GeriLaw | Robert Fleming, Tucson elder law attorney, and colleagues

CODE REQUIREMENTS FOR 468b TRUSTS by Thomas D. Begley, Jr.

 

 

The Internal Revenue Code and Treasury Regulations are very detailed with respect to 468b Trusts. A 468b Trust must meet all of the following requirements:[1]

 

 1.  Code Requirements

 

 •  Court Order. Established by a court order that extinguishes completely the taxpayer’s liability.[2]

 

 •  Qualified Payments. No amounts may be transferred other than in the form of qualified payments.[3]

 

 •  Independent Administrator. The QSF must be administered by persons, a majority of whom are independent of the taxpayer.[4]

 

 •  Personal Injury Death or Property Damage Claims. Is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage.[5]

 

 •  No Beneficial Interest. The taxpayer may not hold any beneficial interest in the income or corpus of the fund.[6]

 

 •  Election. An election must be made by the taxpayer.[7]

 

 2.  Treasury Regulations

 

 •  Governmental Authority. The trust must be established by an order of, or be approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law), of any of the foregoing and is subject to continuing jurisdiction of that governmental authority.[8]

 

 •  Types of Claims. The trust is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability–

 

 ◦  under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA); or

 

 ◦  arising out of a tort, breach of contract, or violation of law; or

 

 ◦  designated by the commissioner in a revenue ruling or a revenue procedure; and the trust is valid under state law.[9]

 

 

 

Thomas D. Begley, Jr., CELA

 

Begley & Bookbinder, PC

 

ATTORNEYS AT LAW

COMMITTED TO EXCELLENCE

 

Specializing in Elder & Disability Law

 www.begleylawyer.com

(800) 533-7227

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[1] Id. §468B(d)(2).

[2] Id. §468B(d)(2)(A).

[3] Id. §468B(d)(2)(B).

[4] Id. §468B(d)(2)(C).

[5] Id. §468B(d)(2)(D).

[6] Id. §468B(d)(2)(E).

[7] Id. §468B(d)(2)(F).

[8] Id. 1.468B-1(c)(i).

[9] Id. 1.468B-1(c)(iii).

Summary of Public Benefit and Tax Numbers Adjusted Annually

Summary of Public Benefit and Tax Numbers Adjusted Annually
by Andrew Hook and Thomas Begley

There are a great many public benefit numbers and tax numbers that are adjusted on an annual basis.  The following are current numbers for 2008.

Medicaid

$1,911 Income Cap

$104,400 Maximum Community Spouse Resource Allowance (CSRA)

$20,880 Minimum CSRA

$2,610  Maximum Minimum Monthly Maintenance Needs Allowance (MMMNA)

$1,711.25 MMMNA (until June 30, 2008)

$1,750 MMMNA (July 1, 2008 until June 30, 2009)

$525 Excess Shelter Allowance (July 1, 2007 until June 30, 2008)

Social Security

2.3% For 2008 there has been a 2.3% increase for Social Security

Benefits

$2,185  The Maximum Social Security benefit for a single individual for 2008

$637 Supplemental Security Income (SSI) – Single

$956 Supplemental Security Income (SSI) – Couple

$7,644 Maximum Annual SSI benefit

$11,472 Maximum Annual SSI benefit

$940 Substantial Gainful Activity (SGA) – Disabled

$1,570 SGA – Blind

7.65% Tax Rate Employee

15.30% Tax Rate Self Employed

$670 Trial Work Period

$102,000 Maximum Social Security Wage Base

$1,050 Quarter of Coverage

Medicare

A) Part A

$128.00 Medicare Co-Payment – Skilled Nursing Facility (SNF)

$1,024 Hospital Deductible

$256 Per day/Co-Insurance Day 61 -90

$512 Per day/Co Insurance Day 91-150

Part A Premium (for voluntary enrollees only)

