Retain an Attorney or Accountant to Seek and Obtain a Taxpayer Identification Number for a Trust

Seemingly simple decisions can cause unexpected difficulty administering an estate. Among these is the decision whether to utilize an attorney or accountant to  file for and obtain a taxpayer identification number (TIN) for a trust.  

Most revocable trusts change their tax and legal status upon the death of the last surviving grantor. Sometimes called a settlor, the grantor is the person that generally creates and contributes property to a trust that benefits the grantor during his or her life.  During the life of the grantor, particularly if the trust is revocable, the trust is considered a “grantor” trust under the Internal Revenue Code.  The significance of being classified as a grantor trust is that the trust does not have a separate tax existence; the grantor is not required to obtain a separate Taxpayer or Employer Identification Number (TIN or EIN), and the trust is not required to file a separate tax return.  The grantor affixes his or her social security number to assets requiring a TIN for the trust, and files only a personal income tax return.

Upon the death of the grantor, however, the IRS requires that the trust, which is now irrevocable, utilize a different TIN.  Simply, a trust cannot use the social security of a dead person.  If the trust has taxable income, the trust may also be required file a separate income tax return.  Thus, a successor trustee will typically file for and obtain a new TIN for the trust shortly after the death of the grantor. This application process is relatively simple, and common for attorneys and accountants familiar with trusts, the grantor trust rules in the Internal Revenue Code, and the distinctions between the the original revocable trust and the resulting irrevocable trust.  

Because the proper name and characterization of the trust on titles and accounts is important, attorneys will usually prepare for the successor trustee a Certificate or Memorandum of Trust, which permits financial institutions to properly title assets, and follow the instructions of the successor trustee.  These documents often identify the correct TIN. Filing for and obtaining the TIN, and preparing the Certificate or Memorandum of Trust is usually completed the same day, or within a few days of completion of the necessary forms, for a nominal fee: easy breezy nice and easy.

Increasingly, however, successor trustees are either filing for the TIN themselves, or relying upon professionals with neither accounting nor legal expertise to request and obtain the TIN.  The results can range from frustrating to devastating to the estate plan.

Consider the following examples of mistakes attorneys increasingly observe:

• The successor trustee goes to the bank in order to access the bank account.  The helpful teller advises the trustee of the need to obtain the TIN, and “assists” the successor trustee in applying online for the TIN.  The account is closed, and a new account is opened with the new TIN, and the trustee is given a piece of paper showing the TIN, and sent on his or her way.  The successor trustee goes to the next bank, broker, or financial advisor holding or managing trust accounts.  Confident that everything will go smoothly, the trustee presents the death certificate and the TIN to the institution with a polite request to liquidate the account.  The institution refuses, advising that they do not have everything needed.   The institution is unclear what the title of the trust is or should be, and what authority the successor trustee has regarding the account.  After several attempts the successor trustee is forced to contract an attorney to prepare documents that could have been prepared initially, which would have prevented the delay and frustration.

• The attorney in the foregoing example reviews the paperwork provided by the teller and realizes that the application is completed incorrectly, and that as a result the IRS will likely request the filing of Form 1041 trust income tax returns from the date of the creation of the trust through the present tax year.  In a “pay me now or pay me later,” series of alternatives, the attorney offers to correct the improperly completed application.

• The attorney in the foregoing example reviews the paperwork, but cannot determine whether the application for the TIN was properly prepared.  The teller prepared the application online, but did not print out a hard copy of the application. Concerned that improper preparation of the application will result in expense or loss to the trust, for which the trustee or heirs may seek to hold the attorney responsible, the attorney either (1) refuses to utilize the TIN and recommends abandonment of the TIN, charging the client for preparation of a new application, and paperwork abandoning the prior TIN, or (2) the attorney requires the trustee to sign an acknowledgment that use of the TIN may cause loss or expense, which releases and indemnifies  the attorney from loss resulting from continued use of of the TIN.

