavo case. "Even a significant impact from the Schiavo case doesn't put a dent in the need that's out there."

Underwriting Ceases on National Flood Insurance

FOR IMMEDIATE RELEASE
FROM THE OHIO DEPARTMENT OF INSURANCE

Monday, March 29, 2010

CONSUMER ADVISORY:

National Flood Insurance Program Not Issuing New Policies

COLUMBUS — Ohio Department of Insurance Director Mary Jo Hudson is advising consumers that the National Flood Insurance Program (NFIP) ceased issuing new policies or renewing policies to cover flood damage, following the expiration of the program’s federal authorization at midnight March 28, 2010. Congress will not act again on reauthorization legislation until after it returns to session on April 12.

The NFIP sunset could cause short-term problems for consumers waiting to close on the sale of a property within a Special Flood Hazard Area. However, consumers with current policies are still covered by the federal program. Only those seeking to purchase a policy during this time will be affected. Until Congress approves this reauthorization, the NFIP cannot issue new policies, increase coverage or approve renewal policies.

National Healthcare Decisions Day is April 16

National Healthcare Decisions Day is April 16th! On this day, all across the country, health care facilities, health care professionals, chaplains, the legal community, and others will be participating in a collective effort to highlight the importance of making advance health care decisions and to provide tools for decision-making..

Notwithstanding a much higher awareness on the part of individuals and institutions regarding the need for health care decisions planning, implementation by individuals and institutions of plans meeting the need are still rare.   Less than fifty percent of the severely or terminally ill patients  had an advance directive in their medical record, according to a study by the  U.S. Agency for Healthcare Research and Quality (http://www.ahrq.gov/).   In a 2003 article, “Advance Care Planning: Preferences for Care at the End of Life,” USAHRQ reported that only twelve percent of patients with an advance directive had received input from their physician in its development.  Moreover, between sixty-five and seventy-six percent of physicians whose patients had an advance directive were not aware that it existed. 

Even when the advanced directive exists, and the physician is aware of its existence, most physicians do not consult with their patients regarding end-of-life issues until treatments have been exhausted, at least according to researchers publishing a report in the journal Cancer, reported last month in this blog (click here).  According to the researchers, most doctors don't talk about end-of-life issues with their cancer patients when those patients are feeling well. Nor do they talk about them until treatments have been exhausted. Those delays might mean patients are unable able to make truly informed choices early in their treatment.

Annuity Tax Remains in Health Care Reform

By Steven A. Morelli, Senior Editor, InsuranceNewsNet

Despite protests from insurance groups, the health care reconciliation act will add a new tax on annuity income to pay for Medicare once the bill becomes law.

Several insurance groups issueda last-minute appeal in a letter to legislators on Wednesday to exempt annuities from the new tax, citing the important growing role annuities are playing in securing retirement. But annuitiesremained in the reconciliation bill the Senate and House passed on Thursday and sent to President Barack Obama to sign.

The 3.8 percent tax applies to investment income from married individuals filing a joint return and surviving spouses with taxable income of at least $250,000; married taxpayers filing separately with an income of $125,000; and other individuals, with an income of $200,000.

The bill lists annuities as investment income. The tax would apply to annuity income that is already taxable (the amount above the annuity owner’s cost basis), starting in 2013. Annuities sold in employer-sponsored retirement plans would be exempt.

Ohio Increases Annuity Guaranty Coverage

Ohio Department of Insurance Director Mary Jo Hudson has announced that a recent amendment to Ohio insurance law by the Ohio General Assembly has increased The Ohio Life and Health Insurance Guaranty Association’s coverage protection for annuities from $100,000 to $250,000. The change goes into effect on May 26th, 2010.

The new changes to the law (Section 3956.04 of the Ohio Revised Code) will guarantee that consumers who purchase an annuity product may be able to recover up to $250,000 of their policy in the unlikely event that the company they purchased the product from becomes insolvent.

The Ohio Life & Health Insurance Guaranty Association (OLHIGA) is a non-profit association of insurance companies that sell life insurance, health insurance, and annuities in Ohio. It was created by Ohio law to provide some level of protection for certain Ohio policyholders against the insolvency of an insurance company licensed to sell those types of policies in Ohio in the event that the company is placed into liquidation.

Planners' Corner- Health Care Reform and LTCI

The health bill package includes provisions that could impact long term care insurance sales.  President Obama signed into law the giant Patient Protection and Affordable Care Act that the Senate passed early on Christmas Eve, 2009.  The new law includes the Community Living Assistance Services and Supports Act (CLASS).  The CLASS Act is intended to provide a lifetime cash benefit that offers people with disabilities some protection against the costs of paying for long term services and supports, and helps them remain in their homes and communities.  It is a self-funded, insurance program with enrollment for people who are currently employed. Premiums will be paid through payroll deductions if an individual’s employer decides to participate in the program. Participation by workers is entirely voluntary. Self-employed people or those whose employers do not offer the benefit will also be able to join the CLASS program through a government payment mechanism. 

Under CLASS, individuals qualify to receive benefits when they need help with certain activities of daily living, have paid premiums for five years, and have worked at least three of those five years.  Qualified individuals will a receive a lifetime cash benefit based on the degree of impairment, which is expected to average between $50 and $75 a day or more than $27,000 per year.  This benefit can be used to maintain independence at home or in the community, and should be sufficient to cover typical costs of home care services or adult day care. The qualified individual's benefits can also be used to offset the costs of assisted living and nursing home care.

Many experts, including actuaries at the government's own Centers for Medicare and Medicaid Services, have argued that a combination of relatively rich benefits and the opt-out provision make the program actuarially unsound, by encouraging workers with health problems to flock to the program and healthy young workers to opt out.  Of course, it is possible that the provisions of CLASS will be amended by the reconciliation bill currently under consideration by the Senate.  

Beware Fake Health Care Plans In Wake of Reform

In the wake of sweeping health care reform, consumers will need to be wary of con artists promoting fraudulent plans and benefits.  State regulators are already struggling to stop fraudulent health insurance plans, a growing problem that has cheated tens of thousands of consumers at a cost of tens of millions of dollars, according to Sean P. Carr, Washington Correspondent in an article published March 23, 2010, by InsuranceNewsNet.com.

