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An important estate planning goal for the vast majority of people as they get older is to preserve their hard-earned assets for their loved ones upon their passing. A long-term stay in a nursing home, however, can present a considerable obstacle toward achieving that goal. While advance planning, whether in the form of gifting or purchasing long-term insurance or a combination of both, is the ideal way to protect a loved one’s assets against the threat of substantial nursing home costs, options are still available for those loved ones who did not engage in any advance planning when they enter the nursing home to help them qualify for nursing home (chronic care) Medicaid assistance and preserve a significant portion of their assets from being spent on their nursing home care.
These options include the following:
Using a gift and loan strategy, one can potentially preserve a significant portion of his or her nest egg and expedite his or her eligibility for nursing home (chronic care) Medicaid assistance.
Under the current Medicaid rules, any Medicaid penalty period will not begin to run until (a) the Medicaid applicant’s countable assets are at or below the eligibility threshold, (b) Medicaid applicant is residing in the nursing home and (c) a Medicaid application is filed.
The goal of this strategy is to get the Medicaid penalty period running as quickly as possible. To effectively implement this strategy, all of the excess assets will either be gifted or loaned to family members and then a Medicaid application has to be filed as soon as possible following the gift and loan of the excess assets.
Any delay in filing the Medicaid application after the excess assets have been gifted and/or loaned will diminish the effectiveness of the strategy.
The funds gifted to family members will trigger a Medicaid penalty/ineligibility period while the funds loaned to family members will be used to cover the nursing home expenses during the Medicaid penalty/ineligibility period.
If, for example, a single person went into a nursing home with $160,000 of excess assets and is spending $10,000 per month on his or her nursing home care and the applicable Medicaid regional rate used to compute the Medicaid penalty period is $10,000, he or she could gift $80,000 of excess assets and loan the remaining $80,000 of excess assets to his family members and qualify for nursing home (chronic care) Medicaid assistance in 8 months [or $80,000 (gift amount) divided by $10,000 (Medicaid regional rate)]. To get the 8-month Medicaid penalty/ineligibility period running as quickly as possible and preserve all of the gifted assets, the Medicaid application should be filed in the same month as the gift and loan is made. The reason why this strategy works is because the loan is not considered an asset of the lender, but rather an income stream to the lender.
It is important that the loan comply with the Medicaid rules so that it is not considered a gift. For the loan to be Medicaid-compliant, the loan must be:
Medicaid planning is a complicated process, but options are usually available to protect some of a loved one’s assets with the help of an experienced elder law attorney. This article should not be relied upon as legal advice without first discussing your or your loved one’s particular situation with an attorney who practices in the area of elder law.
If you would like to discuss in further detail, please do not hesitate to contact me or the attorney in our office with whom you typically work.
To view this article in PDF format, please click here [Last Minute Medicaid Planning].
Retirement plan sponsors should be aware of the costs associated with missing participants: (1) time and expenses involved in searching for them, (2) additional administrative costs when billed on a per participant basis, and (3) additional costs based on surpassing participant limits for, among other things, annual plan audits. However, there may also be associated legal perils.
An October 2, 2017 letter, from the American Benefits Counsel (“ABC”) to Tim Hauser at the Department of Labor (“DOL”), outlines the aggressive legal positions recently taken by DOL investigators with respect to missing participants:
The second position – that forfeiture of unclaimed retirement benefits may be a prohibited transaction has been pursued even when the plan document provides for the forfeiture and restoration and received a favorable determination letter from the Internal Revenue Service. Because prohibited transaction issues are within the purview of the DOL, plan sponsors are insulated from potential DOL liability. In addition, the DOL has indicated that relying on a third party administrator or record-keeper’s routine process for locating missing participants may not be sufficient if the plan administrator fails to appropriately monitor the service provider.
The ABC letter requests that the DOL engage in a rule-making process to issue comprehensive guidance on plan fiduciary responsibilities with respect to unresponsive and missing participants and cease taking ad hoc enforcement positions until the DOL provides actual guidance.
Plan administrators should review their administrative procedures for locating missing participants to determine if additional procedural safeguards are necessary. As noted above, even if this responsibility has been delegated to a third-party service provider, it may be necessary to review the provider’s processes and determine whether they are adequate. Plan administrators should also examine their plan documents and participant communications, such as summary plan descriptions, to determine how the plan treats the benefits of missing or unresponsive participants and assess whether modifications are warranted.
To view this article in PDF format, please click here [Missing Participants].