• The teller in the previous example identifies the grantor of the trust, now deceased, as the responsible party, since the grantor created the trust.  IRS correspondence is directed to the deceased grantor at the grantor’s last residence.  Because the property is promptly sold, the successor trustee is not advised that a Form 1041 income tax return must be filed. When the successor trustee learns that a return should have been filed, the trustee is forced to pay the tax liability, and resulting penalty and interest, from his personal assets since the trust assets were distributed. 

• An agent assisting a successor trustee in filling out a beneficiary claim form, assists the trustee in obtaining online a TIN, and opening a a money market account to hold the funds.  The successor trustee is the only beneficiary of the trust, and the recipient of various means-tested government benefits.  Although the trust was drafted to protect the assets for the benefit of the beneficiary, under state law, the protection is only effective if the beneficiary is not also the trustee.  Absent the important legal advice and direction to resign as trustee prior to filing the claim form he negotiates the account.  The trustee later learns that the claim of funds constituted income in the month that the claim was paid, thereby disqualifying the beneficiary from a host of government benefits, including free health care.  

• A successor trustee completes the application to obtain a TIN for the trust online, and proceeds to administer the trust estate.  The IRS sends letters demanding Form 1041 income tax returns for fourteen tax years.  The letters, unfortunately, are sent to the deceased grantor’s home, pursuant to the application, which home was promptly sold by the successor trustee.  The successor trustee is later contacted by a revenue agent.  With the assets of the trust long distributed, the trustee pays from her own funds an attorney and accountant to resolve the matter. 

• A family friend helps the successor trustee obtain a TIN, but writes down the TIN incorrectly.  Neither the friend nor the trustee realize the error.  The IRS contacts the taxpayer when a return is filed using the incorrect TIN.  An accountant is retained to investigate and resolve the problem.

Each of the foregoing represent actual cases. The application for a TIN may seem simple, but the terms used in the application, and the precise information requested can be confusing.  The fact that the application can be  prepared online may cause some to believe that the application is either very easy to complete, or that proper completion is unimportant.  Neither assumption is correct. 

Well-meaning professionals, such as tellers, bankers, insurance agents, brokers, and financial planners, and helpful friends may assume that they are are in safe waters completing the form for a customer or friend.  IRS rules require that third parties that complete the application identify themselves, and abide by record-keeping requirements, which rules the well-intentioned often fail to observe.  Failure to observe these rules may make impossible immediate solutions to online technical glitches or typograghical errors, thereby delaying adminstration of the estate.  Perhaps the ultimate tragic irony to the immediacy offered by the online application process is that failure to follow the third party disclosure, record preparation and record keeping rules may mean that a good TIN takes longer to obtain online than if it had been applied for by traditional mail.

Professionals should also be aware that there may be liability for applications prepared improperly, and that the professional insurance may or may not cover any loss.  Non-lawyers and non-accountants are properly cautioned that the completion of the forms, and the accompanying advice, may constitute the unauthorized practice of law, or exceed the scope of the professional's licensing.

Simply, retain an attorney or accountant to seek and obtain the TIN.

Study Concludes that Advanced Directives are Associated with Peaceful Death

                                The 7th Annual NHDD is April 16th, 2014

Dying nursing home residents who have dementia display significantly less fear and anxiety if they have a written advance directive in place, according to recently published research findings.

Investigators analyzed responses from 69 Belgian nursing homes, focusing on the roughly 200 residents who had dementia at their time of death. The researchers found that those residents who had completed a written advance directive were three times more likely to have experienced less fear and anxiety in their last days, the researchers determined. They reached this conclusion based on input from residents' family members, which used the Comfort Assessment in Dying with Dementia scale.

Having a do-not-resuscitate order, in particular, related to a calmer process of dying, the researchers found. The existence of written orders from a doctor or other health care professional, did not have any association with this aspect of the dying process. Neither did verbal communication between nurses and the patient and/or relatives.  In other words, a patient's written instructions are associated with a more peaceful passing but verbal instructions from patient are not, and written or verbal instructions from health care workers are not.  The study found "no association between the quality of dying as judged by the relative and verbal communication such as the resident expressing their wishes to the nurse or the nurse speaking with the resident concerning medical treatments at the end of life or the desired direction of care."