According to the article:

Fraudulent plans continue to grow in size and scope. "There's no end in sight," said James Quiggle, communications director for the Coalition Against Insurance Fraud.  A common scam involves plans that promise full health care coverage but deliver worthless policies or lesser products designed to look like comprehensive coverage, said Quiggle, who has studied the issue for years. Consumers may purchase "limited benefit" plans or medical discount cards that often present themselves as providing full insurance coverage -- until the bills come, he said. Such fraudulent plans surged in the early 2000s, Quiggle said. When confronted, companies sometimes claimed they were not subject to state insurance regulation...Regulators knocked many of them out of business in the mid-2000s, he said, but the combined effects of recession, sustained joblessness and increasing numbers of uninsured provided a target-rich environment for their return. The number of people victimized are in the tens of thousands, he said. 

States Attack Community Spouse Income Planning

One of the benefits of an annuity in estate and government benefits planning is the ability to convert assets countable for the purpose of determining Medicaid eligibility, and therefore subject to long term care spend down, to income for a community spouse, that is not countable, and therefore, not subject to spend down. This strategy is particularly comforting to a community spouse, who often is confronted with the task of making limited assets and income last over a lifetime. Given that the community spouse is often a younger female with a much longer life expectancy than the institutional spouse, providing a guaranteed income that the spouse cannot outlive from assets that otherwise would be extinguished by long term care is an important goal for seniors and their families, and the planners representing them.

This technique is not common, and is not without its risks. The community spouse must make an irrevocable decision preferring income over assets the spouse could otherwise spend without limitation. As income, the spouse has comfort in meeting routine obligations, but does not have a large pool of convertible assets as a safety net. The spouse gives up flexibility and liberty to convert a lump sum of assets to whatever purpose the spouse might have. Moreover, the technique means making a decision to prefer taking care of the surviving spouse at the expense of an inheritance for the children. Under the Deficit Reduction Act of 2005 (DRA), the state must be the beneficiary of any residue upon the death of the community spouse.

Nonetheless, states have waged an aggressive battle in the courts to prevent families from converting assets to income, but have, to date, been largely unsuccessful. The Third Circuit Court of Appeals, for example, recently held that since the annuity payment is payable to the community spouse, it is income and should not be included in the eligibility calculations, regardless of whether it can be sold on the secondary market. Weatherbee v. Richman, 2009 U.S. App. LEXIS 24939 (2009). See also, Vieth v. Ohio Dep't of Job and Family Servs., 2009 Ohio 3748 (Ohio Ct. App., Franklin County, July 30, 2009) (where community spouse purchased $140,000 annuity, court granted Medicaid benefits to the institutional spouse). But see, N.M. v. DMAHS, 405 N.J. Super. 353 (2009) (annuity is countable for Medicaid purposes if it can be sold in the secondary market).

Now, apparently conceding defeat in the courts, the National Association of State Medicaid Directors (NASMD) has sent a letter to the Center for Medicaid and State Operations (CMS) requesting that the Agency revisit its treatment of community spouse annuities. NASMD seeks to foreclose a family from preferring income for the benefit of a community spouse over assets, the latter of which may be lost in a long term care spend down.The effort, if successful, would reverse years of accepted law and practice. In the 1993 Omnibus Budget Reconciliation Act (OBRA), Congress delegated the Medicaid treatment of annuities to the Secretary of Health and Human Services (HHS). 42 U.S.C. § 1396p(d)(6). CMS then exercised that authority in Transmittal 64 to the State Medicaid Manual which contained the Secretary's determination. The treatment was modified somewhat by the DRA, but recent cases have upheld the purchase of DRA compliant annuities by community spouses to protect resources in excess of the default Community Spousal Resource Allowance (CSRA). NASMD now wants CMS to change its rules so that annuities will be treated like trusts which would make them countable and available resources.  More importantly, the change removes from community spouses the opportunity to make assets

End-of-Life Care Not to Blame for Increased Costs

In this information age, there certainly seems to be a large amount of misinformation.  One of the more persistent myths, is that the high cost of end-of-life care for the elderly represents a financial threat to the health care system.  According to a recently released study by the International Longevity Center-USA, "Myths of the High Medical Cost of Old Age and Dying," it is simply not true that the aging of Americans and over aggressive care at the end of life are major causes of increasing health care costs in the United States.

According to the report, studies that have looked at the causes of increased health care spending conclude that as little a 5 percent of the increase may be attributed to the aging of the population, the other 90 to 95 percent resulting from other causes.

Many have predicted that the already high cost of caring for seniors will skyrocket in the next tewenty years as the oldest baby boomers start reaching age 85. The new report suggests that this is not necessarily true, particularly if better health care can reduce the prevalence of chronic disability as it has in the past. For example, the incidence of chronic disability among seniors decreased  by 6.5 points over the period between 1982 and 1999.  The mere fact that full recovery from stroke and heart failure is now so prevalent, suggests that mere extrapolation from the past regarding disability or related health care cost is likely to lead to wrong conclusions.

"Today Show" Tells Story of Divorce Resulting from Long Term Care

An emotional segment on a recent Today Show episode featured a wife who divorced her husband after 44 years of marriage in order to protect assets from a a long term illness. Suggesting the divorce, and also appearing on the show, was Massachusetts attorney Hyman Darling, a member of the National Association of Elder Law Attorneys (NAELA).

The husband of "Roberta" (not her real name) was diagnosed with dementia after the couple had been married more than 40 years. When she became unable to care for him at home, Roberta moved her husband to a nursing home and began paying bills of between $7,500 and $8,000 a month. After she had gone through $75,000, her husband's neurologist suggested that she find "a really good lawyer."

Roberta found Darling, an elder law attorney with the firm of Bacon & Wilson, P.C., based in Springfield, Massachusetts. Darling suggested to her that, as a last resort, she could terminate her marriage. This would preserve her remaining assets and allow her husband to quickly qualify for Medicaid coverage of his nursing home care.