  $233/mth With 30-39 quarters of Social Security coverage

$423/mth With 29 or fewer quarters of Social Security coverage

B) Part B

$135.00 Medicare Part B Deductible

Medicare Part B - Single or Married and Filing Separate return

Part B Income-Related Premium

Beneficiaries who file an individual tax return with income:	Beneficiaries who file a joint tax return with income:	Income-related monthly adjustment amount	Total monthly premium amount
Less than or equal to $82,000	Less than or equal to $164,000	$0.00	$96.40
Greater than $82,000 and less than or equal to $102,000	Greater than $164,000 and less than or equal to $204,000	$25.80	$122.20
Greater than $102,000 and less than or equal to $153,000	Greater than $204,000 and less than or equal to $306,000	$64.50	$160.90
Greater than $153,000 and less than or equal to $205,000	Greater than $305,000 and less than or equal to $410,000	$103.30	$160.90
Greater than $205,000	Greater than $410,000	$142.90	$238.40

In addition, the monthly premium rates to be paid by beneficiaries who are married, but file a separate return from their spouse and lived with their spouse at some time during the taxable year are:

Beneficiaries who are married but file a separate tax return from their spouse:	Income-related monthly adjustment amount	Total monthly premium amount
Less than or equal to $82,000	$0.00	$96.40
Greater than $82,000 and less than or equal to $120,000	$103.30	$199.70
Greater than $130,000	$142.00	$238.40

Standard Part D Cost-Sharing for 2008

On April 2, 2007 CMS issued information about Part D cost-sharing for 2008:

$27.93 Base Beneficiary Premium 

$275.00 Deductible

$2,510.00 Initial Coverage Limit

$4,050.00 Out-of-pocket Threshold 

$5,726.25 Total Covered Part D Drugs to Get to Catastrophic Limit

$2.25 Catastrophic cost-sharing: Generic/ Preferred Drug

 

Low-Income Subsidy Co-Payments (LIS)

Full Benefit Dual Eligibles w/incomes

  ≤ 100% Federal Poverty Level

$1.05 Generic/Preferred Drugs

$0.00 Above Catastrophic Limit

Full Benefit Duals with Incomes

>100% Federal Poverty Level &

Other Full-Subsidy Eligible Beneficiaries

$2.25 Generic/preferred drugs

$0.00  Above Catastrophic Limit

Partial Subsidy Eligible Beneficiaries

  $56.00  Deductible 

  15% Co-insurance to ICL

  $2.25 Generics above catastrophic limit

  $5.60 Others above catastrophic limit 

Tax

A) $12,000 Annual Gift Tax Exclusion

$128,000 Gifts to Non-Citizen Spouse

$10,700 Income Level/Maximum Tax Estates and Trust

$357,700 Income Level/Maximum Single Individual Income Tax

$2,000,000 Federal Estate Tax Exemption

$3,500 Personal Exemption

$1,600 FICA Wage Threshold

$7,000 FUTA Wage Base

$5,000 Maximum IRA Contribution

$1,000 “Catchup” IRA Contribution

$101,000 Applicable Allowable Limit Roth IRA Single Taxpayer

$159,000 Applicable Allowable Limit Roth IRA Married Taxpayer Filing

Jointly

Long-Term Care Insurance

$270 Exclusion from income taxation of daily LTC insurance benefits

Tax Deduction of LTC Premium

$310 40 years old or less

$580 41 to 50 years old

$1,150 51 to 60 years old

$3,080 61 to 70 years old

$3,850 more than 70 years old

§28.01.06 Standard and Poor’s 500 Index

1.9% average S&P dividend yield January 1, 2008.

Explanation of Terms-

Medicaid

B) Income Cap. Many states use an income cap to determine eligibility for some or all Medicaid Programs. These are known as income cap states. Generally the income cap is calculated at 300% of the maximum federal SSI benefit rate for a single individual.

C) CSRA. The Medicaid Catastrophic Recovery Act was designed to avoid impoverishing a community spouse where one spouse is institutionalized. Some states permit the community spouse to retain all countable resources up to the maximum CSRA. Other states permit the community spouse to retain one half of the countable resources not to exceed to maximum CSRA and to retain all countable resources up to the minimum CSRA.