The study concludes:

For nursing home residents with dementia there is a strong association between having a written advance directive and quality of dying. Where wishes are written, relatives report lower levels of emotional distress at the end of life. These results underpin the importance of advance care planning for people with dementia and beginning this process as early as possible.

The study was not designed to determine why advance directives had a positive emotional effect for the dying residents, but the researchers offered some possible explanations. One is that relatives, assured that their loved one was receiving preferred types of care, projected a greater sense of calmness onto the resident. Another is that completing an advance directive triggers a psychological process that helps the resident die in peace.

Given that only 17.5% of the residents in this study had a written advanced directive, the authors of the study concluded that their findings suggest that advanced directives should be more common and that the process of advance care planning should begin “as early as possible” for people with dementia.

National Health Care Decisions Day is April 16th.

Source: Tim Mullaney, "Chances of peaceful death are three times higher for dementia residents with an advance directive, study finds," McNight's Long Term Care News.

Facebook Changes Memorialized Accounts to Give Users Greater Control

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on February 26, 2014 at HDWalling
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Facebook recently announced changes that will give its users more control over Facebook accounts after death.  Facebook will discontinue its practice of restricting access to the account by altering the privacy settings of a memorialized account. In the announcement, members of Facebook’s Community Operations team explained:

Up to now, when a person’s account was memorialized, we restricted its visibility to friends-only. This meant that people could no longer see the account or any of its content unless they were Facebook friends with the person who passed away. Starting today, we will maintain the visibility of a person’s content as-is. This will allow people to see memorialized profiles in a manner consistent with the deceased person’s expectations of privacy. We are respecting the choices a person made in life while giving their extended community of family and friends ongoing visibility to the same content they could always see.

Facebook is also now permitting anyone who has suffered the loss of a loved one to access that person’s “Look Back” video. In recognition of Facebook's ten-year anniversary, Facebook created personal movies for people using posts and photos shared over the years. Facebook now offers this video on all memorialized accounts to the  friends of the deceased user. 

Facebook explained the genesis of these changes:

For one man in Missouri, the Look Back video he was most desperate to watch was one that had not yet been made. John Berlin reached out to ask if it was possible for Facebook to create a video for his son, Jesse, who passed away in 2012. We had not initially made the videos for memorialized accounts, but John’s request touched the hearts of everyone who heard it, including ours. Since then, many others have asked us to share the Look Back videos of their loved ones, too, and we’re now glad to be able to fulfill those requests.

Loved ones can now request the video using an online application.  The video is not, however, transferable, and the link to the video apparently cannot be shared.  Regardless, the video may provide loved ones of deceased Facebook account holders comforting access to the departed user's photos, pictures, and timeline posts.

Evan Carroll, writing for The Digital Beyond, welcomed the changes. Noting that the most recent is Facebook’s second major announcement about how accounts are handled after death, he concluded:

...it is their first step to allow users control over the process.  [t]ogether these announcements indicate a trend towards greater control of the process by users.  At the Digital Beyond, we advocate primarily for individuals to have control of what happens to their digital assets following death, and in the absence of instructions, for access to be granted to an executor with a fiduciary responsibility to make decisions in the best interest of the deceased. We believe Facebook’s announcement, while limited in scope, is in-line with our stance and is a step in the right direction, therefore we applaud their efforts.

In a subsequent article, Mr. Carroll predicted future changes coming from Facebook.  To read his predictions, click here.

The Impotent Power of Attorney

The General Durable Power of Attorney (GDPOA) has a mixed reputation, judging by articles in financial magazines and newspapers. Some tout it as a powerful tool, whose broad and sweeping grant of authority to another can well serve the maker.  Others warn of its misuse by others in facilitating financial fraud.  The public is left twisted and confused. Moreover, planners and drafters often reflect, sometimes intentionally, this schizophrenic view of the document, and its attendant risks, and draft either "watered-down" documents or "springing" powers designed to capture the "best of both worlds."  Unfortunately, we know intuitively that the "best of both worlds" approach often leaves much to be desired; aren't we taught that a house divided cannot stand? 

