December 17 Federal Estate and Gift Tax Planning

            The December 17 program primarily dealt with the compromise tax legislation that Congress had just passed and that President Obama signed that same day, the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.” A link to the Senate Finance Committee’s summary of that legislation is included at the end of this blog.

            Because the announced subject of this program was federal gift and estate taxation, I dwelt on the extremely important changes made by the new legislation in that area. In short, beginning in 2011, there will be a fully “unified” federal gift and estate with a $5 MM exemption per person ($10 MM per married couple) and a top marginal tax rate of 35 percent. Thus, there will no longer be a lesser gift tax exemption than an estate tax exemption, but every taxable gift (from 1977 onward) that has used up part of a person’s lifetime gift tax exemption will be subtracted from that person’s estate tax exemption upon his or her death. Gifts that have been covered by the spousal deduction, the charitable contribution deduction, the Annual Exclusion (presently $13,000 per year per donee), and the Medical and Tuition Payment Exclusion will not be treated as having used up any part of the lifetime gift tax exemption or as having reduced the estate tax exemption at death, just as before.  The increase of the gift tax exemption from $1 MM to $5 MM, subject to the corresponding possible reduction in the estate tax exemption as just described, is of huge importance to families with sufficient assets to make such large lifetime gifts.

            Of even greater importance to many more families, the new legislation also provides that if one spouse dies without fully utilizing the unified $5 MM exemption - - say, by leaving everything to the other spouse in joint tenancy or by a simple will - - the executor of the deceased spouse’s estate may transfer any unused exemption to the surviving spouse. Thus, on the death of the latter, a total exemption of up to $10 MM may be available. This change, effective for decedents dying after the end of 2010, will largely mitigate the problem of “wasting” a spouse’s exemption by leaving everything to the other spouse, thus adding to that spouse’s estate without commensurately increasing that spouse’s estate tax exemption.

            The new legislation also permits a retroactive application of the $5 MM unified exemption to the estates of decedents who died in 2010, subject to the executor’s election to choose to pay no federal estate tax but receive a modified carryover basis increase of up to $1.3 MM ($4.3 MM in the case of a married couple) for assets in the deceased spouse’s taxable estate. For all but the wealthiest taxable estates of such decedents, the use of the retroactive $5MM exemption, and the corresponding unlimited step-up basis for most assets (other than “income in respect of a decedent” such as IRAs), will be preferable.

            The new legislation also provides for the continuation of the separate and additional Generation Skipping Tax (“GST”) at a rate of 35 percent but with an increased exemption amount of $5 MM.

            It should be emphasized that these changes are temporary and will expire, like the temporary extensions of the 2010 income tax rates, at the end of two years.

            I noted that in at least two respects the new legislation promoted charitable giving. First, for taxpayers taking distributions from regular Individual Retirement Accounts, it will remain possible for such distribution to be made directly to charities without being treated as taxable income to the taxpayers up to the amount of $100,000 per taxpayer per taxable year (through 2011). Second, for very well-to-do taxpayers, the temporary repeal of the “Pease limitation” on itemized deductions, including charitable contribution deductions, will make charitable contributions substantially more beneficial than they were in 2009 and previous years.

            Turning from the discussion of federal transfer taxation, I wrapped up a few important points about Third-Party Special Needs Trusts and OBRA-qualified Self-Settled Special Needs Trusts that had been unintentionally omitted from the previous month’s program due to time constraints. Third-party special needs trusts are a wonderfully beneficial estate planning device for trust beneficiaries who are disabled or might become disabled, enabling them, when disabled, to enjoy a far superior quality of life than they would if they had to rely solely on governmental support. And, for those not fortunate enough to have such trusts established for them by others, it is still possible for all their nonexempt assets to be placed in a “self-settled” OBRA-qualified special needs trust that will supplement governmental support but not disqualify them for it. Assets in such trusts are not “countable assets” for Medicaid purposes.

            These proven devices do not eliminate the importance of long-term care insurance planning for those in a position to afford the premiums. (Consider the general unavailability of Medicaid benefits for long-term care recipients except in nursing homes, as discussed in the November program.) But they can be essential backstops to such planning or, if necessary, alternatives to it if it has not been done.

            Remember to put any legal questions that you like to me, “The Lakeshore Lawyer,” on any of the subjects covered by any of these programs. I look forward to answering them all in confidence on a no-names basis, merely discussing some of the most important questions and answers on this blog or on the program itself.

            The link to the Senate Finance Committee report mentioned above appears immediately below:

http://finance.senate.gov/legislation/details/?id=10874ed6-5056-a032-52cd-99708697eff0.

November 19 Broadcast

The featured guest on the November 19 program was Jocelyn Hibshman, an expert on long-term care insurance.

            The first part of the program, however, dealt with another quite different legal subject that I felt that the audience might know nothing about but should - - the MERS system of electronic mortgage registration. Referring to three recent newspaper articles that I had read (linked below) and two recent law review articles by Professor Christopher Peterson of the University of Utah School of Law, I noted that the purpose of this system has been to make only a single recording with the county recorder’s office of any residential real estate mortgage to MERS - - no matter how many times that mortgage is subsequently assigned.  After that initial recording, either showing MERS as the initial mortgagee itself or else showing MERS as the initial assignee of the mortgage, no further public recording of subsequent assignments of the mortgage ever occurs. Instead, all information about such assignments and the ownership of the note secured by the mortgage is supposedly electronically tracked within this company-owned nongovernmental system.