Value of Annuities Behind Fed Efforts to Boost Retirement Savings

In January, the Obama administration announced an initiative to promote the availability of annuities in qualified retirement, 401(k), and similar plans. Only 22% of such plans now offer annuities among the options available to plan participants.   While the initiative is not long on details, it is gaining support among senior advisors and advocates.  Making annuities an option in qualified retirement planning would permit more workers to turn some of their nest egg into guaranteed income for life.  The opportunity to insure a lifetime of income is an attribute unique to annuities, and is an attribute uniquely suited for retirement planning.

Simultaneously, a Senate bill that would require your 401(k) to inform you of the projected monthly income you could expect at retirement based on current savings.  Causing investors to focus on the income they can expect from their retirement planning, rather than upon their account balances, is a welcome turn of events.  Investors often pay too much attention to the balances in their retirement plan portfolio, without careful attention to whether that portfolio will sustain them after retirement.  Simply, income is a more relevant basis upon which to plan for retirement.  That is the approach Social Security takes with its annual statements.

The confluence of these events suggests that the government is finally acknowledging the value of income retirement planning, and the value of annuities in securing that income.  As Americans grapple with the challenge of potentially outliving their retirement savings, lifetime income annuities are among the most cost-effective and least risky asset class for generating guaranteed retirement income for life according to numerous studies, perhaps the most prestigious being one co-sponsored by the Wharton Financial Institutions Center at the University of Pennsylvania and New York Life Insurance Company.

Planner's Corner- Beware of Ghostwritten Articles

You've probably received the solicitation, and been tempted to purchase the beautiful book or glossy magazine, with your picture and name on the cover.  The solicitation promises instant credibility, because no client would know that you had nothing to do with writing the book, or that the magazine article is purchased.  These "ghostwritten" marketing efforts promise much, are extremely high quality, and as a result, are tempting.

Beware!  The Financial Industry Regulatory Authority (FINRA) warns that sales representatives for member firms should take care when using ghostwritten books and articles in marketing their services.   A rule established by the National Association of Securities Dealers (NASD)  "prohibits false, misleading or exaggerated communications with the public and the omission of material facts or qualifications that would cause a communication to be misleading," FINRA officials write in Regulatory Notice 08-27.   Many of the ghostwritten books, pamphlets and newspaper advice articles may violate that rule and other rules established by the NASD and FINRA's other predecessor organization, the regulatory arm of the New York Stock Exchange, the notice states.

Avoiding Census Fraud

With the U.S. Census process beginning, the Better Business Bureau (BBB) advises that people be cooperative, but cautious, so as not to become victims of fraud or identity theft. The first phase of the 2010 U.S. Census is under way as workers have begun verifying the addresses of households across the country. Eventually, more than 140,000 U.S. Census workers will count every person in the United States and will gather information about every person living at each address including name, age, gender, race, and other relevant data.

The big question is - how do you tell the difference between a U.S. Census worker and a con artist? The BBB offers the following advice:

• If a U.S. Census worker knocks on your door, they will have a badge, a handheld device, a Census Bureau canvas bag, and a confidentiality notice. Ask to see their identification and their badge before answering their questions. However, you should never invite anyone you don't know into your home.

CitiMortgage Program to Aid Borrowers Avoid Foreclosure Costs

According to an article written by Les Christie, and published on CNNMoney.com, CitiMortgage, one of the nation's largest mortgage servicers, launched a pilot program Friday designed to ease the pain of some homeowners heading for foreclosure.  The program, a modification of a traditional deed in lieu of foreclosure, gives borrowers new and substantial  incentives to avoid the legal and administrative costs of foreclosure.

Instead of borrowers falling further and further behind on their mortgages, leading to an eventual foreclosure sale, they can stay in their homes for up to six months, if they agree to then hand over the deed to the lender. 

CitiMortgage will then, additionally, pay the borrowers a minimum of $1,000 to help with relocation expenses.  CitiMortgage will also provide relocation counseling, and may even cover some monthly property expenses while the borrowers remain in their homes, if Citi determines the borrowers can't afford the expenses.Citi will also forgive any difference between the value of the home at time of repossession and what the borrower owes. Once the deed goes back to the lender, the borrowers walk away free and clear.

Doctors Avoid End-of-life Counseling with Patients

According to researchers publishing a report in the journal Cancer, most doctors don't talk about end-of-life issues with their cancer patients when those patients are feeling well. Nor do they talk about them until treatments have been exhausted. Those delays might mean patients are unable able to make truly informed choices early in their treatment.

The study, published online, by Nancy L. Keating, MD, MPH, of Brigham and Women's Hospital in Boston, and colleagues, surveyed 4,188 physicians about how they would talk to a hypothetical cancer patient with four to six months to live. A majority of respondents (65%) said they would discuss prognosis, but only a minority said they would discuss do-not-resuscitate status (44%), hospice (26%) or preferred site of death (21%) at that time. Rather, they would wait until symptoms were present or until there were no more treatments to offer. An abstract and the full text of the study are available here.

Current guidelines, from the National Comprehensive Cancer Network, a not-for-profit alliance of 21 of the world's leading cancer centers, say that such conversations should be initiated whenever a patient has been given less than a year to live, if not at diagnosis.  The survey suggests that these guidelines are not being observed in practice.

The survey did not ask physicians to explain their answers, but the researchers offered several possibilities.

Alzheimer's: Type 3 Diabetes?

I don't usually include information regarding health care, but some of you might remember that the first incarnation of my website had a page devoted to health and prescription drug information.  But, this article, available online on the Canadian version of Healthzone, is so compelling, I thought I would share it.

Some experts are now calling  Alzheimer's, "Type 3 diabetes" or diabetes of the brain. Here are a few links between the two diseases:

Beware Direct Transfer Designations (TOD's/POD's)

Direct transfer designations, like POD's (payable on death designations) and TOD's (transfer on death designations), and simple beneficiary designations, are mechanisms by which an account or other asset is transferred or paid upon the death of the account holder or asset owner to a beneficiary. They are often recommended by the administrator of the account, such as a bank, broker or life insurance company. While these can be very effective and inexpensive means by which to avoid probate and transfer assets at death, they are not without their risks and challenges. A lack of careful consideration of the risks and rewards of these mechanisms can be disastrous. A carefully prepared estate plan will consider, and resolve, all of the risks and challenges of these mechanisms.