For most estate plans, the GDPOA is employed to permit a surrogate to make decisions during a time that the principal is unavailable, incapacitated, or incompetent.  As such, the grant of authority should generally be broad and comprehensive.  Limiting the grant of authority only means that the authority of the attorney-in-fact is limited, and, therefore is his or her ability to solve problems or complete necessary tasks.  Because one never knows what decisions will be needed at some future date, limiting the attorney-in-fact means limiting the available solutions, options, and opportunities. 

Generally, then, "springing,"  "contingent," or "limited" powers should be avoided in broadly defined estate planning.  Financial institutions have a variety of incentives to reject, for their own reasons and purposes, an otherwise enforceable GDPOA.  Forcing a financial institution to "jump through hoops," in order to verify the occurrence of conditions, contingencies, or circumstances, before accepting a GDPOA only increases the likelihood that the attorney-in-fact will be thwarted. 

Springing, contingent, or limited powers make sense in specific situations and should be so tailored to fit the situation presented.  For example, an elderly homeowner desiring to grant a local grandchild authority to sell a home while the homeowner vacates with his children warrants a limited power of attorney.  An elderly business owner desiring to grant authority to vote his shares of stock in any emergency meeting called for specific purposes, such as to cause the the sale of assets, warrants a springing GDPOA.  Conditioning a GDPOA upon "unavailability," "illness," "dementia," "incapacity," ""incompetency" or any marital circumstance (separation, dissolution, or divorce) may be tantamount to no grant of authority at all.

For those with estate plans employing a revocable trust, it is important to remember that the attorney-in-fact, the person who you appoint by your GDPOA, is not necessarily your Trustee, and the authority of an attorney-in-fact is limited regarding trust assets.  In other words, an attorney-in-fact cannot, using your GDPOA, legally direct trust assets.  An attorney-in-fact will typically have the authority, if such authority is included in the GDPOA, to transfer or convey assets to the trust.  Moreover, the attorney-in-fact may have the authority to amend the revocable trust, so long as that authority is included in both the GDPOA and the trust.  In many cases, this power to amend is limited to administrative provisions of the trust and does not permit amendment to the distribution provisions of the trust. 

For those who have a revocable trust, the common question is, "why do I needa GDPOA?" There are several important objectives served by the GDPOA in an estate plan  governed by a revocable trust:

• The attorney-in-fact can convey property and assets to the trust in the event that the trustee becomes incapacitated or incompetent;

• The attorney-in-fact can manage or direct insurance policies, annuities, retirement plans, and accounts that are left out of the ownership or control of the trust;

• The attorney-in-fact can communicate with third parties, and manage debts of the estate, such as credit cards, mortgages, and utilities; and

• The attorney-in-fact can communicate with government agencies, such as the social security administration, internal revenue service, and the united states postal service. 

A GDPOA is, undoubtedly, an indispensable legal document in a comprehensive estate plan. Sadly, many people do not have one, and most of those that do have one, rely upon a document that does not contain powers and provisions that are absolutely essential in the modern world of estate planning.

Properly drafted powers of attorney should include a broad grant of authority to the attorney-in-fact.  But there are some specific "powers" that are best made specifically, and best included in almost every GDPOA. The first of these is the power to make gifts.  Tax considerations for gifts generally do not discourage gifting; there is a five-million-dollar exemption for all lifetime gifts before a gift tax is levied.  There is, nonetheless, an annual gift tax filing exemption for gifts in the amount of $14,000.00 to any one person.  Such gifts do not need to be reported. Keep in mind, that you are also permitted to make unlimited gifts for medical expenses so long as the payments are made directly to the medical care provider, as well as unlimited gifts for educational expenses so long as the payments are made directly to the educational institution.

In the event of your incapacity, however, the person holding your Durable Power of Attorney cannot legally make the tax-free gifts unless they specifically have the power to make those gifts. Moreover, the IRS does not consider a gift made under a Durable Power of Attorney that does not specifically mention the power to make gifts to be tax-free.  A general power to do “anything that I can do myself” or words to that effect is not specific enough, at least in the eyes of the IRS. You might believe that this is not an important power because you don’t commonly make gifts to your family, but this power may be more important than you think.