            As I pointed out, this “one-stop recording” approach appears to conflict with the long-established policy of all the states’ recording acts of enabling members of the public to determine who owns real estate and who owns the mortgages on real estate, from an examination of the public records. Thus, there would seem to be serious questions about the legality of making multiple successive assignments of the rights to a mortgage without paying the fees to record those assignments in the public record and equally serious questions about the validity of “assignments in blank,” i.e., assignments to a proxy without the recordation of each actual interest holder in the public record.  

            But these question become even more serious if, as is very often the case, MERS has been recorded as the initial mortgagee lender. The problem in all such cases is the long-settled law in every jurisdiction in this county that a mortgage may not be separated from the note that it secures. MERS is certainly not in fact a mortgage lender. The notes supposedly secured by MERS mortgages have instead been issued to mortgage “originators” which, as soon as they have funded the loans, have resold them to underwriters for “packaging” into mortgage-backed bonds and derivative “collateralized debt obligations.”  These, in turn, have been purchased by supposedly nontaxable income pass-through trusts (“REMICs”) owned by investors throughout the world. This extended process of mortgage “securitization,” involving multiple assignments of the beneficial interest in each loan contained in the “package,” all under the supposed security blanket of MERS’s supposed initial mortgage rights, is extremely difficult to reconcile with the settled principle of law just mentioned (i.e., that a mortgage may not be separated from the note that it secures). Instead, at least three state supreme courts - - those in Arkansas, Kansas, and Maine - - have recently ruled that such an obvious separation of the notes from the mortgages securing them makes those mortgages themselves invalid.

            Such possible invalidity would have potentially immense ramifications. In bankruptcy, for example, it might enable hard-pressed homeowners to propose Chapter 13 repayment plans that treat a MERS mortgage loan as unsecured debt on a par with, say, credit cards.

            Such invalidity could also expose the originators and underwriters of such loans, after they have been “securitized,” to liability for failure to comply with their warranties that those loans were secured by valid mortgages. Furthermore, the trusts that ultimately purchased those loans would possibly owe huge amounts of income taxes because they would not qualify as “REMICs” - - Real Estate Mortgage Income Conduits - - if the mortgages were invalid.

            In short,  as I concluded this important initial segment of the program, in funneling more than one-half of all the residential mortgage loans made in this country through the MERS system, the mortgage bankers may well have created for themselves a problem vastly larger that one of sloppy recordkeeping. The possible invalidity of many, if not indeed most, MERS mortgages is a matter of major public interest, which is why I brought it to the attention of the audience.

            Long-term care insurance is also of major public interest, as evidenced by Indiana’s “Partnership Program” with insurance companies that offer suitably qualified long-term care insurance benefits. Basically, under that program, if the insured person first exhausts the insurance benefits - - for policies issued in 2008, in the minimum amount of $228,045 - - that person may then qualify for Medicaid benefits without regard to the amount of that person’s assets.

            As Jocelyn explained, long-term care insurance also provides liberal benefits for in-home health care or residence in an assisted-living facility, other than a nursing home. Both of these are strongly preferred over nursing homes by most elderly people who need daily care assistance, but in-home health care requires a Medicaid waiver, for which there is a growing waiting list.

            Given the facts that a very large percentage of the population will at some point in their lives need long-term care but that such care is not covered by Medicare, a strong case can be made that many more middle-class families should have long-term care insurance for their more elderly members than presently do. Such insurance can be indispensable in protecting a middle-class family’s wealth from the potential cost of extended long-term care, which can easily exceed Seventy-Five Thousand Dollars ($75,000) per year. Such insurance can also free family members from the often overwhelming burden of themselves providing such care.

            Jocelyn explained many further additional details about long-term care insurance products (including “hybrid” products combined with life insurance or annuities) and their pricing. We discussed another newspaper article that reported Met Life’s withdrawal from underwriting new long-term care policies for individuals after the end 2010 and other main-line insurers’ seeking premium increases of as much as 40% (on a class basis) for many of their customers.  The entire, extremely informative interview is available in electronic format for any listeners who request it. November happened to be “long-term care awareness month,” and hopefully this program did its part.

            Links to the aforementioned newspaper article links about MERS appear immediately below:

“Some Sand In The Gears Of Securitizing”:

http://www.nytimes.com/2010/10/19/business/19norris.html?_r=1&scp=34&sq=october%2019,%202010&st=Search;

“One Mess That Can’t Be Papered Over”:

http://www.nytimes.com/2010/10/24/business/24gret.html?_r=1&scp=1&sq=october%2024,%202010.%20Mess%20cant%20be%20papered%20over&st=Search;

“AP IMPACT: Bypassing County Fees May Cost Banks”:
http://www.foxnews.com/us/2010/11/10/ap-impact-bypassing-county-fees-cost-banks/.