Benefits of Direct Transfer Designations

Direct transfer designations, such as POD's and TOD's have several benefits. The most important benefits are that they are cheap and easy. Most institutions will permit you to make such designations as a service, for no additional fee. They are simple to create, and there is no need for an attorney or other professional. Most of these designations are made by account owners without legal or professional advice or counsel. Particularly because of their simplicity, they are very popular.

The second benefit is that the payment or transfer is more or less immediate and direct. Where there is a need to make cash or other liquid assets immediately available to a child or grandchild for some purpose, a TOD or POD appear attractive at first glance. Beneficiary transfers, however, typically require claim forms, and documentation in support of the claim. In reality, the process may take more time and effort than succession of ownership (such as through a living trust or joint tenancy with right of survivorship). Nonetheless, it is the assumption that funds are available immediately that often causes folks to choose direct transfer designations.

New AOA Website Offers Legal Help

The Administration on Aging, in partnership with five national non-profit organizations, launched a new web site intended to empower legal and aging services advocates with the resources necessary to provide high quality legal help to older adults. The site is part of AoA’s National Legal Resource Center initiative, created in 2008.

AoA’s five national non-profit partners are: the National Senior Citizens Law Center, the National Consumer Law Center, The Center for Social Gerontology, The Center for Elder Rights Advocacy, and the American Bar Association Commission on Law and Aging.

Yes, You Can Follow Michael Jackson's Estate!

If you are interested, you can follow developments in the Estate of Michael Jackson.  It only takes a few minutes of searching to locate the public website for viewing the court dockets for estates being probated in the Los Angeles County Superior Court. So if you're interested in keeping up to date on what's going on with the probate of Michael Jackson's will and estate, then follow the links and instructions provided below.

Even if you are not interested, the fact that you can follow the developments in probate court is instructive; it speaks volumes to the level of privacy one can expect in probate cases.  It also serves to illustrate what can be accomplished with trust planning.  You will note that Michael Jackson's estate plan included a revocable trust.  Although the probate court will involve numerous issues, such as guardianship of the children, if Michael Jackson;s trust was completely funded, identification and valuation of assets, and court overseen administration of them, would be limited. 

How to View the Court Docket for Michael Jackson's Estate:

Things to Remember at Tax Time

Tax time is rapidly approaching.  You want to file all the proper forms and take all deductions you're entitled to. Following are some things to keep in mind as you prepare your tax form.

• Gifts. Did you give away any money this year? The gift tax can be very confusing. If you gave away more than $13,000 in 2009, you will have to file a Form 709, the gift tax return. This does not necessarily mean you will owe taxes on the money, however, and most folks making gifts will owe no tax. Click here for more information.
• Medical Expenses. Many types of medical expenses are tax deductible, from hospital stays to hearing aids. To claim the deduction, your medical expenses have to be more than 7.5 percent of your adjusted gross income. This includes all out-of-pocket costs for prescriptions (including deductibles and co-pays) and Medicare Part B and Part C and Part D premiums. (Medicare Part B premiums are usually deducted out of your Social Security benefits, so be sure to check your 1099 for the amount.) You can only deduct medical expenses you paid during the year, regardless of when the services were provided, and medical expenses are not deductible if they are reimbursable by insurance. Click here for more information.

Carryover Basis Complicates Planning / Settlement

I have been asked a lot of questions about the new carryover basis rules and what this means for someone who inherits property in 2010. Simply put, repeal of the federal estate tax that has taken effect in 2010 means that the stepped up basis that the inheritor would have received in 2009 and prior years is officially gone.

The good news is, that for most smaller estates, the practical effect of the change is non-existent. Moderate and larger estates, however, will now find additional taxes, and complications.

A stepped up basis means that the recipient of an inherited asset gets to increase the income tax basis of the asset to its date of death fair market value, which in turn is the basis used for calculating capital gains taxes when the inherited asset is sold. But not so now - instead for deaths occurring in 2010 an heir will receive the decedent's original basis in the inherited asset, which can be adjusted by the executor or personal representative using the new modified carryover basis rules. The personal representative call allocate additional basis to the property received by the beneficiary, in order to reduce the capital gain.

In 2009 and years prior, for example, if a beneficiary inherited a house that cost the decedent $500,000 but

No Estate Tax in 2010 - Good and Bad News

There is currently no tax on the estates of those dying during 2010.   Although it is possible that Congress could reinstate the tax retroactively in 2010, the possibility is uncertain, at best.  If Congress fails to act, however, although a few wealthy families will benefit, many families with smaller estates will pay capital gains on inherited assets.  Moreover, executors and successor trustees must contend with new, and what may prove to be significant, administrative burdens.

Under the provisions of a Bush-era tax-cut bill enacted in 2001, the value of estates exempt from the tax has increased over the past eight years while the tax rate on estates has been reduced, so that in 2009 only an individual estate worth $3.5 million or more is taxed, at a rate of 45 percent. For the year 2010, according to the 2001 law, the estate tax disappears entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more.

For persons with larger estates, their estate plans will need to reviewed and reconciled with the lack of

Strange Suit Against Michael Jackson's Estate

After reading that a taxpayer had sued the Michael Jackson estate to recover money spent for his memorial, I suspected that there would be other cases.  Of course, a quick google search revealed an interesting case, reported by TMZ.   TMZ reported last week that "[a] woman who claims to have spent 2,000 hours analyzing the extended family of Michael Jackson -- including children, birth mother(s), sperm donor claims ... and on and on ... wants more than $2 million from Michael Jackson's estate." 


According to TMZ, "Claire McMillan says she's a 'homeschool expert' who did 'a thorough analysis' of Jackson's complete extended family, to determine ... well, it's not clear why she was doing it.  Whatever ... she concluded that Katherine Jackson is doing 'a poor job outside of the home, related to - grooming, age, and psyc (sic) appropriate activities, same-sex, academic & soc interactions w/ non-extended family children .... ' oh, what's the use? It makes no sense." 

TMZ reports that McMillan claims she also inquired as to whether Dr. Arnold Klein would be interested in obtaining guardianship of the children with McMillan and her husband.  McMillan claims that her time is worth $1,000 an hour, and she wants $2,002,000 for her efforts.  Wow!

