COVID-19 Pandemic Borrowing from Family at Ultra-low Rates Creates Estate Planning and Tax Challenges

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"Desperate small business owners seeking cash to keep their businesses alive during the coronavirus pandemic are turning to their families for loans," according to an article recently published in Forbes:

“People are risking their own money for their brother, sister, kids, grandkids,” says Rebecca MacGregor, an estate planning lawyer with Bowditch & Dewey in Boston, Massachusetts. She’s recently set up intra-family loans in the case of clients trying to hold onto a gas station, a third-generation Italian restaurant and a fifth-generation insurance agency. “No one is singing the praises of the family and friends who are saving these small businesses,” she says. “They’re unsung heroes.”

Familial loans with ultra-low interest rates are a lifeline.

It is hard to know how common familial generosity is, but an overwhelming 71% of retirees said they would offer financial support to their family needed due to Covid-19 even if it could jeopardize their own financial future, a recent retirement study by Edward Jones and AgeWave found.

The Internal Revenue Service announces special interest rates (applicable federal rates or AFRs) monthly, and for August, per IRS Revenue Ruling 2020-15, here’s how low they are:

• Short-term — Three years or less: 0.17%
• Mid-term — More than three years and less than nine years: 0.41%
• Long-term — More than nine years: 1.12%

Obviously, no borrow is going to find these rates at a bank.  They are incredibly low, but it is, in part, a reflection of the fact that the risk is incredibly high. That is, unfortunately, an important consideration in extending loans to family. 

According to the Forbes article, while many business owners received CARES Act paycheck protection program loans, they are now turning to family members. Families are lending money to keep businesses afloat in the hopes that once Covid-19 passes, customers will return, and the loans can be repaid.

If you are considering becoming a familial lender, it is vitally important to consider how much you are comfortable and able to lend.  You should, in fact, assume the worst, that your loan will become a gift, and hope for the best. You should consider carefully how much you have saved for your lifetime, and how comfortably you are living within your income.

An intra-family loan is a private loan, instead of a loan through a known bank lender, but if the amount of the loan exceeds $10,000, you should have the same type of documents as for a bank loan. These should be documented as real loans intended for repayment, and if there is available security,. such as inventory or real estate, the lender should be protected and secured.  Neither borrower nor lender will be happy if, in the worst case, assets are liquidated to pay creditors other than family because commercial lenders were protected, while the family lender was not. 

 You can make the loan payment an "interest only," or make it a traditional payment of interest and principle. You can structure the loan so the lender gifts part of the principle over time. So long as the gift stays under $15,000 per individual/$30,000 per married couple, there is no requirement to file a gift tax return. Regardless, if the gift exceeds that amount, there is typically no gift tax assessed; the lifetime gift tax exclusion is $11.58 million per person, so there is no gift tax due. If the gift is more than $15,000/$30,000, you are technically required to file a gift tax return and report use of a portion of your lifetime gift tax exclusion. 

Be careful of no-interest or too-low interest loans; they risk imputed interest income, and resulting penalties and interest from non-reporting. Imputed interest is the interest that a lender is presumed to have received and must report as income on their taxes regardless of whether they received it. It applies to family loans and other personal and business loans extended at no interest or an interest rate the IRS considers to be too low. For more information, go here and here. 

Finally, if you are considering any familial financial arrangement, it is important to discuss your desires with your estate planner.  Many trusts and some Wills have provisions that claw-back advancements, such as unrepaid loans or gifts made for a period prior to death, from shares of the estate directed to heirs.  In other words, these arrangements may merit or require changes to your estate plan.

Who Has The Right in Ohio to Bury or Cremate a Deceased?

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Authority to make decisions regarding disposition of bodily remains, funeral, cremation, and related goods and services is conferred to a person by one of two means.  The first is appointment by the deceased prior to death, and the second is by statute.  

Appointment of Representative 

Ohio law allows an individual during his or her lifetime to appoint a representative who will have the top priority when it comes to making funeral and disposition arrangements. If an individual appoints a representative in a document that meets the requirements of Ohio Revised Code § 2108.72, that representative has full authority, even over the contrary wishes of a spouse, or eldest child, to make funeral, cremation, and disposition arrangements.