With the cost of college continuing to rise at a rapid pace, many grandparents want to help their grandchildren with the cost of higher education. The use of a 529 plan not only allows grandparents the satisfaction of helping their grandchildren through college, but there are also estate and gift tax advantages.
In New York, contributions to a 529 plan grow deferred from federal and state income taxes. In addition, the account owner does not pay federal or state income taxes on the money used to pay qualified higher-education expenses.
529 plans can support a long-term gifting strategy to reduce one’s taxable estate. For example, $14,000 ($28,000 if married filing jointly) can be contributed annually to each grandchild’s 529 plan without triggering federal gift tax. These annual gifts can be made to remove assets from your taxable estate and to pass them into the plan free of federal gift tax. New York permits a special election, which allows you to accelerate your gifting schedule and make five years’ worth of gifts in one year. A lump sum contribution of $70,000 ($140,000 for married couple), is spread out over five years, provided you do not make any other gifts to the same beneficiary over that five-year period.
Although the assets are no longer in your taxable estate, a unique advantage of the 529 plans is that they permit the account owner to maintain control over the assets. You can decide how the assets are invested, when the assets are withdrawn and for what purpose. Furthermore, if necessary, you can change the beneficiary.
When deciding on a plan, it’s important to review any costs and fees associated with the plan. In addition, you should consult with your estate planning attorney or other professional advisor before any decisions are made that could impact your tax liability.
To view this article in PDF format, please click here [Grandparent-Funded 529 Plans].
It is not simply having a will that leaves assets to family members and it is not simply a buy-sell agreement that provides that if Dad dies, Uncle Bob buys him out and vice versa. Succession planning involves many components of a well-coordinated plan that are based on the particular circumstances that exist within the business or farm and most importantly it must be in writing and kept up-to-date. These components include:
Estate Planning – Family business-based wills and trusts that do not simply divide assets among heirs. What entities are involved and who is to own and manage them needs to be carefully thought out and set forth.
Asset Protection Planning – Utilization of limited liability entities and trusts to protect assets for not only the current generation, but future generations, is critical to succession planning to protect assets not only from third parties but from “non-business” heirs.
Management and Knowledge Transfer – Establish a plan today that allows the junior generation to benefit from the years of experience of the senior generation and the many relationships that have been established by the senior generation over the years. For example, the time for the next generation of owners/managers to meet the banker for the first time should not be at Dad’s funeral.
Succession Planning Agreements – Planning for expected and unexpected events that will arise in the future such as death, disability, divorce, departure etc. with proper agreements such as buy-sell agreements among the owners of the operation and employment and long-term incentive arrangements with key employees who may not be owners, but are critical to the continued success of the business operations.
Lifetime Planning – Implementing the appropriate lifetime strategies to protect assets from plaintiffs in lawsuits, minimize or eliminate estate taxes including spouses in matrimonial matters and possibly to protect assets from being improperly managed by owners who should no longer be in controlling positions.
Opportunities for succession planning today are greater than ever. Federal estate and gift exemptions are nine times what they were twenty years ago. In 2017, there is a federal estate and gift exemption of $5,490,000.00 for each individual. With a properly structured plan a married couple can benefit from almost an $11,000,000.00 exemption. Proposed legislation in Congress nearly doubles the present exemptions. This affords opportunities not only for transfers at death, but utilizing long-standing and accepted planning strategies to remove significant assets from a taxable estate during life – and this can be done in a manner that benefits both the senior and junior generations. State laws such as New York must be taken into consideration as well, but many states have followed the federal lead in lessening the impact of estate taxes on closely-held business owners. In New York, our present exemption is at $5,250,000 and the present laws provide that New York’s exemption will match the federal exemption in 2019. So, does that mean that if the federal exemption increases to almost $11,000,000 New York’s will as well? – – – We’ll see.
Your Succession Plan Audit
Questions to Ask
Regardless of when a plan was put into place, it needs to be periodically reviewed and maintained just like any equipment utilized in a business. If changes are needed, they should be made while everyone is alive, well and in agreement on issues rather than after a death or another difficult situation has arisen. It is also critical to review your plan with your advisory team – your attorney, accountant, financial consultant and other advisors.
If we can be of any assistance in working with you on the creation of your own family business succession plan or to review your present plan with you, please do not hesitate to contact us.
To view this article in PDF format, please click here [Family Business Succession Plan].
In a previous newsletter, I discussed the effectiveness of mediation as a method of resolving a dispute. I now want to a take a look at arbitration as a vehicle through which to bring finality to a dispute.
