Legal Updates

The United States Treasury Department has proposed new regulations which would substantially curb the ability of family owned businesses to transfer wealth from one generation to the next.

For many years, families have been able to lawfully transfer interests in their business to the next generation through entities including Limited Liability Companies, Family Limited Partnerships and Corporations. Specifically, in each of these entities, control is retained by the older generation while economic interests have been transferred to the younger generation.

Because control has been retained by the older generation, the value of the interests transferred has been able to be discounted substantially on the theories that the interests transferred are not controlling interests and are virtually unmarketable. Thus, for example, a majority owner of a corporation could transfer $100,000 of shares to his or her children but claim that lack of marketability and lack of control discount the value of same by 20% which, in turn, would allow the owner to claim that the gift was worth only $80,000. This allows $20,000 to be transferred outside of gift and estate tax exposure.

Proposed REG-163113-02 would restrict these types of transfers. A hearing on these regulations is scheduled for December 1, 2016. Thus, any business owner who is considering this form of gifting may wish to do so prior to this date.

Over the past three decades, the increasing costs of long term care have led many individuals and families to look for ways to preserve the assets which they have spent a lifetime accumulating. In that regard, the discipline of elder law has arisen and has been a focus of practice for many attorneys. As the need for advocacy in this area of law has increased, so too has the number of non-lawyer individuals or other groups seeking to provide services in this area.

Recently, the New Jersey Supreme Court issued what is known as Opinion 53. The purpose of this opinion was to distinguish actions which are permissible by non-lawyers as opposed to those which rise to the unauthorized practice of law. The Court recognized the legitimacy of certain functions by non-lawyers. Its basis in allowing same is based on federal Medicaid law which provides, in relevant part, that States “must allow individual(s) of the applicant or beneficiary’s choice to assist in the application process or during a renewal of eligibility.” 42 C.F.R. Section 435.908(b) includes “legal counsel, a relative, a friend, or other spokesman” in any hearing on agency action or decisions. 42 C.F.R. Section 431.206(b)(3). To that extent, the federal regulations permit States to certify staff and volunteers to act as application assistors. 42 C.F.R. Section 435.908(c). “Certified” assistance includes “providing information on insurance affordability programs and coverage options, helping individuals complete an application or renewal, working with the individual to provide required documentation, submitting applications and renewals to the agency, interacting with the agency on the status of such applications and renewals, assisting individuals with responding to any requests from the agency, and managing their case between the eligibility determination and regularly scheduled renewals.” Id. at (c)(2).

The Court strongly held, “While non-lawyer Medicaid advisors may provide these limited services, the Committee finds that it is the unauthorized practice of law when non-lawyers provide advice in matters that require the professional judgment of a lawyer. Hence, only a lawyer may provide legal advice on issues such as strategies for Medicaid eligibility, including provisions of wills and powers of attorney; on the need for guardianships and the authority to transfer assets; on nursing home laws; on transfers of property; on the impact of marriage and divorce; and on estate administration and the elective share.” In making this finding, the Court reflected upon instances where the advice of non-lawyers caused substantial harm to the public.

Specifically, it noted, “……, non-lawyer advisors advised a family member that she could receive monies as a caregiver when the family member did not qualify for that status; advised a family member to spend down an IRA when it would have been more reasonable to purchase an annuity with those monies; advised a family member to draw down her assets when it would have been more sensible to transfer monies to a disabled child; advised a family member to transfer real estate when it would have been prudent to address the significant tax implications of that plan; and the like.”

Abraham Lincoln has been quoted as saying, “He who represents himself has a fool for a client.” In issuing its opinion, the Court does not impede this right. On the other hand, it has taken a firm step to insure that non-attorneys do not make fools of those who would otherwise be represented by them.

All of us want to make sure we keep important original documents. Problems certainly can arise if one loses bonds, stock certificates or their Will.  However, one document which can be lost without any negative repercussion is a Deed.

When an individual takes title to a home, his or her deed is recorded in the County in which the property is located.  Although the original deed is returned to the property owner after it is recorded, the ownership of the property is preserved even if the deed is lost.

Unfortunately, there are groups which are running scams telling people they need to get a “Current Grant Deed” and a “Property Assessment Profile”.  If you call or send them payment online, they will give you a “certified” copy of your deed and information re your property.  All for $83.  THIS IS A SCAM!

Deeds are a public record.  Most can be obtained online at no charge. A copy can be made from the county office for a fraction of the cost.  The property information supplied can be obtained free from one’s township and the internet.