D) MMMNA. Under MCCA the Community Spouse is entitled to a Minimum Monthly Maintenance Needs Allowance. If the income of the Community Spouse falls below the MMMNA, the Community Spouse can retain income from the Institutionalized Spouse to bring the Community spouse up to the MMMNA. Some states permit the Community Spouse to keep all of the income up to the Maximum MMMNA. In other states, the MMMNA is made up to two components, the basic allowance and the excess shelter allowance. Excess Shelter Allowance is calculated by totaling the Shelter Expenses of the Community Spouse. These expenses are limited to rent, a mortgage (including principal and interest), taxes and insurance, utility expenses, and maintenance charges for condominium or co-op. Some states use a flat amount or amounts for the utility allowance.

Social Security

A) Cost of Living. Social Security benefits are indexed to inflation and are adjusted annually to reflect increases in the cost of living.

B) Maximum Social Security Benefit. Social Security Benefits fall into three categories: Social Security Retirement, Social Security Disability Income (SSDI) and Supplemental Security Income (SSI). Social Security Retirement and Social Security Disability Income (SSDI) are based on payments made into the Social Security System by wage earners during their working careers. SSI is a welfare program. There is a maximum Social Security Benefit for any single individual. This is also adjusted annually.

C) SSI Benefit. There is a maximum federal benefit for SSI for single persons and a separate maximum for married couples. Some states provide a state supplement to the federal benefit. There is also a maximum annual SSI benefit.

D) Substantial Gainful Activity. To be eligible for either SSDI or SSI, the applicant must be disabled as defined in the Social Security Act. The statute references the applicant’s inability to perform “substantial gainful activity.” Substantial gainful activity is the ability to earn more than a certain amount published by the Social Security Administration (SSA) on an annual basis. There are two income levels to determine substantial gainful activity. One is for the general population and one is for blind.

E) Trial Work Period. During a trial work period, a Social Security beneficiary receiving disability benefits may test his or her ability to work and still be considered disabled. Social Security does not consider services performed during the trial work period as showing that the disability has ended until services have been performed in at least 9 months (not necessary consecutive months) in a rolling 60 month period. Any month in which earnings exceed the trial work period amount is considered a month of service for the individuals trial work period. The trial work period amount is adjusted annually.

F) Social Security Wage Base. There is a Social Security tax imposed on income up to the maximum Social Security Wage Base. Income in excess of the wage base is not subject to the Social Security tax.

G) Insured Status. To be eligible for Social Security Retirement Benefits or Disability Benefits, a worker must have insured status. This means the wage earner must accumulate a certain number of quarters of coverage. The wage earner is “fully insured” for life if he or she has 40 quarters of coverage. The wage earner is currently insured if he or she has 6 quarters of coverage during a 13 quarter period ending with the quarter in which the person became entitled to benefits. The amount of earnings required for a quarter of coverage is adjusted annually.

Medicare

A) Medicare Part A. Medicare is a medical insurance program that pays for a broad range of medical services. Generally, Medicare Part A covers hospitalization and certain limited coverage in skilled nursing facilities as well as the first 100 days of home care and hospice benefits for the terminally ill. There are premiums, co-payments, deductibles and maximums per spell of illness.

B) Medicare Co-Payment – Skilled Nursing Facility. If a person is eligible for Medicare in a skilled nursing facility, Medicare pays the first 20 days in full but days 21 to 100, the Medicare recipient pays a co-payment and Medicare pays the balance.

C) Deductible. Under Medicare Part A, Hospital coverage is limited to 90 days per spell of illness. For 60 days there is a deductible which is adjusted annually.

D) Co Insurance. For the next 30 days of hospitalization, the patient pays co-insurance of 25% of the deductible. For days 91 to 150 for spell of illness, utilizing “lifetime reserve days”, there is a co-payment of one half of the deductible.

E) Medicare Part B. Medicare Part B covers physicians, diagnostic tests, medical equipment, ambulance services, outpatient physical and speech therapist, certain home care and prostheses. Medicare Part B is available to persons over 65 years of age or eligible for Part A and who are receiving SSDI after two years.