Consider a situation where you need long-term care and don’t have enough money to support yourself for the rest of your life. Or you might find yourself in a situation where your long-term care costs may financially ruin your family, leaving your spouse or other loved ones destitute. In this situation, the person holding your Durable Power of Attorney may need to transfer assets out of your name so that you can qualify for Medicaid, or for the veterans' benefit Aid and Attendance.  Here the power to make a transfer in the form of a gift is vitally important.

The second power is to establish and fund trusts. In a situation where you are incompetent but you need the person holding the Durable Power of Attorney to qualify you for Medicaid as I described in the last paragraph, not only must the holder of your Durable Power of Attorney need to have the ability to make transfers of your assets, but they also may need the power to create and fund trusts. Trust planning may be integral to qualifying for long-term care benefits – or minimizing taxes. Unless the Durable Power of Attorney specifically includes such powers, chances are the governmental agencies dealing with the issues will not consider it to be sufficient for the holder of your Durable Power of Attorney to create and fund your plan legally.

The third power concerns the authority to direct retirement plan assets, including, but not limited to the authority to withdraw funds from a retirement plan or IRA, to alter automatic payments, and the authority to control the minimum required distribution.   When you attain the age of 70½, the IRS mandates that you withdraw a minimum distribution from your account annually.  You may already have the minimum distribution automatically deposited into your checking account. But if there is a medical or other emergency requiring greater access to the IRA account, your Durable Power of Attorney should the power holder the ability to withdraw funds from the account, or to change your minimum required distribution.

The fourth power that might be important for your Durable Power of Attorney regards third parties.  The GDPOA should include not only provisions for your own financial and medical care and support, but provisions to authorize distributions to others, particularly if you are responsible for the financial or medical care or support of another.  A common example is when you might be financially supporting an aging parent or another relative. If you should fall ill, the person holding your Durable Power of Attorney should be expressly authorized to use your financial accounts to continue to support those that you have always supported and who may need your support.

Finally, although not a "power," the GDPOA should contain provisions encouraging third parties to accept the GDPOA when presented.  These provisions include a release of liability for third parties accepting the power of attorney, and a provision permitting the copy of the document to serve as an original.  GDPOAs are routinely rejected by financial institutions, one of the many reasons supporting use of a lifetime trust, and the document should be drafted and executed to minimize this risk.

A GDPOA does present a risk of misuse, and particularly in an estate plan where the existence of a trust does not naturally limit the attorney-in-fact, the possible damage from misuse can be substantial.  There are, of course, steps one should follow to minimize the risk. First, and foremost, only appoint someone with whom you have the utmost trust and confidence. Second, review the appointment frequently for changes in circumstances that might suggest a lack of trustworthiness or competence.  Third, appoint another fiduciary, such as a trustee of a trust, that can review the decisions of the attorney-in-fact.  Fourth, keep the GDPOA  in safe-keeping until it is needed, thereby minimizing the temptation and opportunity for misuse.        

The bottom line is that you should consider your Durable Power of Attorney an important document necessary to fulfilling the objectives of your estate plan. You simply should not accept an impotent document, unable to protect you or your estate when needed.  Read it carefully to ensure that it is drafted completely and correctly, and if not, consult an elder law attorney for revision.

Crummey Powers Targeted by 2015 Budget Proposal

President Obama's proposed budget for fiscal year 2015 includes several important tax changes, some  of which would, if adopted, impact many estate, financial, and business succession plans.  Most of the proposals that appear in each year’s budget proposal never make it into law, or even into the following year’s budget proposal.  It is worth noting the proposals, however, because they represent what the President would sign into law if unbridled by the legislative process,  and what might end up as potential bargaining chips in the legislative process.  

The latest budget proposal includes the elimination of Crummey powers in estate planning   under the misleading title, “Simplify Gift Tax Exclusion for Annual Gifts.” Crummey powers are currently drafted in a trust in order to allow a gift to the trust to qualify for the annual gift tax exclusion. By granting the beneficiary of the trust the right for a limited period of time to withdraw the gift, the Crummey powers give the beneficiary a “present interest” in the gifted property, allowing the gift to qualify for the annual exclusion.  Without the Crummey powers, the gifts would be considered incomplete or future gifts, meaning that the gifts would be taxable. Crummey powers are named for the Ninth Circuit decision in Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968), which approved and explained the use of this tool to satisfy the present interest requirement for gifts.