If a declarant or deceased adult has made an anatomical gift under sections 2108.01 to 2108.29 of the Ohio Revised Code, any person given the right of disposition is bound by the anatomical gift and must follow the instructions associated with the gift before making any decisions or taking any other actions associated with the right.  See, Ohio Revised Code § 2108.78.

An appointment is valid only if made in a written document that meets the requirements of Ohio Revised Code 2108.72. Owners and employees of funeral homes, cemeteries and crematories may not be appointed as a representative unless they are related by blood or marriage to the individual making the appointment. 

Appointment of Representative forms are available free of charge at most funeral homes and crematories, and are available online here courtesy of the Franklin County Probate Court, and here, courtesy of the Funeral Consumers Alliance (FCA), a nonprofit organization that protects consumers' rights to choose meaningful, dignified, affordable funerals.  We encourage use of the forms available courtesy of Franklin County Probate Court, because they are "form fillable;"  you can type your personal information into the form and print it out for signature, before witnesses and/or a notary public.
   

Statutory Authority of a Representative

Section 2108.81 of the Revised Code, establishes the following order of priority of a representative to make disposition decisions:

(1)The representative appointed by the decedent to have the right of disposition.

(2)The decedent's surviving spouse.

(3)The decedent's surviving child or children.

(4)The decedent's surviving parent or parents.

(5)The decedent's surviving sibling or siblings.

(6)The decedent's surviving grandparent or grandparents.

(7)The lineal descendants of the decedent's grandparents as spelled out in Section 2105.06 of the Revised Code.

(8)The decedent's personal guardian at the time of death.

(9)Any person willing to assume the right of disposition, including the personal representative of the estate or the licensed funeral director with custody of the body, after attesting in writing and good faith that they could not locate any of the persons in the above priority list.

In the event that several individuals of the same class cannot agree on funeral or disposition arrangements, the law permits the majority to control. Additionally, if an individual cannot be located, the majority of those who are available will control. For example, if a widow dies with five adult children, two of whom want cremation, one of whom wants burial and two of whom cannot be located, the children who opted for cremation would prevail.

If there is not a majority present to resolve a dispute, any party, including the funeral director, may petition the probate court to decide the issue. The probate court is given five factors in the statute to consider when rendering a decision as to who will control the disposition.

Liability for the Cost of Disposition

Although a deceased's estate is liable for the cost of the funeral, cremation, burial, or other disposition goods and services, the person with authority, whether designated in writing or acting pursuant to the Ohio statute is also personally liable.  Section 2108.89 of the Ohio Revised Code provides that:  

The following persons shall be liable for the reasonable costs of any goods or services purchased in connection with the exercise of the right of disposition for a declarant or deceased person:

(A) A representative or successor who assumes liability for the cost of such goods and services by signing a written declaration that states that such an assumption is made;

(B) A person to whom the right of disposition is assigned pursuant to section 2108.81 of the Revised Code and who has purchased goods or services associated with an exercise of the right.

While the agent or representative of the deceased can make a preferred claim against the estate for reimbursement, and be paid before other creditors of the estate, the agent is, nonetheless, personally responsible. 
  

Loss of Right of Disposition 

In order to exercise the right of disposition, an individual must be 18 years or older and mentally competent. Persons who have been appointed as a representative or who hold the right of disposition because of their relationship with the decedent will lose that right in the following situations:

• The person dies or is declared mentally incompetent by the probate court;
• The person resigns or declines to exercise the right of disposition;
• The person refuses to exercise the right within two days after notification of the decedent's death;
• The person cannot be located with reasonable effort;
• The person is charged with the murder, aggravated murder or voluntary manslaughter of the decedent;
• The person is charged with an act of domestic violence and it is alleged that the violence resulted or contributed to the decedent's death;
• The person is the spouse of the decedent and a petition for divorce has been filed and has not been dismissed at the time of death, or;
• The person is the spouse of the decedent and the probate court determines that the decedent and the spouse were "estranged" at the time of death;
• The person is unwilling to accept responsibility for paying the funeral costs.