F) Medicare Part B Deductions. There is a deduction for services covered by Medicare Part B. The amount of the deduction is adjusted annually.

G) Premiums. Under Medicare Prescription Drug Improvement and Modernization Act, beneficiaries pay premiums depending on their income. Premiums are adjusted annually.

H) Medicare Part D. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Act of 2003) provides a prescription drug benefit known as Medicare Part D. To be eligible, individuals must be eligible for either Part A or Part B of Medicare. Individuals may obtain the prescription coverage either through a standalone prescription drug plan (PDP) or through a Medicare Advantage Plan (MA-PD).

Tax

A) Annual Gift Tax Exclusion. Tax payers are permitted to make gifts up to a certain amount each year without any gift tax consequences. This is known as the annual gift tax exclusion. The exclusion is indexed to inflation.

B) Gifts to Non-Citizen Spouse. The estate and gift tax marital deduction is not allowed for transfers to a spouse or a surviving spouse who is not a U.S. Citizen. The concern is that the non-citizen spouse will leave the country and avoid federal estate tax. For federal gift tax purposes, the maximum that a spouse can give to a non-citizen spouse is adjusted annually.

C) Income Level/Maximum Tax, Estates and Trust/Single Individual Income Tax. Generally, it is advantageous to distribute income from estates and trusts to individuals rather than pay the tax at the estate or trust tax level. Under the federal Internal Revenue Code, income is taxed on a graduated basis. The maximum income tax rate is 35%. The maximum income tax rate for an estate or trust is achieved at a much lower level of income than the maximum tax rate for an individual.

D) Federal Estate Tax Exemption. There is an exemption from the federal estate tax for each taxpayer’s estate. This is sometimes known as the unified credit. Under current law the amount of the exemption is scheduled to change from $2,000,000 in 2008 to $3,500,000 in 2009. The tax is scheduled to be repealed in 2010 but the tax is scheduled to be reinstated at the $1,000,000 in 2011.

E) Personal Exemption. Each taxpayer is entitled to a personal exemption which is adjusted annually. If a person pays more than 50% of support of a relative and a relative had gross income for the year less than the personal exemption amount and has not filed a joint return with his or her spouse and the person paying the support may claim the relative as a dependant on the person’s federal income tax return.

F)        Federal Insurance Contributions Act (FICA) Wage Base. Social Security and Medicare Part A taxes are imposed on all employers and employees on cash wages in excess of the threshold in any calendar year. Social Security Old Age, Survivors, and Disability Insurance (OASDI) taxes are limited to the Social Security wage base. There is no limit for the imposition of the tax for Medicare Part A.

G) Federal Unemployment Tax Act ( FUTA) Wage Base. If an employee receives total cash wages in excess of the FUTA Wage Base in any calendar quarter, Federal Unemployment Taxes must be withheld.

H) Deductible Contribution Traditional IRA. Taxpayers are permitted to take a tax deduction for contributions to a traditional IRA. The deducti9be amount is $5,000 for 2008. In addition taxpayers 50 years and over are entitled to a “catchup” contribution of $1,000 per year. In calendar year 2008, a maximum deductible contribution is indexed to inflation in increases in multiples of $500.

I) Applicable Dollar Limit Roth IRA. Generally a Roth IRA is treated in the same manner as a Traditional IRA. However, no deduction is allowed for contributions. Contribution limits are the same as for Traditional IRA’s. The bonified adjusted gross income of a single taxpayer to be eligible to contribute to a Roth IRA, the taxpayers adjusted gross income cannot exceed the applicable dollar amount. The applicable dollar amount for married taxpayer filing a joint return is $159,000. The applicable dollar amount for a single taxpayer is $101,000.

Eligible Long-Term Care Insurance

A) Exclusion from Taxable Income. A person who is insured under a qualified long-term care insurance policy is entitled to an exclusion from taxable income a daily amount of long term care insurance benefit. This is adjusted annually for inflation.

B)       Premium Deduction. A portion of the premium for long-term care insurance is deductible as a medical expense. The amount of the allowable deduction depends on the age of the policy holder and is adjusted annually.