Under New York law, arbitration is final and binding except in certain circumstances which are more specifically outlined in New York Civil Practice Law and Rules Section 7511. For purposes of this article, however, I want to focus on the pros and cons of arbitration as a form of alternative dispute resolution.
First, it is important to note that unless parties to a dispute mutually agree to arbitrate their dispute, arbitration must be contractually agreed to. Unlike proceeding through the New York State court system, arbitration proceedings can usually be commenced and concluded in a significantly shorter period of time. Furthermore, the amount of attorneys’ incurred in an arbitration proceeding, in many cases, are less than they would be in the more traditional court proceeding. Keep in mind, however, legal fees can be awarded to the prevailing party in an arbitration proceeding just as in State Court under certain circumstances.
In addition to the expedited basis on which an arbitration proceeding can be conducted, the applicable rules of evidence are also more relaxed than they are in a State court proceeding. Simply stated, there are no written rules of evidence in an arbitration proceeding and whether certain evidence is admitted is left to the discretion of the arbitrator(s). One can certain argue that the relaxed evidentiary rules can cut both ways.
Perhaps the biggest risk associated with arbitration is its finality. As mentioned above, there are limited circumstances under New York in which arbitration award can be “appealed”. Unless one of those rare circumstances exist, the losing party in an arbitration proceeding has no avenue of redress. In State Court, however, a losing party has the right, provided the appeal is not frivolous, to appeal an adverse decision to the Appellate Division and then to the New York State Court of Appeals in very limited circumstances. One can certainly make the argument that litigating in New York State courts provides more opportunities to have “justice served” than an arbitration proceeding does.
The decision whether to include an arbitration clause in a contract should be made at the outset of the negotiation process. In some industries, arbitration and mediation provisions are almost boilerplate. Before agreeing to an arbitration provision or asking that one be included in a contract, it is important to consider the nature of the contract, the issues that could possibly be in dispute at some point in the future, the amount of time that could be expended resolving the dispute in the absence of an arbitration proceeding and the amount of legal fees that could be incurred.
We would be happy to discuss the arbitration process and other avenues of dispute resolution with you.
To view this article in PDF format, please click here [Alternative Dispute Resolutio].
Effective January 1, 2018, new audit rules under Congress’s 2015 Bipartisan Budget Agreement will go into effect and raise havoc in the investment and business worlds. These new rules will turn the audit process 180 degrees to be much more favorable to the Internal Revenue Service, putting each partner at greater risk of tax assessments well after the filing of the partnership’s tax returns. Limited liability companies (LLCs) that choose to be taxed as a partnership are similarly affected. LLCs and partnerships need to be aware of how these rules will work to IRS’s favor in order to avoid surprises, frustrations and potentially unfair (yet fully legal) tax assessments to partners in the future.
Under current rules, small partnerships (that is, those with 10 or fewer partners, none of whom are themselves LLCs or limited partnerships) are not audited at the partnership level. Rather, the IRS selects individual partners for audit and, in the course of that audit, reviews the partnership tax return, raising the possibility that other partners may be drawn into audit as well.
Each partner participates in his or her own audit, but there is no right to participate in any other partner’s audit. Typically, however, partners will coordinate their efforts when more than one partner is the subject of an audit in order to pose a consistent defense and minimize the total tax liability. IRS may then issue proposed adjustments to a partner’s return (and to other partners’ returns), and each partner independently pursues appeals within the IRS and/or judicial challenge to those adjustments. Most important, the IRS must pursue separate collection efforts against each individual partner, thereby making the entire process inefficient to the IRS’s disadvantage.
Larger partnerships and those with “disqualified” partners (i.e., LLCs, limited partnerships or foreign taxpayers) are bound to rules enacted in 1982. Those rules provide that the tax audit is conducted at the partnership level with a single “tax matters partner” taking responsibility for communication among the partners and the IRS. However, the collection process is still conducted at the individual partner level, making collection of additional assessments still inefficient for the IRS.
Keep in mind that the IRS’s assessment will be at the highest individual tax rate for the year of review. If any one partner complies with filing an amended return and pays the tax liability, the partnership can then seek adjustment to the assessed liability based upon whatever facts and circumstances may impact the marginal tax rate of the affected partners. Absent that, the partnership has no standing to contest the liability.
This “push-out” right raises several questions for the partners to consider within their Partnership Agreement (or Operating Agreement):
The new audit rules place a heavy emphasis on initial discussion and planning among the partners (or members) in dealing with future tax audits. Listed above are just some of the issues that a partnership or LLC should address within the Partnership or Operating Agreement to determine and establish the partners’ rights and obligations. We’d be happy to review your current agreements and assist in developing a workable strategy for you.