Currently individuals can gift up to $14,000 a year per donee without reporting the gift for gift  tax purposes.  Under current law, everyone can each transfer up to $5.34 million tax-free during life or at death without incurring a tax of up to 40% on the gifts. That figure is called the basic exclusion amount and is adjusted for inflation. In addition, widows and widowers may be able to add any unused exclusion of the spouse who died most recently to their own, thus permitting them together to transfer up to $10.68 million tax-free.

The annual gift tax exclusion, however, does not apply to gifts to a trust unless the donor gives the beneficiaries Crummey powers.  Crummey powers are central to many estate planning trusts.  Crummey powers are used by wealthy donors, for example, to create trusts for multiple beneficiaries and gift large amounts of money to the trust tax-free.  By drafting a trust with a large number of beneficiaries, some of which will never exercise their withdrawal power or ultimately receive a distribution from the trust, each additional donee means  more property can be transferred using the annual exclusion.

But, the technique is also used by not-so-wealthy individuals to protect life insurance benefits from taxation.  The planning technique is particularly effective and commonly used in irrevocable life insurance trusts that utilize annual exclusion gifts to fund large insurance premiums on the life of the grantor.  These trusts, while also common in wealthy estates, are also popular in more modest estates where the risk of estate taxes is particularly unacceptable, such as for family farmers, or family business owners.  These insurance trusts often provide taxpayers the best opportunity to leverage their annual exclusion, and can be a key part of ensuring necessary liquidity for an estate.

The new proposal would eliminate the present interest requirement and Crummey powers altogether. Instead, there would be a new category of transfers that would allow a donor to give an additional annual maximum of $50,000 within this category and qualify for the gift tax exclusion. The new category would include transfers in trust and transfers to other entities that normally do not qualify as a transfer of a present interest. This means, however, that if the donor gave more than $50,000, the gift would be taxable, even if the total gifts to individual donees did not exceed $14,000.  It also means that existing wealth transfer trusts, such as irrevocable life insurance trusts, that currently require or intend a total annual contribution or gift in excess of $50,000, would begin to eat into the current  lifetime exclusion. 

The proposal explains the administration’s justification for the change:

"The IRS’s concern has been that Crummey powers could be given to multiple discretionary beneficiaries, most of whom would never receive a distribution from the trust, and thereby inappropriately exclude from gift tax a large total amount of contributions to the trust. (For example, a power could be given to each beneficiary of a discretionary trust for the grantor’s descendants and friendly accommodation parties in the hope that the accommodation parties will not exercise their Crummey powers.)  The IRS has sought (unsuccessfully) to limit the number of available Crummey powers by requiring each powerholder to have some meaningful vested economic interest in the trust over which the power extends. See Estate of Cristofani v. Comm’r, 97 T.C. 74 (1991); Kohlsaat v. Comm’r, 73 TCM 2732 (1997).”

The IRS has attempted for some time to challenge the broad use of Crummey powers by arguing that each beneficiary must have a reasonable chance or expectation of receiving the property held in the Crummey trust.  The Tax Court has repeatedly rejected this argument, holding that the legal right to withdraw funds creates the present interest, thus upholding the right of taxpayers to employ such trusts. 

The Proposal also notes  the administrative costs to the taxpayers who utilize this planning technique and the costs to the IRS in enforcing the rule. Of course, by administrative costs to the taxpayer the  proposal means the legal and accounting fees taxpayers willingly pay in order to avoid what they consider to be an onerous additional tax on wealth transfer, wealth acquired only after paying taxes for an entire lifetime on income and realized gain, and the taxpayer expense in fighting the IRS as it has attempted to challenge otherwise court-approved Crummey powers.  By IRS costs in enforcing the rule, the proposal ostensibly includes the cost of the IRS’s protracted battle against taxpayers to limit Crummey powers, which would undoubtedly be saved.  

To read the Proposal, click here.