Standard and Poor’s 500 Index

The Standard and Poor’s 500 Index (S&P 500) is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Companies are selected by a team of analysts and economists at Standard and Poor’s. The S&P 500 is a market-value weighted index – each stock’s weight in the index is proportionate to its market value. The front-end yield is the average dividend yield for the entire group of stocks. 

Note:  The information in this blog can be found in the forthcoming 2008 Cumulative Supplement to Representing the Elderly or Disabled Client by Thomas D. Begley Jr. and Andrew H. Hook, (Warren, Gorham & Lamont of RIA, 2008). 

Alleging exploitation -- who pays?

Arizona has an especially strong law permitting punishment for abuse, neglect or exploitation of vulnerable adults. Once a finding has been made that a senior was abused, neglected or exploited, the penalties can be quite severe. They can include automatic imposition of treble damages (that is, three times the provable injury). If the defendant was an heir or named in the victim's will his or her inheritance can actually be forfeited. (You can look at Arizona's broad statutory authority at Arizona Revised Statutes section 46-455.)

That's good news for those trying to recover for abuse, neglect or exploitation. But there is another side to the strong Arizona law. It is increasingly common to see allegations of exploitation raised in all sorts of family disputes, and especially in will and trust contests. The result can be extensive and expensive legal investigations and proceedings.

A recent Arizona Court of Appeals (Division I) case illustrates the problem. When Victor Friedman died in Phoenix at the age of 91, he left a warring family, three different trusts, and a will. His will and his trusts almost completely disinherited his son Dennis and, after a small bequest to his sister Libby, left the bulk of his estate to his daughter Jo Ann.

Dennis Friedman was sure that his sister had taken advantage of their father, and he and his aunt Libby filed a probate proceeding in which they alleged that there had been exploitation. They asked that Jo Ann be disinherited as a consequence. After some initial legal skirmishing the family members all agreed that a "special administrator" could be appointed to look into the allegations, and that they would be bound by the special administrator's decision.

The special administrator investigated the background and decided that Jo Ann had behaved completely appropriately. She also questioned Dennis and Libby's motivations for filing the actions, and recommended dismissal of the litigation.

The probate judge granted the dismissal, and then noted that the special administrator had cost the estate $27,500 in legal and investigative fees. The judge ordered that Dennis and Libby's share of the trust estate should pay all those expenses.

Arizona's Court of Appeals (the intermediate appellate court--an appeal might still be taken to the Arizona Supreme Court) considered the case and this week sent the matter back to the probate judge for a follow-up determination. While the appellate court agreed that the cost of investigating allegations that turn out to be unfounded can be assessed against the person making the allegations, that result is not automatic. The Court of Appeals ruled that the cost of investigation must be paid out of the entire estate unless the probate judge finds that Dennis and Libby acted maliciously in promoting their claims of exploitation.

No doubt about it -- Arizona's powerful laws on abuse, neglect and exploitation can help right wrongs committed against the most vulnerable of adults. They can also be invoked without foundation, and incur significant costs for a family member or friend who turns out to be not just blameless, but exemplary. And that's not even the end of the issue; while the estate's (and Jo Ann's) potential liability for the $27,500 cost of the special administrator is being decided, there are presumably many thousands of dollars of legal fees and court costs being incurred by the lawyers on both sides of the question while they work out who is responsible for paying the disputed fee.

The case is In the Matter of the Estate of Friedman, decided February 12, 2008.

Robert B. Fleming
Fleming & Curti, PLC
Tucson, Arizona
www.elder-law.com
www.specialneedsalliance.com

Structured Settlements and the Deficit Reduction Act of 2005

I was recently interviewed for an article in The Structured Settlements Report.  The article considered the impact of the Deficit Reduction Act of 2005 (DRA) on structured settlement annuities for persons receiving needs-based benefits such as Medicaid and Supplemental Security Income (SSI).

