MAY 2020
CURRENT ISSUES IN THE AREAS OF ESTATE, TAX
AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
A Review Of Reverse Mortages. A reverse mortgage is a financial planning tool for people who are over age 62 and wish to tap into their home equity. Most reverse mortgages are underwritten and insured by the federal government (they are called home equity conversion mortgages or “HECMs”), but some are underwritten by private financial institutions. It is also possible for a family to enter into a private reverse mortgage if there are family members who have funds available to loan to the parent. The amount of the loan can be paid out in a lump sum or through installment payments. The homeowner is required to pay real estate taxes, maintain insurance, and pay other expenses associated with the ownership. Certain triggering events will require that the loan be repaid. This will occur upon the death of the borrower, or if the homeowner is no longer using the property as a primary residence, or if the borrower fails to pay taxes, insurance, maintenance, etc. Reverse mortgages tend to be fairly expensive loans to initiate with relatively high closing costs, and the younger the borrower, the less money the homeowner will be able to borrow relative to the property’s value (because of the interest that will accrue in respect of the funds borrowed over a longer period of time). Reverse mortgages definitely have a place in helping to meet the needs of older homeowners. However, people need to be aware of the fact that there are other options, and that even if a reverse mortgage is an appropriate option, if there are funds available within the family, funds can be loaned pursuant to a private reverse mortgage arrangement at much less cost and with much greater flexibility. If the parent later is no longer living in the property, the family will be able to coordinate the sale of the property in order to pay off the reverse mortgage with greater flexibility that may yield a much better financial result to the parent and the family. When funds are needed by an older homeowner, many options are available to meet his or her needs.
IRS ABLE Account Regulations. Previous issues of this newsletter have addressed various aspects of ABLE accounts. Readers may also consult my website, www.rkcraiglaw.com, which provides a significant amount of additional information regarding ABLE accounts. ABLE accounts are derived from the Achieving a Better Life Experience Act of 2015 (the “ABLE” Act). ABLE accounts are tax-favored accounts that can be set up for a disabled beneficiary in an amount equal to the gift tax exclusion (currently $15,000 per donee per year). The maximum amount to be contributed based on the annual donee exclusion is the maximum amount that is allowed from all sources. However, under the Tax Cuts and Jobs Act, account owners who work and earn income are permitted to make contributions to their ABLE accounts in excess of the $15,000 annual contribution limit. On October 10, 2019, the IRS published proposed regulations governing ABLE account contribution limits. The regulations will not be effective until publication in the Federal Register in final form. The proposed rule adds T.R. § 1.529A-8, which limits the annual ABLE account contribution limit for a qualified ABLE account beneficiary to the lesser of either the beneficiary’s compensation for the taxable year or an amount equal to the applicable federal poverty guideline in effect for a one-person household for the calendar year preceding the calendar year in which the designated beneficiary’s taxable year begins. Consequently, an ABLE account beneficiary with compensation can contribute an additional amount to his or her ABLE account, in addition to the $15,000 annual contribution limit, equal to the amount of his or her income or the federal poverty guideline for a one-person household in the particular state. As an example, if an ABLE account beneficiary has compensation of $20,000, and if the federal poverty guideline for a one-person household in that state for the applicable year is $13,960, then the beneficiary could contribute (or could have contributed by others) not only the full $15,000 annual contribution limit to his ABLE account, but also an additional sum of up to $13,960 to his or her ABLE account. Please note that the ability to make larger contributions based on earnings will sunset in 2025 under the Tax Cuts and Jobs Act of 2017.
Nursing Home Arbitration Agreements. When the revised Centers for Medicare and Medicaid Services (“CMS”) regulations were issued on October 4, 2016, there were various provisions that were going to be phased in. Certain phases were delayed. The revised regulations would have prohibited the use of pre-dispute arbitration agreements. However, the ban on arbitration was enjoined by a lawsuit brought by a nursing facility trade association, and CMS declined to pursue an appeal. CMS then released a new final rule governing long term care facilities participating in the Medicare and Medicaid programs on July 16, 2019 which allows facilities to use arbitration agreements with residents or prospective residents. They may now incorporate a voluntary provision for pre-dispute arbitration with the resident in an admission agreement. However, the resident’s admission or continued care at the facility cannot be conditioned on consent to binding arbitration. The resident or the resident’s representative has the ability to decline to enter into an agreement and cannot be denied admission or continued care for doing so. It must be explained clearly that the resident’s or the resident’s representative’s agreement is not a condition to admission. It should also be noted that long term care facilities must retain arbitration documents for five years. Such documents, including an arbitrator’s final decision, must be retained for five years and must be available for inspection by CMS.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.