The last provision is not listed overtly in in the Ohio Revised Code Sections describing the conditions which cause a person forfeit the authority to make disposition decisions, but arises as a consequence of Ohio law making the agent personally responsible for costs and expenses.   A person who holds the right of disposition, but is unwilling or unable to pay the costs of the funeral and disposition, loses that right; funeral homes are not  required to take directions from relatives unless they are willing and able to pay for the funeral, burial, or cremation.  

Funeral Home Protection

Ohio law provides an extensive array of protections for funeral homes, cemeteries and crematories against lawsuits and claims by disgruntled family members. As long as employees of funeral homes, cemeteries or crematories are acting in good faith, they may rely upon statements made to them by persons claiming to have the right of disposition. Moreover, the statute provides immunity against lawsuits in the event that reliance was misplaced. For example, if a person misrepresents that they have the right of disposition, the funeral home will not be responsible for relying upon that misrepresentation unless it can be shown that the funeral director had reason to know that the misrepresentation was false.

Most funeral homes,  crematoriums, and cemeteries will require the person arranging the funeral to sign a "Claim of Authority to Carry Out Disposition" form which  tracks the wording of the Ohio statute.  This form constitutes a certification that the person is authorized to make decisions, and helps to demonstrate that the funeral home acted in good faith in relying upon claims made by family members.

The law also provides that a funeral director who is aware of a dispute regarding the right of disposition may refuse to accept the remains or to complete the funeral or disposition until the funeral director receives a court order or a written authorization from the person or persons who have the right of disposition. During a dispute, the statute authorizes the funeral director to embalm or refrigerate the remains in order to preserve them and to add those costs to the funeral bill. Moreover, if the funeral home must seek the intervention of the probate court, the funeral home may add its legal fees and court costs to the funeral bill.

For this reason and many others, every person adopting an estate plan should complete a form identifying the persons, in order of succession they desire to exercise disposition authority.  Failure to do so is an invitation to disputes, and the costs can be extreme for disputes and disagreements, in part because the estate will be responsible for the legal fees incurred by the funeral home, crematorium, or cemetary. 

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Who Can Sign A Tax Return for a Deceased Person?

As tax time approaches and passes, my clients often wonder why my office is so stressed, given that we prepare no tax returns on behalf of clients.  The answer is found in the myriad of questions that clients pose, sometimes at the request of a tax preparer, which arise because of a trust or other entity created as part of an estate plan.  These questions often arise from simple misunderstandings regarding the tax return, or serious inability to determine a proper course of action.  

Beginning this year, and for however many years that I am able, I am turning these confounding queries and quandaries into articles for future reference.  Every year seems to have one or two that dominate the time and effort we expend, usually without charge, in service to our clients' goals.  As you consider the following question and discussion, remember than most of our clients employ some form of trust in their estate plan, and settlement of the vast majority of these involve no probate, no involvement with the probate court, and of course, no purpose in seeking or obtaining appointment of an executor.  The general information that we provide indicates that the successor trustee should file the deceased's final tax return, and by implication, that s/he can sign the return.

Every season we are besieged by hysterical calls usually within weeks, days or hours of the filing deadline; "I was just advised that a trustee cannot sign the final tax return, and only and executor or administrator appointed by a probate court can file the return,  Help!"  Often, this is the first my office learns of the death of a client, which only adds to the "drama." Often, too, clients' successor trustees have already consulted with another lawyer, who has asked for an extravagant retainer to prosecute a hastily prepared probate to seek and obtain appointment of a fiduciary. Fortunately, there is no reason for hysteria or concern, and the answer is quite simple and satisfying.

So, who can sign a return for a deceased person? Such a common and simple question, which apparently elicits different responses from different people, some wrong or partially wrong, and more often than not, missing a more important question soon discovered. 

To begin, the answer to the direct question is rather simple; a surviving spouse, trustee, executor, guardian, custodian, administrator, or conservator can sign a return on behalf of a deceased person. An agent or attorney-in-fact under a power of attorney cannot technically sign the return; the powers are void on the death of the Principal. What if, however, the agent/attorney-in-fact has property or assets of the deceased? Then the agent is a custodian and can sign as a custodian.