Structured settlement annuity brokers could cause problems for their clients if the brokers are not careful in writing these annuities because the clients could lose their eligibility for needs-based government benefits.  The structured settlements should be set up with special needs trusts or Medicare set-asides, which, if created properly, are exempt for Medicaid and SSI eligibility purposes.

The DRA requires that the state be named as the primary beneficiary of an annuity unless the applicant has a spouse, or a minor or disabled child.  The Center for Medicare and Medicaid Services (CMS) permits each state to write its own interpretation on how this DRA provision applies to Medicaid eligibility in the state.  As a result, states may vary on their interpretations and applications of the DRA.  What has pretty much come down from CMS is they are not going to get involved with how a state interprets federal laws.  It gives flexibility in the interpretation by rewriting the eligibility.  What we are beginning to see, however, is that the states are going in all different directions.  This is something that could create a lot of problems.  The potential is for states to restrict the eligibility to qualify for Medicaid.  Some states have already done so by lengthening the review period for qualification from three years to five, and by creating a new period of ineligibility for each new annuity.  Structured settlement annuitants who have not listed the state as the primary beneficiary could end up being ineligible for Medicaid.

I also recommended that structured settlement annuity brokers consult with special needs planning attorneys.  We are trying to work with the structured settlement people to be brought in at an earlier point in the settlement process.  We are experts at what is available. [Special needs plaintiffs] need, typically, a larger reserve fund. [The] issue sometimes comes up after a settlement is entirely structured, and the claimant asks, ‘How am I going to get my house?’  There was no lump sum.  It’s much better to get in early.  You can discuss everything, make plans.  SNA member Bernard Krooks agrees, “It is critical that a structured settlement be placed into a special needs trust or else the claimant could be denied Medicaid.  The personal injury bar is not educated about this.  We are trying to educate personal injury attorneys and structured settlement brokers.” 

Andrew Hook
Oast & Hook
www.oasthook.com

Negative Inheritance

A recent column in Conde Nast’s Portfolio.com addressed the concept of “negative inheritance.”  Economists use this term to describe the situation where any gifts or bequests that children otherwise might receive from their aging parents are outstripped by the costs to the children for caring for their parents.  Negative inheritances can destroy a child’s retirement and financial plans.  For example, if a child had planned to withdraw a small percentage from his or her portfolio each year to support the child’s lifestyle, but now must increase that percentage by fifty percent to take care of aging parents, then the child’s financial plan won’t work.  As a result, financial advisors have developed detailed strategies for dealing with these risks.  These strategies include family dialogue, long-term care insurance, and active management of the parents’ assets.

The most critical element in avoiding negative inheritances is proactive family discussion.  The family dynamics may be difficult, but if the family does not discuss possible scenarios in advance, then the caregiving inevitably falls to one child.  This can cause tension and resentment and can damage the family.  If the children to whom this responsibility will fall are reluctant to bring up the subject with their siblings, then they may want to start by discussing what will happen when the parents can no longer drive.

Financial advisers and elder law attorneys often ask their clients for permission to talk with their aging parents to review the status of their assets, and to determine what plans the parents may have in place for their long-term care.  The financial advisor can then run a series of projections to see if the parents’ assets will be sufficient for their care.  If the funds will not be sufficient, then purchasing long-term care insurance might be an answer, even if the children pay the premiums.  Purchasing a policy that covers half the cost of in-home, assisted living, or nursing home care is better than having no insurance at all.

If the parents cannot qualify for long-term care insurance because of their age or medical conditions, then it is essential to actively manage the parents’ assets.  This may include dealing with the family home; often people are house-rich and cash-poor.  Obviously, selling the family home in order to provide funds for care, or to diversify assets can be stressful for all concerned.  Sometimes, however, it can be the inevitable option.

Studies show that middle-aged caregivers can suffer emotionally and vocationally, as well as financially.  Some baby boomers will work at paying jobs in retirement so they can care for their parents.  The caregiving workload can increase from an average of five hours per week to forty hours per week when the parent suffers from Alzheimer’s disease or severe dementia.  The caregiver has less time to spend with peers and operates on much less sleep.  This emotional toll does not appear on a balance sheet, but it is real.