Howard Weitzman, lawyer for the Michael Jackson estate, reportedly told TMZ that, "[t]o the best of our knowledge, Ms. McMillan never did anything for the estate and the estate owes her nothing."  TMZ goes so far as to characterize the suit as a "Crazy Creditor's Claim."  No clarification if TMZ is saying the claim is crazy, the creditor is crazy, or both.

You can read more here.

Michael Jackson's Estate Sued Over Memorial

The Michael Jackson memorial in Los Angeles last July reportedly cost the cash-strapped city millions of dollars in police overtime and sanitation expenses, and now one  resident wants  Michael Jackson's family to pay the bill. According to the Associated Press, Jose F. Vallejo is seeking $3.3 million from Jackson’s estate.  The lawsuit, typically called a taxpayer's suit, is brought under a California law which permits taxpayers to sue in order to recover money on behalf of a governmental entity to which the taxpayer pays taxes. The taxpayer has requested that the money be deposited into the treasury for the City of Los Angeles.  Although the taxpayer typically does not benefit directly from the action, there are typically attorney fees which may have to be paid either by the defendant or the City, depending upon the outcome of the case.  The taxpayer benefits, at least theoretically, indirectly by reduced need for taxation.

Ohio, too, has a statute which permits taxpayer suits in certain cases. 

While the memorial cost the city millions, it also reportedly earned $4 million for the city’s hotels, restaurants

Laddering Fixed Annuities for Cash Accumulation

The July issue of Advisor Today introduces a unique cash accumulation strategy that merits close attention: laddering fixed annuities. MassMutual has back tested the strategy against several traditional strategies, and demonstrated its strength.

The strategy is simple. In addition to a portfolio of equities and bonds, simply make an initial purchase of a life-only fixed income annuity, with additional proportional fixed annuity purchases annually. Over a twenty-seven year period, the strategy resulted in a liquid account value of more than seven times the original deposit. This compared to an account value of only five times the original deposit when invested in a traditional equities and bonds only portfolio.

While the common misconception is that the inclusion of a fixed annuity in the mix impairs the liquidity of the portfolio, the performance over the intermediate and long-terms certainly made the short term illiquidity a risk worth taking.

Consequently, a retirement plan may benefit from the use of three asset classes- equities, bonds, and fixed income annuities. Retirees can build more wealth by making incremental annuity purchases with assets transferred from mutual fund accounts, for example.

The strategy also greatly increases the safety of the portfolio. Fixed income annuities are safe. They also are, in many states better protected from creditors. One would think these benefits would only be icing on the cake, given the strategy can outperform a traditional portfolio.

But the real icing on the cake, is building for your clients the opportunity to guarantee a stream of income that your clients cannot outlive. In these years of increasing life expectancies, the real "treat" is ensuring that the client can live the reminder of his or her life without concern whether the money will run out.

In August 2007, in the articles section of the Estate Planning Information Center, I reported about a study, co-sponsored by the Wharton Financial Institutions Center at the University of Pennsylvania and New York Life Insurance Company, identifying lifetime income annuities as the most cost-effective and least risky asset class for generating guaranteed retirement income for life.

The Wharton academic study revealed that:

• 
  
  Income annuities can provide secure income for one's entire lifetime for 25-40% less money than it would cost an individual to provide a similar level of secure lifetime income through traditional means, thanks to an insurer's ability to spread risk across large numbers of people;
• 
  
  Consumers are not annuitizing enough of their portfolios even though income annuities are low-cost, available from creditworthy insurers, and provide guaranteed payments for life. Equities, fixed income and other investment products like mutual funds carry the risk of outliving one's nest egg;
• 
  
  By covering at least basic living expenses with income annuities, consumers have much greater flexibility in other areas of a retirement plan, including the ability to take more investment risk with the remaining portfolio; and
• Recent innovations in income annuities, such as annual inflation adjustments, legacy benefits and access to capital in emergencies, have helped elevate the products to a desirable asset class in retirement.

The findings are outlined in a paper entitled "Investing Your Lump Sum at Retirement," which is based on an academic study entitled "Rational Decumulation," co-authored by Professor David F. Babbel of The Wharton School and Professor Craig B. Merrill of The Marriott School of Management at Brigham Young University. The study explored financial options for retirees and compared income annuities with other asset classes in retirement.

"Living too long is fast becoming the major financial risk of the 21st century," said Professor Babbel. "Combined with the challenges facing Social Security and the decline of corporate pensions, this adds up to a 'perfect storm' for retirees who might outlive their retirement nest egg."

Only lifetime income annuities can in an efficient way protect from the risk of outliving assets. This simply cannot be duplicated by other types of investments.

Caregiving Complicated By Late-In-Life Marriages

Disputes with Step-Children Increase Risk of Guardianship and Institutionalization

Mrs. Staffler calls her step-daughters to inform them that her husband, their father, has been admitted to the hospital following a massive stroke. As they gather in the hospital, it quickly becomes clear that the eldest daughter has been selected to give Mrs. Staffler some chilling and unexpected news. "You are not making decisions for our father; as his daughters, we will decide what needs to be done for him."

Feeling betrayed and offended, Mrs. Staffler rushes home to retrieve the health care power of attorney which appoints her as attorney-in-fact to make health care decisions. Armed with what she trusts is a clear statement of her authority, she returns to the hospital to find that the step-daughter has an attorney, and a caseworker from adult protective services awaiting her. In the ensuing battle, the stepdaughter is appointed guardian for her father by the probate court, and Mrs. Staffler is forced to hire an attorney to prevent the court from appointing a guardian for her.

Although she is successful in maintaining her freedom and independence, her legal expenses exceed fifteen thousand dollars. Moreover, although Mrs. Staffler assumed that she would have access to her husband's estate to care for her in the event of her husband's death, it is now apparent that the step daughters want their to inherit from their father's estate immediatelyupon his death.

Trust Scammers Refuse to Pay Penalty; Hurl Insults at Court

James Nash reports in the Columbus Dispatch that the Ohio Supreme Court's attempts to collect more than $7 million from two companies accused of scamming senior citizens are not going well.  According to the Columbus paper, the court on Monday handed off the collection action to the office of Attorney General Richard Cordray, who employs lawyers and others to shake loose money from reluctant debtors.