One of the biggest offenders is a group called Record Transfer Services.  These low lifes are based in Westlake Village, California.  What they provide is garbage.  If you see solicitations like this from any outfit, discard same.   Avoid the waste of money.

On June 12, 2014, the United States Supreme Court issued a decision holding that Inherited Individual Retirement Accounts (Inherited IRAs) are not exempt from creditors in a bankruptcy proceeding.  In Clark v. Rameker, Trustee, Justice Sonia Sotomayor, writing the majority opinion, stated that the change in the status of such accounts upon the death of their original owner make them less like retirement savings and more like a source of assets which can be available to repay creditors.  She stated that if the court were to hold otherwise nothing could prevent a debtor from discharging her obligations then spending the entire balance of an inherited IRA “on a vacation home or a sports car immediately after her bankruptcy proceedings are complete.”

To substantiate its holding, the court held, “The ordinary meaning of ‘retirement funds’ is properly understood to be sums of money set aside for the day an individual stops working. Three legal characteristics of inherited IRAs provide objective evidence that they do not contain such funds. First, the holder of an inherited IRA may never invest additional money in the account. 26 U. S.C. §219(d)(4). Second, holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement. §§408(a)(6), 401(a)(9)(B). Finally, the holder of an inherited IRA may withdraw the entire balance of the account at anytime—and use it for any purpose—without penalty.”

For many individuals, one of the largest, if not the largest, asset in their estate is their IRA.  When planning to distribute these assets in their estate plan, the customary practice is for one to distribute to their spouse, if applicable, then outright to one or more of their children.  Prior to this case, one could argue that an inherited IRA was protected.  Obviously, that is no longer the case.

The case underscores the point that one needs to thoughtfully plan regarding the manner in which his or her heirs inherit, especially if those heirs are children.  In doing so, one has to realistically assess the financial condition of such children.  If a child has a history of financial problems, there are alternatives to direct distribution of IRA proceeds.  One can be to that child’s portion placed into a spendthrift trust to insure that he or she has access to funds but that same are exempt from creditors.  This strategy should be effective in that the trust is considered to be a separate legal entity than the child.  Another alternative is to direct the IRA assets to other children or beneficiaries and compensate the other child by placing other assets into his or her spendthrift trust.  In all, this case underscores the need to avoid a “fill in the blank” mentality when distributing non-probate assets such as IRAs and life insurance, and to have to inheritance of same intertwined with a thoughtful estate plan.

Historically, individuals who have invested in IRAs have had the ability to roll over each IRA on an annual basis.  Known as the one-rollover-per-year, the IRS’ own Publication 590 has detailed that each individual IRA can be rolled over once in any twelve month period.  However, that has just changed.

In 2008, Alvan Bobrow rolled over distributions from two separate IRAs.  He took the position that the rollovers were valid because they were done in a timely fashion.  He stated that the IRS’ own publication supported his position.  The IRS disagreed and stated that only one of the two rollovers were valid.  This dispute led to a hearing in the U.S. Tax Court.

The Tax Court, in a stunning ruling, asserted that Internal Revenue Code Section 408(d)(3)(B) allows only for one rollover from all accounts per year.  This decision determined that Mr. Bobrow owed an additional $51,298 in taxes and $10,260 in penalties.  The ruling is known as Bobrow v. Commissioner, T.C. Memo. 2014-21.

The upshot of this ruling is that IRA owners need to look into consolidation or patience.  Rollovers are often undertaken to keep up with ebbs and flows in the market.  However, it is strongly advised that prudent financial advice be sought in order to comply with the new interpretation of the law.

Earlier this year, the Social Security Administration released a substantial revision to its Program Operations Manual System (POMS) which has a dramatic impact upon those who are classified as disabled and receive needs based government benefits such as Supplemental Security Income (SSI), Medicaid and Section 8 Housing.  Specifically, POMS SI 01120.201 has been modified to make two changes.  First, it states that Special Needs Trusts cannot allow for payment of travel expenses for family members to visit the trust beneficiary.  Second, it is reviewing language in trusts that permit the payment of caregivers, including family members, and will soon require that the caregivers be “medically certified, medically trained or approved to provide care.”

It appears that the provisions may apply only to First Party Special Needs Trusts which are those typically established as a result of a personal injury action as such trusts are meant to be for the “sole benefit” of the disabled individual.  Third Party Special Needs Trusts, which are those typically established by the estate plans of families with disabled children, appear to be exempt.

In all, if you have a Special Needs Trust, you should have it reviewed by competent counsel to insure that it complies with current law.

Capehart Scatchard’s Thomas D. Begley, III obtained a significant decision in the Superior Court of New Jersey when he successfully argued that an unexecuted Will of a Burlington County resident be admitted to probated.