The answer to that question begs another: who can negotiate a refund check?  The answer should be determined before a fiduciary actually has a check in hand.  Regardless, determination and resolution should not impede filing the return.  In other words, there is time to make a determination if there is a problem, and implement a solution if necessary.    

The material question isn't even whether there is a refund, but whether there will be a substantial refund. If there is any refund, technically, a probate has  to be opened to appoint a fiduciary (executor or administrator) empowered to negotiate the check, which will be made out to the deceased or the estate of the deceased.  Clients often ask, "Can I just deposit the check into the trust account?"  Legally, no.  Practically, maybe.  

Because I can't assure a client that a bank will negotiate a check made out to a deceased person or the estate of a deceased person, suggesting they may do so would be poor "practical" advice.  Legally, though, there is no real option.  The trust estate and probate estate are different estates, and they may have different beneficiaries, and fiduciaries. Legally treating one as another is dangerous and unwise.  Despite that banks do and have  permitted negotiation of such checks, an executor or administrator should be appointed to negotiate the check and distribute, legally, the proceeds. 

IRS uncertainty makes the matter even more difficult; if the return is signed on behalf of the deceased by someone other than the deceased, and the date of death is not disclosed or is overlooked by the Service, there is the possibility that the refund check will be drawn payable to the deceased, and not to the estate of the deceased.  This occurs, too, when a tax preparer (layperson or professional) is unsure whether or how to advise the Service that the return is a final return on behalf of a deceased.  A check drawn payable to the deceased is significantly more likely to be accepted by a bank on deposit into the deceased's irrevocable trust, than would a check made out to the "estate of" the deceased. I advise clients that a probate fiduciary should be appointed to negotiate the check.  

There is no answer to the question, what constitutes a "substantial refund." If the refund is too small, less than fifty dollars, for example, it may not make sense to appoint an executor/administrator given the cost. The court filing fee for a Summary Administration without a Will typically exceeds $80.00.  Obviously, the circumstances and the amount of the refund will dictate or inform the proper course of action.  

"But I only did the return to get the refund," is a common lament.  "Yes," I reply, that may be true, but you also prepared the final return because it is your duty to do so, and there is no way other than filing the return to know that you have accounted for all income, and paid all taxes that are due.  These are your legal responsibility.  In other words, had you called and asked, 'I am confident that the deceased doesn't owe any taxes, so I don't have to file a final return?' my reply would have been along the lines that the only real way to know, and more importantly, the only way to start a statute of limitations running if you are wrong, is to file the return."     

Bottom line? A successor trustee can and should sign the return.

The following is from the IRS in response to the question "who can file a decedent's return?"

The personal representative of an estate is an executor, administrator, or anyone else in charge of the decedent's property. The personal representative is responsible for filing any final individual income tax return(s) and the estate tax return of the decedent when due. You may need to file Form 56, Notice Concerning Fiduciary Relationship to notify the IRS of the existence of a fiduciary relationship. A fiduciary (trustee, executor, administrator, receiver or guardian) stands in the position of a taxpayer and acts as the taxpayer.

So when an advisor says a trustee cannot sign a return, they are probably saying that the trustee "shouldn't," sign the return under the circumstances, or advising that they may not be able to negotiate the check. Clearly, a fiduciary or other representative can sign a return on behalf of a deceased.

Trump Administration Initiative Helps States with More and Faster COVID-19 Testing in Nursing Homes

Nursing homes with three or more COVID-19 cases will be the first to receive on-site diagnostic test equipment from federal health agencies, starting in regions where infections are spiking.

The news was announced Wednesday by the Centers for Medicare & Medicaid Services (CMS), a day after Administrator Seema Verma revealed a new federal plan to deploy rapid point-of-care COVID-19 testing capabilities to eldercare facilities nationwide.

In this week’s rollout, federal agencies will prioritize about 2,000 facilities in hard-hit locations such as Florida, Arizona and Texas. Each approved facility will receive one diagnostic testing instrument and associated tests. Once equipment is distributed, operators can procure additional tests directly from the manufacturers, health officials told nursing homes in a conference call last week, according to McKnight's Long-term Care News.