Jeffrey and Stanley Norman, owners of two companies that were fined $6.4 million Oct. 14 for having non-lawyers perform legal functions as part of an alleged trust-mill scam targeting the elderly, now owe more than $7 million with penalties for non-payment.  The Normans unsuccessfully tried to get the Supreme Court to rehear the case, but "[w]hen that failed, Jeffrey Norman lashed out at the court, accusing justices of a 'disgusting abuse of power.'"

Reportedly, Norman has said he would not pay the fine, calling it unfair, and he has put his southern California home on the market for $4.9 million.  Even if the state does collect the money, the proceeds won't go directly to victims of the alleged scam. The funds, under court rules, go toward the cost of investigating allegations of unauthorized practice of law, continuing legal education and other purposes.

The Normans were principals in the American Family Prepaid Legal Corporation scheme that resulted in The Ohio Supreme Court instituting a civil penalty in excess of six million dollars.  I wrote about the Court's action last November (2009), under the blog entitled "Court Imposes $6.3 Million Civil Penalty on "Trust Mill" Companies and Owners."

BIOGRAPHY

Monty L. Donohew is an attorney concentrating his practice in estate planning, wills, trusts, succession planning, and probate, with an emphasis on strategic trust planning. His firm, Monty L. Donohew, LPA, has offices in: Green, Ohio (Akron, Canton); Beachwood, Ohio; Westlake, Ohio; Dublin, Ohio; Cincinnati, Ohio; and, Chesterfield, Missouri (St. Louis).

Monty received his Juris Doctorate from Washington University School of Law in St. Louis, Missouri, where he served on the Washington University Law Quarterly, Washington University's most prestigious law review. Monty has been admitted to practice in Ohio, Illinois and Missouri, and currently practices in Ohio and Missouri. He is a member of several local and state bar associations.

Monty graduated from Tallmadge High School in Summit County, Ohio. He received his B.A. in political science from Eastern Illinois University, where he attended on a full academic scholarship. Monty was an intercollegiate debater, and received numerous individual and team awards, including placing second at "Novice Nationals," a national tournament for freshmen debaters, and qualifying three times for the National Debate Tournament. While at Eastern Illinois, Monty was an award winner in the annual social sciences writing competition, and received a coveted appointment to the Student Legal Services Board after serving as a student legal intern.

Monty is a member of the National Academy of Elder Law Attorneys, Inc. (NAELA). He is also a member of the National Family Caregivers Association, and the National Care Planning Council.

You can learn more about Attorney Donohew, his practice, background, credentials and education at the Estate Planning Information Center, http://www.donohew.com/. You can follow his blog at http://estateplanningcenter.blogspot.com/.

Bankruptcies Hit Retirement Communities

The recession is hitting elderly people where they live, literally. Financial problems have been mounting at a number of assisted-living and continuing-care communities, forcing some facilities into bankruptcies and inflicting new worries on residents and their families who thought their life plans were comfortably set.

In recent weeks, Erickson Retirement Communities, which manages 19 continuing-care retirement communities in 11 states, declared bankruptcy. Sunrise Senior Living Inc. posted a quarterly loss of $82 million and announced plans to sell off 21 of its assisted-living communities. Nationally, smaller retirement communities are raising their prices, changing the way they operate, selling themselves off to bigger chains, or getting out of the business altogether. Many companies say they can't make a profit—or even succeed on a nonprofit basis—in an environment that combines the high cost of caring for elderly residents, restrictive Medicaid budgets, tight credit markets and fewer residents willing and able to pay top dollar for their care.

When a facility fails, it can have myriad effects on the residents. The good news is that no one gets kicked to the curb–at least not right away. "Nobody has ended up on the street, which is a primal fear when you're dealing with these places," says Jason Frank, an elder-law attorney in Baltimore. "But their fees can skyrocket, and they can become unaffordable. Then they can kick you out for nonpayment."

In some cases, residents may find that the sizeable deposits they made to get their apartments in the first place have disappeared. (Continuing-care communities like Erickson's typically charge deposits of $150,000 or more, and assure residents that they can stay on the campus for the rest of their lives regardless of how their needs change, and that the deposits will be refundable to themselves or their heirs when they leave or die. But residents typically also have to pay monthly fees for care, and those fees can continue to increase. Assisted-living facilities like Sunrise generally require no deposits but charge a monthly pay-as-you-go-plan.) That's what happened to the 170 people who lived in Covenant at South Hills in Lebanon, Pa. Their deposits went up in smoke when their facility was sold in bankruptcy to Concordia Lutheran Ministries, which did not take on that liability. Several are now suing B'nai Brith Housing, the original operator of Covenant.

Nortwestern Mutual Launches Long Term Care Calculator

With Americans living longer than ever before, having a long term perspective for individual care needs is critical.  Northwestern Mutual has launched a new Long Term Care Cost Calculator to help people better understand the financial impact of those needs.

The calculator builds on Northwestern Mutual's Cost of Care research, released earlier this year, which surveyed nearly 7,000 home health care providers, assisted living facilities and nursing homes across the U.S. and revealed stark differences in costs for long term care services in geographic locations across the country.

"It is clear that most people simply can't afford to pay for long term care by drawing on their retirement nest eggs," says Terence Holahan, Northwestern Mutual. "Planning for long term care is about protecting both your assets and your lifestyle when you are unable to care for yourself; this new calculator helps educate consumers about the potential cost of a long term care event and how it can vary by age, location and length of time the care is needed."

Happy 18th Birthday! You'll Never Guess What I'm Getting You!

What are you planning to give the teenager in your family when he or she becomes an adult? A car, money for an apartment, a trip to Europe? Those are all fine gifts, depending on what you can afford to spend. But here’s one you may not have thought of, and the benefits could be far greater. Bring your new adult (child or grandchild) to our office, introduce us and have us prepare a basic estate planning package of documents: a simple trust or will, a durable power of attorney, a medical power of attorney, a HIPAA Release and a living will.

Actually, it’s a gift for the entire family, because once the child reaches legal age, parents will no longer be able to automatically make medical and legal decisions for him or her without the appropriate legal documents authorizing them to do so. If an adult child becomes ill or injured and cannot handle his own financial affairs, no one, not even Mom or Dad, will be able to step in and conduct business (sign checks, sell assets, etc.) unless he has a trust or a durable power of attorney and has named them as his successor or agent. If he hasn’t, they will have to go through the courts.... and that will take time, cost money, and restrict them in ways you cannot imagine.