If you have any questions, please do not hesitate to contact me or the attorney in our firm with whom you typically work.
To view this article in PDF format, please click here [New Partnership Tax Audit Rules Demand Your Attention].
The IRS recently issued an update to its qualified plan correction guidance, the Employee Plans Compliance Resolution System (“EPCRS”) which was effective January 1, 2017.
EPCRS may be used to correct plan qualification issues affecting certain types of retirement plans, including 401(k) and profit sharing plans. It permits the correction of errors either (i) by “self-correction,” whereby a plan sponsor takes reasonable steps to correct an issue, or (ii) under the auspices of the IRS via its “voluntary compliance program”, whereby a plan sponsor submits a proposed correction to the IRS for review, along with a user fee, and ultimately receives a compliance statement from the IRS “blessing” the correction. For the next several issues of this newsletter, I will be reviewing the most common errors plan sponsors make and how to correct them.
Two common plan errors that we see are with regard to hardship distributions: (1) the failure to comply with the terms of the plan for hardship distributions, and (2) the failure to properly document these distributions.
Failure to Comply With the Terms of Your Plan Document. Not all plans allow hardship distributions and a primary failure is to allow these distributions when the plan document does not. There are a number of options available for hardship distributions and you must ensure that the distributions you are making comply with the provisions in your plan. Please review the terms of your plan on a periodic basis!
Documentation. Even if you use a third party administrator (TPA) to handle participant transactions, you are still ultimately responsible for the proper administration of your retirement plan. Make sure you are keeping up with the recordkeeping requirements. Plan sponsors must obtain and keep hardship distribution records. Failing to have these records available for examination is a qualification failure that should be corrected using EPCRS.
Keep these records in paper or electronic format:
It is insufficient for plan participants to keep their own records of hardship distributions. Participants may leave employment or fail to keep copies of hardship documentation, making their records inaccessible during an IRS audit of the plan.
Also, electronic self-certification is not sufficient documentation of the nature of a participant’s hardship. IRS audits show that some TPAs allow participants to electronically self-certify that they satisfy the criteria to receive a hardship distribution. While self-certification is permitted to show that a distribution was the sole way to alleviate a hardship, self-certification is not allowed to show the nature of a hardship. You must request and retain additional documentation to show the nature of the hardship.
If you discover any discrepancies between the hardship provisions in your plan document and actual practice, or if you have not maintained complete documentation for participants’ hardship distributions, please contact us so we can help you determine the best correction method.
To view this article in PDF format, please click here [Hardship Distributions – Common Mistakes in the Administration of Your 401k or Profit Sharing Plan]
Today’s topic, in a series of articles designed to uncover interesting and little known rights in New York’s General Obligations Law, is about the reciprocal opportunity for consumers to recover attorney’s fees in some contract settings. In limited circumstances, General Obligations Law §5-327 lets a consumer claim attorney’s fees if the contract the consumer signed provides for attorney’s fees against the consumer.
Whether you are the consumer, or the business or other party contracting with the consumer, the contract being signed often says that the consumer has to pay the other party’s attorney’s fees if they breach the agreement. The effect of §5-327 is to give the consumer a reciprocal right to claim attorney’s fees in the event of a breach by the other side. You may or may not like this depending on what side you are on, and should be mindful of this statute.
The statute defines important terms that limit its use as follows:
When we reviewed the cases reporting on its use, we did not see a lot of activity, but we learned a few things.
For example, a couple that had their vacation plans wrecked turned the tables and recovered their attorney’s fees against the jet broker they made their plans through. Initially, this case was decided by an arbitrator, who applied §5-327 and since he found that the broker breached the contract, he awarded attorney’s fees to the consumers. When the broker appealed, a N.Y. Federal Judge ruled that the award of attorney’s fees was appropriate, because the broker’s contract had an attorney’s fees clause in its favor. Loeb v. Blue Star Jets, LLC, S.D.N.Y. 2009 (2009 WL 4906538; Lexis 118549).
In another case, a homeowner tried to recover attorney’s fees under §5-327 when he sued a heating contractor for a bad job. Jones v. Hill’s Heating and Air Conditioning, Inc., 67 A.D.3d 1432 (4th Dept. 2009). As is typical, the heating contractor had an attorney’s fees clause in his contract and the consumer tried to turn the tables on the contractor by using the reciprocity of §5-327. The consumer was awarded its damages under a breach of warranty theory, but not under a breach of contract theory, and this was lucky for the heating contractor, because the Judge decided that §5-327 was not applicable if the homeowner did not succeed on the breach of contract theory, which is specifically required by the statute.