In February 2012, SalvatoreVarsaci consulted with an attorney to revise his Will.  The Will was drafted and sent to him for review.  On March 7, 2012, he contacted his attorney to let him know that he reviewed the Will and was satisfied with its contents.  He was scheduled to sign the Will on March 19.  However, he never signed that Will, as he died suddenly on March 13.

The longstanding legal standard to admit a Will into probate is that it must be typed and executed by the testator in the presence of two witnesses (unless it is solely in the handwriting of and signed by the testator).  Until recently, this law was strictly enforced.

The success in this case arose from the change in the State’s probate code in 2005, which acknowledged that testamentary writings could be admitted to probate if they “substantially complied” with the statute.  In 2010, an attorney, in reliance upon the revised code, attempted to introduce to probate an unexecuted copy of a Will to probate.  His application was denied.  However, the Appellate Division stated that circumstances might arise allowing for same.

On August 3, 2012, Begley argued and the Court agreed that such circumstances existed in this case.  In allowing Salvatore’s unexecuted Will to probate, the Court determined that Begley presented clear and convincing evidence that: (1) Salvatore had reviewed the Will prior to his death and (2) assented to its terms.

When asked about the decision, Begley commented, “Of course, all of us should strive to prepare our Wills in a customary fashion with the guidance of a competent estate planning attorney.  Having said that, I am gratified that our firm was arguably the first in the State to have such a previously unexecuted document admitted to probate.  Having known Salvatore Varsaci for many years, I am happy to know that his wishes will be observed.”

­­­­­­­­­­­­­­­­­­­­______________________________________________________________________

 Should you have any questions or would like more information, please contact Tom at 856.914.2085 or by e-mail at tbegley@capehart.com.

This blog is designed to provide general information on the topic presented and is provided with the understanding that the author is not rendering any legal or professional services or advice. This blog is not a substitute for such legal or advice. If such services are required, you should retain competent legal counsel.

A recent Appellate Division case tells an interesting tale of human tragedy, mixing in criminal and estate administration law.  Roy Rambo graduated from dental school in 1977.  Along with his wife, Linda, a dental hygienist, he established a dental practice in Warren County.  Apparently, the practice did fairly well, since they amassed joint assets of approximately $3,000,000.  In 2002, police responded to a 911 call to the dental office.  Upon arrival, the officers discovered the body of Linda Rambo and a firearm, and Roy told the officers that he had “just shot his wife”.

Under New Jersey’s “Slayer Statute” in effect at the time of the shooting, if an heir “criminally and intentionally kills” a person, the heir cannot inherit any assets from the victim.  Roy and Linda’s son was appointed as administrator of his late mother’s estate and sought the assistance of the New Jersey Chancery Court to freeze his mother’s estate and prevent Roy Rambo from accessing it until the verdict in the criminal trial.  But the son went further, and froze his father’s funds as well.  This prevented his father from paying for his legal defense. As a result, his father was declared indigent and entitled to the services of a public defender in his criminal case.

In 2005, Roy was convicted of murdering his wife.  Thereafter, the son successfully sued Roy for wrongful death and obtained a judgment against Roy for $6,000,000.  Later, the Chancery Court determined that Roy’s share of the joint estate was only $290,000, and awarded this amount to the son as a partial offset of the $6,000,000 verdict. Roy appealed, arguing that he should have had access to the marital estate to defend the criminal charges, a denial of his right to counsel under the Sixth Amendment.  The Appellate Court denied the appeal, holding that the restraints on access to the marital fund were directly supported by the version of the Slayer Statute in effect at that time.

It is not clear from the case how the court determined that Roy’s share of the $3,000,000 marital estate was only $290,000.  Presumably, that was the value of his own property that he brought into the marriage.  But it is likely that a substantial portion of the marital estate was a result of the fruits of Roy’s labor, who was a dentist.  Whatever the reasoning for placing such a small value on his share, I wonder if the Court got it right in this case.  The Slayer Statute said if an heir “criminally and intentionally” killed a person, he cannot inherit from that person.  But being presumed innocent until proven guilty is a cornerstone of our criminal judicial system.  Prior to his conviction, there seems little basis for preventing Roy from accessing his own property and his one-half of any joint property.  The Appellate Court held that he had received a good defense, and I have no doubt that our public defender system is excellent.  But anyone is entitled to the best defense he or she can afford, and it seems that Roy was hampered in providing himself with that defense.

Of course, you are free to disagree and I welcome your comments.  Who said estate and trust law is boring?

Questions regarding this article may be sent to Publications@Capehart.com.