If an adult child cannot make his own medical decisions, it will be much easier for Mom, Dad or another adult to make decisions if he has a medical power of attorney that names them as his agent. And what if he is placed on life support before they can get to the hospital? Unless he has made his wishes known through a legal document, they may not be able to have life support discontinued without court approval.
Finally, if your new adult should die without a will, the court will distribute his assets according o the laws of the state in which he lived . . . regardless of what the family or he would have wanted.

Make sure your new adult understands these documents will need to be changed as life changes-as s/he accumulates more assets, and as s/he and those s/he cares about move, marry, have children, divorce, die and so on.

Helping your children or grandchildren get started with this adult responsibility at the moment when he or she becomes an adult is just one more responsibility we as parents and grandparents have. It fits right in there with how to balance a checkbook, how to manage credit, and how to buy insurance.

Chances are, it will be a long time before any of these documents will be needed, but you’ll be sending your new adult out of the newest with a full layer of protection... just in case.

Court Imposes $6.3 Million Civil Penalty on "Trust Mill" Companies and Owners

The Supreme Court of Ohio recently imposed a civil penalty of $6,387,990 against two companies and their co-owners for engaging in the unauthorized practice of law, and issued an injunction permanently barring those companies, their principals and employees from any future marketing or sale of living trusts or other estate planning documents or services to Ohio residents.


In a 7-0  decision, the Court found that American Family Prepaid Legal Corporation and Heritage Marketing and Insurance Services Inc., their co-owners, Jeffrey and Stanley Norman, and multiple employees of those firms engaged in more than 3,800 acts of unauthorized law practice by virtue of their participation in a “trust mill” operation from March 2003 through March 2005.


The Court noted that American Family, Heritage, the Normans, and employees of the two companies had been the subject of a prior unauthorized practice of law complaint and investigation by the Columbus Bar Association (CBA) in 2002 that was resolved by the signing of a March 2003 consent agreement. In that agreement, the respondents acknowledged that providing estate planning advice and marketing and preparing trust agreements and other estate planning documents constitutes the practice of law, and promised to permanently cease and desist from such activities in Ohio.

The Court agreed with findings by its Board on the Unauthorized Practice of Law that, after signing the 2003 decree, American Family, Heritage and their owners used third-party marketing firms to send direct mail ads to lists of Ohioans 65 and older and also targeted senior citizens with magazine advertising containing exaggerated claims regarding the costs and complications of disposing of their assets through a will. Persons responding to the ads were subjected to high-pressure in-home presentations in which American Family’s non-attorney sales representatives provided them with legal advice including inflated “estimates” of the costs of probating their estates and the purported savings the customer would realize by purchasing American Family’s standardized living trust document – regardless of the size or composition of that individual’s estate or his/her existing estate planning documents.

In rejecting American Family’s claim that its actions were authorized because it had registered as the operator of a “prepaid legal services plan,” the Court wrote: “In arranging these appointments, American Family telemarketers did not refer to a prepaid legal plan and did not inform the customer that he or she would be solicited to buy a prepaid legal plan or living trust. The telemarketers did ask, however, whether the prospect already had a living trust. In sales presentations, usually occurring in a customer’s home, American Family’s agents focused on convincing a customer that he or she needed a living trust. If sold, the customer paid a $1,995 fee purportedly for an array of legal services relative to landlord/tenant law, businesses, domestic relations, bankruptcy, and other legal fields, at discounted fees, from a number of listed Ohio attorneys. Almost exclusively, however, the only legal service that the plan members received was the preparation of a living-trust document and related estate-planning instruments such as powers of attorney and a living will. For this reason, for the thousands of memberships sold, few if any members obtained legal assistance other than a living-trust portfolio.”

The Court noted that despite the fact that American Family used sales persons who had never been licensed as attorneys to “advise” customers about their estate planning needs and persuade them to purchase a trust, and that other non-attorneys in California actually prepared the trust documents, the company attempted to legitimize its unauthorized law practice by passing each transaction through a Columbus attorney, Edward P. Brueggeman. Brueggeman seldom spoke with the customers who were purported to be his “clients,” and was paid a flat fee by American Family for every trust document he approved.

In its decision, the Court wrote: “From the start of his employment until March 2005, Brueggeman had an office within American Family/Heritage offices on Citygate Drive in Columbus.  Brueggeman did not pay rent and used the supplies and services provided by American Family and Heritage employees to perform his role. Brueggeman did not hire or supervise the American Family sales agents. Brueggeman, after receiving the agreement, sent a form letter to the purchasers of the plans thanking them for choosing him to prepare their living trusts and their estate-planning documents. The letter also stated that the drafting process would take four to six weeks and invited the customer to call him with questions. … Brueggeman rarely, if ever, actually met an American Family plan member in person.” A formal complaint alleging that Brueggeman’s conduct violated state attorney discipline rules is currently pending before the Board Of Commissioners on Grievances & Discipline (Disciplinary Counsel v. Brueggeman, Case No. 08-090).

The Court noted that the “trust mill” operated by American Family, Heritage and the Normans was similar to other such operations that the Court has found to be illegally engaged in the unauthorized practice of law at the expense of vulnerable consumers, usually senior citizens. The Court wrote: “A living-trust package is often not needed and may even be harmful for persons who are without significant assets, who have simple estates, or whose estates may need court supervision. A basic living-trust package, such as those sold by some of the respondents, may likewise be insufficient or even completely inappropriate for those having more substantial assets and who may need specific legal advice or even tax advice to meet their needs. For this reason, we have repeatedly held that these enterprises, in which the laypersons associate with licensed practitioners in various minimally distinguishable ways as a means to superficially legitimize sales of living-trust packages, are engaged in the unauthorized practice of law. We have also repeatedly held that by facilitating such sales, licensed lawyers violate professional standards of competence and ethics, including the prohibition against aiding others in the unauthorized practice of law. Today, we reaffirm these holdings and admonish those tempted to profit by such schemes that these enterprises are unacceptable in any configuration.”