Andrew Hook
Oast & Hook
www.oasthook.com

468 b TRUSTS by Thomas D. Begley, Jr.

 

 

Section 468(b) of the Internal Revenue Code[1][1] authorizes the establishment of Designated Settlement Funds or Qualified Settlement Funds. These funds are usually collectively referred to as Qualified Settlement Funds (QSFs). The purpose of these funds is to permit a defendant in certain types of litigation to deposit funds into a trust and to receive a full and complete release of liability. The defendant is entitled to a current income tax deduction for the amount paid into the fund at the time the funds are deposited into the trust. This is an exception to the general rule under which the tax deduction is not permitted until the funds are actually disbursed to the plaintiff, which is normally the time in which the plaintiff has received the “economic benefit” of the settlement.

 

These QSFs arose out of class action lawsuits. They can be very useful in personal injury actions and other types of cases where there are multiple plaintiffs. Many of these cases also have multiple defendants. The QSF is usually established prior to trial. The parties agree on a maximum amount for a settlement. The defendant pays that amount into the QSF and the parties can then take their time in allocating the settlement among themselves and in dealing with various liens, such as Medicaid, Medicare, and third party subrogation. The QSF could also be established after a jury award, as long as there is an appeal pending.

 

Advantages of 468(b) trusts include the following:

 

•  Defendant Removed from Litigation. Defendants want to be out of the case. By utilizing a QSF a defendant can pay and go. The defendant pays the funds into the QSF and the parties later allocate the settlement between themselves, determine how much should be lump sum and how much to structure, determine whether a special needs trust is required, and wait while a guardian is appointed for an incompetent plaintiff, if required.

 

•  Defendant Removed from Allocation of Settlement. Where 468(b) trusts are used, the defendant leaves to the plaintiff the issue of allocating the settlement among injured parties.

 

•  Plaintiff’s Attorney’s Fees and Costs. When a 468(b) trust is used, the plaintiff’s counsel can be paid fees immediately from the QSF and litigation expenses can also be paid.

 

•  Income to Plaintiff. The plaintiff will immediately begin to receive income from the settlement held by the 468(b) trust. Without the trust, the defendant would be holding the money and the plaintiff would not be receiving the benefit of the income.

 

•  Deduction to Defendant. Defendants and their insurers are able to obtain immediate tax deductions, rather than waiting for “economic performance” to occur.

 

•  Negotiations. Time is no longer a factor in negotiations with Medicare, Medicaid, and third party insurers. Addition time is available to negotiate and satisfy those liens.

 

Thomas D. Begley, Jr., CELA

 

Begley & Bookbinder, PC

 

ATTORNEYS AT LAW

COMMITTED TO EXCELLENCE

 

Specializing in Elder & Disability Law

www.begleylawyer.com

(800) 533-7227

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"The Sea Inside" (2004)

Wow.

I don't know how I managed to miss this incredible movie when it was first released. Somehow it managed to catch my (limited) attention recently, and tonight I actually watched it. Wow.

No matter how you feel about the "death with dignity" movement, or assisted suicide, I think you will be moved by the story of Ramón Sampedro. Rendered a quadraplegic by a diving accident 26 years ago, at the beginning of the movie he is trying to persuade Spanish legal authorities that he should be allowed to end his own life. Since he is unable to move or control any part of his body below his neck, he is going to need assistance from someone if he is to take that final step.

Here's the "wow" part: the movie is clearly about Ramón's wishes and his legal struggle, but it is also about love, life, birth, redemption, family and faith. Though it is sympathetic to Ramón's cause, the movie also recognizes the complexity and moral, legal and ethical difficulties of his position. His older brother, for example, is movingly portrayed in his opposition to Ramón's quest, both because he views it as morally wrong and because he does not want to lose Ramón.

Finely-drawn, believable and well-acted characters abound, and subplots move the main storyline forward with richness but without distraction. Ramón's odyssey is in no way linear. As portrayed by Spanish actor Javier Bardem, Ramón never wavers from his goal -- but he clearly understands the toll it will take on his loving (and mostly supportive) family.