According to a statement released by Verma, 

The goal is to support on-site infection control and prevention through universal testing. It gives nursing homes the ability to swiftly identify residents that need to be isolated and mitigate the spread of the virus. As one more tool in the toolbox, it represents an important step toward the long-awaited reunion of residents with their loved ones.

To take part, nursing homes must have the capability to test residents and staff on a weekly basis or in accordance with state and local health department guidance, according to the Department of Health and Human Services (DHS), which is helping to distribute the equipment. Visitor testing is also possible “if appropriate for that facility,” the agency added.

The equipment, including the Quidel Sofia and Sofia 2 instruments and BD Veritor Plus Systems, uses antigen tests that can quickly detect fragments of viral proteins in nasal cavity swab samples, providing results in minutes. 

While point-of-care tests may be “slightly more likely” to have a false negative result than laboratory tests, “these are the best, most cost-effective tests we have on the market right now,” said Adm. Brett Giroir, Assistant Secretary of the DHS during the Wednesday call.

“We think this is going to be a turning point in this fight against the coronavirus and keeping our residents safe,” CMS’s Verma concluded.

The new federal initiative was announced after months of lobbying for better testing access by the eldercare industry. Now some advocates have questions. Katie Smith Sloan, president and CEO of LeadingAge, has called for more information about staff training, access to ongoing test supplies, and test reliability for operators’ planning purposes. 

According to CMS, there are more than 200,000 confirmed or suspected cases of COVID-19 and more than 35,000 COVID-19 deaths among nursing home residents as of July 9, 2020. Additionally, the Centers for Disease Control and Prevention (CDC)  recommends that nursing homes perform baseline testing of all residents and staff, followed by regular screening and surveillance through routine testing to detect potential outbreak situations early and reduce morbidity and mortality.  

Trump Expected to Issue Executive Order Reducing Reliance on Foreign Prescription Drugs, PPE

 According to the The Senior Citizens League (TSCL) Weekly Update for Week Ending July 11, 2020,  White House Chief of Staff Mark Meadows announced that President Trump would soon be signing three executive orders regarding prescription drug prices.  While he did not provide any further information, the Washington Post published an article about the likely subject matter of at least one the orders.

It is anticipated that one of the orders will be to shift drug and medical production to this country by suddenly cutting off federal agencies from those offshore supply chains.  The order is expected to apply to government programs and agencies that directly purchase drugs and medical supplies, according to lobbyists and industry watchers. They may include the Department of Veterans Affairs, the Strategic National Stockpile, and the Federal Bureau of Prisons. 

The order would broaden existing federal requirements for government agencies to prioritize buying supplies for medicines deemed “essential” from U.S. manufacturers, rather than companies in China or elsewhere around the world. According to the Post, labs struggled to ramp up coronavirus testing, and hospitals and nursing homes ran short of personal protective equipment over the spring. These failures hampered the national and state responses to the pandemic, leaving the United States with far more infections and deaths than any other country. Even now, shortages of protective medical gear are looming as outbreaks grow in the South. One big reason is because these supplies often come from other countries, which were also dealing with outbreaks. 

The nation’s pharmaceutical industry has pushed back against the potential order, arguing that the United States should not shut itself off from a global supply chain. There is concern that it could make it even harder to obtain supplies critical to combating the pandemic, such as personal protective equipment, testing supplies and even medications to treat coronavirus patients.

“Turning our backs on trading partners during a crisis could damage our relationships long after this pandemic ends,” the Pharmaceutical Research and Manufacturers of America (PhARMA) and dozens of other business and trade groups wrote in a letter to the administration.

Other critics say that revising the government’s purchasing rules will not provide a quick solution to the supply shortages of the current pandemic. “Making Buy American provisions tighter during the current crisis would likely do more harm than good,” according to William Reinsch and Jack Caporal of the Center for Strategic and International Studies.

Eighty percent of the nation’s active pharmaceutical ingredients come from overseas — and China is its No. 2 supplier, behind only Canada.

When it comes to generic drugs, a “substantial portion” of U.S. imports come either directly from China or third countries such as India, which use active ingredients sourced from China.

Moreover, U.S. dependence on China for drugs and drug products is growing. Its imports of Chinese medical equipment increased 78 percent between 2010 and 2018.