In imposing a civil penalty of $6,387,990 jointly and severally against American Family, Heritage and their co-owners, the Court noted the aggravating factors that the respondents had been advised of  and acknowledged the illegality of their involvement in the marketing and sale of trusts in the 2003 CBA consent agreement, but shortly thereafter resumed the same activities and engaged in thousands of acts of unauthorized practice that resulted in potential or actual harm to many of their customers for a period of two years. The Court also imposed civil penalties of $10,000 against American Family’s state marketing director, Paul Chiles, $7,500 against office manager Harold Miller, and $2,500 against multiple American Family and Heritage agents who continued to engage in the unauthorized practice of law after signing the 2003 consent agreement.

In its injunction, the Court permanently barred American Family, Heritage, Jeffrey and Stanley Norman, other named parties and “their successors, assigns, subsidiaries and affiliates” from marketing, selling or preparing wills, living trusts, durable powers of attorney, deed transfers or other legal products in Ohio; offering legal advice to anyone concerning estate planning or the execution of legal products; offering or selling prepaid legal plans of any kind to Ohio residents; and from engaging in a wide range of other enumerated activities.

I have had the opportunity to review the estate plans generated by American Family.  With a "one-size-fits-all" mentality, all of the trusts are virtually identical, with clients running the risk that the particularly cumbersome and sophisticated estate tax planning trust, create for them and their families unnecessary burden.  Of course, this is the essence of the attorney-client relationship.  Your attorney should represent you, and should not represent other persons whose interests are in direct conflict with your interests.  Only by having an attorney that is independent from others, and by that attorney discharging aggressively his or her obligation to provide for you specific advice and counsel based upon your specific circumstances, goals, and objectives, will your estate plan fit you.

Payments for In-home Care of Elderly Escape Tax and Information Reporting

The IRS has privately ruled that payments by a state agency to help the elderly live at home as an alternative to care in a nursing home are tax-free even though they were made to the caregivers. Because they were tax-free, no information reporting of the payments was required.

In the case, the State agency making the payments was established to advise, assist, and serve the State's growing elderly population, and to create an environment that provides choices, promotes independence, health, and well-being, and enables elderly individuals to remain in their communities and avoid nursing home placement through its various programs.

The specific legislative purpose of the Program was to encourage low-income elders to be cared for in family-type living arrangements as an alternative to nursing homes or other institutional care settings. To be eligible to participate in the Program, the elderly individual must:

1. be at least 60 years old;
2. have income not exceeding Medicaid limits for institutional care;
3. be at risk for nursing home placement, which is measured by the total number of Activities of Daily Living (personal care tasks such as bathing and eating) and Instrumental Activities of Daily Living (normal, everyday tasks performed by an independent individual such as meal preparation and shopping) that the elderly individual requires help to accomplish; and
4. live with an adult caregiver who is present in the home and able to provide supervision and care for the elderly individual.

Only those elders who receive a high-risk evaluation in terms of risk of institutional placement are eligible for participation.

Currently, elders participating in the Program on average require assistance on more than 4 of the 6 Activities of Daily Living and almost all of the 8 Instrumental Activities of Daily Living. More than half of the elders participating in the Program have dementia. Commercial caregivers are not eligible to participate in the Program.

The Program provides for two types of subsidy payments, basic and special, to offset, in part, the costs of support and maintenance for elderly individuals living in the home of a capable adult caregiver, usually a spouse or other relative. The basic subsidy is a monthly payment to the caregiver to defray, in part, the basic living needs of the elderly individual, such as food, clothing, housing, medical needs, and other incidentals (not covered by Medicare, Medicaid, or other insurance). Special subsidy payments are made for additional goods and services that the case manager determines are necessary to maintain the health and well-being of the elderly person. Special subsidy payments can be made for items such as chore services, counseling, home-delivered meals, education and training for the caregiver, housing adaptations, medical therapeutic services, medical transportation, respite care, medical supplies and equipment (such as medication and wheelchairs).

The basic and special subsidies promote the health and well-being of elderly individuals by partially reimbursing the caregivers for some of the monthly living expenses of the elderly individuals, and are not a payment for caring for the elderly individuals or for any other services. Because of this subsidization of their home living costs, many elderly individuals are able to postpone nursing home care for longer periods than would otherwise be the case, or avoid institutional care altogether.

The State Department administers the Program through State's agency system for the aging, which consists of two systems. The first system (including the Taxpayer) consists of agencies that within a geographic area monitor service providers, write subsidy checks, and serve as the final appeal for client/applicant grievances. The other system consists of local agencies or community service providers that determine client eligibility and eligible subsidy amount, provide care planning and case management, annually reassess on-going eligibility, enter data to generate monthly payments, prepare reports, and maintain documentation.

Under the general welfare exclusion, payments to individuals by the government under legislatively provided social benefit programs for the promotion of the general welfare are not included in a recipient's gross income. The payments must (1) be made from a governmental fund, (2) be for the promotion of the general welfare (i.e., generally based on individual or family needs), and (3) not represent compensation for services. (See, e.g., Rev Rul 2003-12, 2003-1 CB 283 ).

Code Sec. 6041(a) provides generally that all persons engaged in a trade or business that pay another person $600 or more in any tax year of fixed or determinable income in the course of that trade or business must file an information return setting forth the amount of the payment and the recipient of the payment.

The recent ruling observes that the Taxpayer makes payments under the Program to defray a part of the costs necessary to maintain the health of frail, elderly individuals who need daily care. These payments are made from a governmental fund pursuant to a state statute, are based on economic need and health status of the elderly individuals, and are not for services rendered by the caregivers or the elderly individuals. Because the payments are intended to reimburse the caregivers' expenses of promoting the health and well-being of the elderly individuals, the interposition of the caregivers as the recipients does not bar application of the general welfare exclusion. Accordingly, the basic and special subsidy payments Taxpayer makes for the benefit of the elderly individuals under the Program are not includible in the incomes of the elderly individuals or their home caregivers. Thus, the Taxpayer is not required to file information returns for these payments for either the elderly individuals or their home caregivers.

Information is also available at the Estate Planning Information Center, from this office, or your local elder law attorney, local area agencies on aging or local county departments of job and family services.