The movie is Spanish, and it won the Academy Award for Best Foreign Language Film (where was I that I didn't notice?). The story is largely true, and based on the real Ramón Sampedro's life and death. Rent it. Watch it. Tell me what you think, please.

Robert B. Fleming
Fleming & Curti, PLC
Tucson, Arizona

Trusts and Taxes

On January 16, 2008, the U.S. Supreme Court settled a long-running conflict among federal appeals courts regarding fiduciary income taxes for trusts.  In Knight v. Commissioner, (No. 06-1286), the Court ruled in a unanimous opinion that investment advisory fees paid by a trust cannot be deducted in full for income tax purposes.  The Court held that the deductibility of such fees is limited by the 2% floor on miscellaneous itemized deductions.

The Knight case is also known as “Rudkin” because it involves a trust established under the will of Henry A. Rudkin, who, with his wife, founded the Pepperidge Farm Company.  In 2000, the trustee, Henry Knight, hired an outside firm to advise him on investing the trust’s assets.  The trust had approximately $2.9 million in marketable securities, and it paid $22,241 in investment advisory fees.  The trust deducted all of the fees, but the IRS said that the fees had to be limited by the 2% floor.  The IRS allowed the trust to deduct the investment advisory fees only to the extent that they exceeded 2% of the trust’s adjusted gross income.  The result was that the IRS said the trust owed an additional $4,448 in taxes.  The trust said that the trustee had a fiduciary duty to act as a “prudent investor” under Connecticut law and therefore was required to hire an investment professional and pay investment advisory fees.  The trust said that the fees should be fully deductible because they were unique to trusts. 

The Court first reviewed the language of the statute governing deductions from gross income, 26 U.S.C. 67(e).  The general rule of the statute is that “[T]he adjusted gross income of [a] ... trust shall be computed in the same manner as in the case of an individual.”  This means that trusts can deduct costs subject to the same 2% floor that applies to individual taxpayers.  The statute provides an exception to the 2% floor when two conditions are met.  First, the cost must be “paid or incurred in connection with the administration of the ... trust.”  Second, the cost must be one “which would not have been incurred if the property were not held in such trust.”  The Court said that “[t]he statute does not ask whether a cost was incurred because the property is held by a trust; it asks whether a particular cost ‘would not have been incurred if the property were not held in such trust.’” The Court quoted the IRS Commissioner’s brief: “Far from examining the nature of the cost at issue from the perspective of whether it was caused by the trustee’s duties, the statute instead looks to the counterfactual question of whether individuals would have incurred such costs in the absence of a trust.”  The Court agreed with this view and the view of the Fourth and Federal Circuits that “[c]osts that escape the 2% floor are those that would not ‘commonly’ or ‘customarily’ be incurred by individuals.”  The Court said that “whether a trust-related expense is fully deductible turns on a prediction about what would happen is a fact were changed – specifically, if a property were held by an individual rather than by a trust.” 

Applying this reading of the statute to the case at issue, the Court said that it is not uncommon for individuals to hire an investment adviser, and that the “prudent investor” standard does not only apply to trustees.  The standard “looks to what a prudent investor with the same investment objectives handling the investor’s own affairs would do, i.e., a prudent individual investor.”  The Court said that it would be difficult to say that it would be uncommon or unusual for investment advisory fees to be incurred if the same property were held by an individual investor.  The Court did say that it was conceivable “that a trust may have an unusual investment objective, or may require a specialized rebalancing of the interests of the various parties, such that a reasonable comparison with individual investors would be improper.  In such a case, the incremental cost of expert advice beyond what would normally be required for the ordinary taxpayer would not be subject to the 2% floor.”  The trustee in the case before the Court did not make such an assertion, and, therefore, the Court held that the investment advisory fees were subject to the 2% floor.

This decision is particularly significant for large trusts that routinely spend substantial amounts on investment advisory fees.  Many trusts, and beneficiaries will be paying higher taxes.

Andrew Hook
Oast & Hook
www.oasthook.com