The importance of the definitions in §5-327 came into play in another case, involving artwork that was part of a loan. Even though the artwork was owned by an individual, it was being used in part as collateral to finance an investment. Christie’s Inc. v. Croce, 5 F.Supp.2d 206 (S.D.N.Y. 1998). The purpose of the transaction was not primarily for personal, family, or household goods, so the plaintiff could not recover his attorney’s fees under §5-327.
If you are a consumer entering a contract that contains an attorney’s fees clause, or if you’re someone that deals with consumers and you include an attorney’s fees clause in your contracts, be mindful of New York’s General Obligations Law §5-327 and how it works.
If you have any questions about this article or legal representation, please do not hesitate to contact Doug Mahr or the attorney in our firm with whom you typically work.
To view this article in PDF format, please click here [Turning the Tables on Contracts with Attorney’s Fees Clauses].
AMENDMENT TO ADVERSE POSSESSION STATUTE (2008) AND ITS IMPACT ON ACTS ACROSS A BOUNDARY LINE
Finally, it is lawn mowing season in New York. Lawn mowing is a task that many New York real property owners endure for the few short enjoyable summer months. It has also been a topic of controversy when considering the doctrine of adverse possession. Adverse possession is a longstanding legal principal that permits a party to deprive another party of its ownership of real property.
The elements of adverse possession claim, prior to the 2008 amendment, were that the possession is (1) hostile or adverse and under claim or right, (2) actual, (3) open and notorious, (4) exclusive; and (5) continuous for the statutory period of ten (10) years.
The change in 2008 came as a result of a Court of Appeals decision in the Walling v. Przybylo 7 N.Y.3d 228 (2006), aff’g, 24 A.D. 3d 1 (3d Dept. 2005). The Walling decision has forever changed the application of the adverse possession doctrine with the Court’s interpretation of claim of right that ultimately decided in favor of the adverse possessor for his acts of mowing, planting, and installing a fence to knowingly deprive his neighbor of that portion the yard.
The Walling decision prompted the New York State Legislature to revamp the Real Property Actions and Proceedings Law to limit the scope of the statute by acts of an adverse possessor. Now, an adverse possessor will need to establish a claim with good faith and mowing and other minor overt acts to infringe upon another’s individual property rights “shall be deemed to be permissive and non-adverse”. RPAPL § 543(2).
The legislature also, in response to the case, amended the statute to define adverse possession in an effort to avoid a Walling type result. See RPAPL §501 definitions below.
If you have any questions on the Adverse Possession Statute, please do not hesitate to contact me or the attorney in our office with whom you typically work.
To view this article in PDF format, please click here [Mowing Your Neighbors Lawn?].
In 2016, Governor Andrew Cuomo signed into law New York State’s Paid Family Leave Act, which provides wage replacement to eligible employees on a leave of absence as well as job reinstatement and continuation of health insurance.
Unlike the federal Family Medical Leave Act, New York’s Paid Family Leave program applies to mostly all private employers, regardless of size. To be eligible for Paid Family Leave benefits, employees must be employed full-time for 26 weeks or part-time for 175 days. In addition, leave must be taken for one of the following qualifying events: (A) to care for a child after birth/adoption/foster care placement within the first 12 months after birth or placement; (B) to care for a family member with a serious health condition; or (C) when a family member of the employee is called to active military service.
The Paid Family Leave program will take effect January 1, 2018, and will be subject to the following phase-in-schedule:
If the employee’s weekly wage is greater than the state average weekly wage, the employee will be capped at a percentage (depending on the phase of the program) of the state average weekly wage.
There is good news for employers. Paid Family Leave will be included under the employer’s disability policy and the premium will be paid for by employees. Payroll deductions are expected to begin July 1, 2017.
An important note for our agricultural clients: Farm laborers are not eligible for Paid Family Leave benefits.
If you have any questions, please do not hesitate to contact me or the attorney in our firm with whom you typically work.
To view this article in PDF format, please click here [NEW YORK STATE’S PAID FAMILY LEAVE ACT].
Since 1979, the Syracuse-based law firm of SCOLARO FETTER GRIZANTI & McGOUGH, P.C. has provided sophisticated tax, business, litigation, employee benefits, estate and trust planning and administration services to its individual, business, entrepreneurial and professional clients throughout New York, Pennsylvania, Florida and other states in which its attorneys are admitted to practice.