Portability Elections: Update

A month ago I wrote a blog on portability, which is an estate tax concept in which a surviving spouse keeps the estate tax exemption of the deceased spouse.  That blog focused on what it is and its potential tax advantages for families.  See here for that article:  https://www.galliganmanning.com/why-you-should-elect-portability/  

Incredibly, the IRS published a revenue procedure last Friday extending filing deadlines for estates which only need to elect portability to 5 years after death.  The time limit had been 2 years.

Previously, the IRS would consider an extension beyond the 2 year limit in private letter rulings.  Essentially, you could write to the IRS explaining why you would need more time or were unable to complete the return in 2 years, and the IRS would consider an extension.  Portability is sometimes so critical that many, many individuals made private letter requests for extensions past the 2 years.  The IRS indicated they received so many letter request that it placed a “significant burden” on IRS resources, so much in fact that the IRS extended the deadline to avoid the need for those letter requests.

You can find the full revenue procedure here:  https://www.irs.gov/pub/irs-drop/rp-22-32.pdf

Now, it is important to recognize this only changed the deadline for returns that are only filed for portability purposes.  If the decedent had sufficient assets so that a return was required (i.e. their assets met or exceeding their exemption), then it remains due within 9 months of death and not filing timely or paying timely could have serious consequences.  Accordingly, in all cases going forward you should assume the deadline in 9 months, but may have the option of up to 5 years.

The immediate advantage of this rule is it gives us more hindsight.  If you or someone you know lost a spouse in the last 5 years and they did not file an estate tax return, it might be worth considering.  Many people didn’t do this a few years ago because the exemptions were high.  They assumed that if the survivor’s exemption was going to be, say $10 million, then portability wouldn’t be necessary and they didn’t take steps to elect it.

However, currently Congress has not changed the estate tax law.  The exemption is still set to cut in half in 2026.  Further, COVID has disrupted the economy in a way that has negatively affected the market, but also lead to substantial growth in some industries and for some individuals.  So, whereas portability might not have seemed prudent 6 months after the death of a loved one, it might seem so 3.5 years after the death of a loved one.  Thanks to this new procedure, filing for portability is still possible.

Similarly, if you were in charge of an estate, either as an executor, administrator or trustee, it might be worth considering doing this as a prudent discharge of your duties. It would potentially assist a surviving spouse and ultimately lead to less tax for the family, and will avoid questions from beneficiaries about why you didn’t do it in the first place.

You can find the full revenue procedure here:  https://www.irs.gov/pub/irs-drop/rp-22-32.pdf


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How Do I Store Estate Planning Documents?

It’s a common series of events: an elderly parent is rushed to the hospital and once children are notified, the frantic search for the estate planning documents starts. It’s easily avoided with planning and communication, according to an article from The News-Enterprise titled “Give thought to storing your estate papers.” However, just because the solution is simple doesn’t mean most people address it.

As a general rule, estate planning documents should be kept together in a fire and waterproof container in a location known to and accessible by fiduciaries, and copies of some documents should be given to the fiduciaries in advance.

Most people think of bank safety deposit boxes for storage. However, it’s not a good location for several reasons. Individuals may not have access to the contents of the safe deposit box unless they are named on the account. Often a court process is necessary for permission to open a safety deposit box if no one is named on the account.

Even with their names on the account, emergencies don’t follow bankers’ hours and access may be difficult. Further, what if the Power of Attorney giving the person the ability to access the safe deposit box is inside the safe deposit box or the principal has died and the Will is in the box.   Bank officials are not likely to be willing to open the box to an unknown person and proof of that person’s authority is in the box.  This is like locking the key in the safe.

Even further, COVID and the economy have led many banks to close or not offer safety deposit boxes.  Banks don’t want to maintain as many brick and mortar locations, so that means safety deposit boxes have to go.

When you store estate planning documents, a well-organized binder of documents in a fire and waterproof container at home makes the most sense.

Certain documents should be given in advance to certain organizations or individuals.  For instance, health care documents, like a Medical Power of Attorney, Directive to Physicians (Living Will) and HIPAA authorizations, may be given to your agents, as well as to your primary care physician or to the medical facility if you go in for a procedure.  This way, agents have the necessary documentation should an emergency occur, and medical systems can add the documents to their file for you.  This way everyone (especially medical providers) are on the same page about your wishes and who will speak on your behalf.

Mary touched on other items that shouldn’t be kept in a safety deposit box in this article.  https://www.galliganmanning.com/things-you-should-not-keep-in-your-safe-deposit-box/  

Financial Powers of Attorney should be given to each financial institution or agency in preparation for use, close in time to when you expect to need it.

This may feel onerous, however, imagine the same hours spent communicating with banks plus the immense stress if the need to use it is time sensitive. Banks often want to review POA’s in advance of their use before accepting them, and that may take several weeks.

If your estate plan includes a trust, you’ll want your trustees’ to have a copy when you are ready to give it to them, and the original can be kept safe with your documents.

Wills are treated differently than POA documents. Wills are usually kept at home and not filed anywhere until after death.

Also, with all documents, especially the Will, it is important to track and keep safe the originals.  You may sometimes be able to probate copies of Wills, but it’s better to keep the original secure and avoid the need to probate a copy.  This is less critical for other documents, but the same policy holds.

Having estate planning documents properly prepared by an experienced estate planning attorney is the first step. Step two is ensuring they are safely and properly stored, so they are ready for use when needed.

Reference: The Times-Enterprise (June 11, 2022) “Give thought to storing your estate papers”

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Does a Supplemental Needs Trust have an Impact on Government Benefits?

I wanted to touch on a topic that has come up quite a lot recently, namely, how to leave property to individuals with disabilities.  The key to this, in most cases, is to create a Supplemental Needs Trust (SNT) which will allow individuals with disabilities to retain inheritances or gifts without eliminating or reducing government benefits, like Medicaid or Supplemental Security Income (SSI).  Using the SNT allows them to receive additional funds to pay for things not covered by their benefits.

Having an experienced estate planning attorney properly create the SNT is critical to preserving the individual’s benefits, according to a recent article titled “Protecting Government Benefits using Supplemental Needs Trusts” from Mondaq.

Individuals who receive SSI must be careful, since the rules about assets from SSI are far more restrictive then if the person only received Medicaid or Social Security Disability and Medicaid.

The trustee of an SNT makes distributions to third parties like personal care items, transportation (including buying a car), entertainment, technology purchases, payment of rent and medical or therapeutic equipment. Payment of rent or even ownership of a home may be paid for by the trustee.

The SNT may not make cash distributions to the beneficiary. Payment for any items or services must be made directly to the service provider, retailers, or other entity, for benefit of the individual. Not following this rule could lead to the loss of benefits as giving the money to the beneficiary counts against their benefit’s asset limit.

Now, some families who already have a loved one utilize government benefits might be familiar with SNTs generally.  If that’s the case, there is a second aspect of SNTs to be familiar with which is whether the SNT is funded with the individuals’ assets or other people’s assets.

If the SNT is funded using the person’s own funds, it is called a “First-Party SNT” This is a useful tool if the disabled person inherits money, receives a court settlement or owned assets before becoming disabled.

If someone other than the person with disabilities funds the SNT, it’s known as a “Third-Party SNT.” These are most commonly created as part of an estate plan to protect a family member and ensure they have supplementary funds as needed and to preserve assets for other family members when the disabled individual dies.

The most important distinction between a First-Party SNT and a Third-Party SNT is a First-Party SNT must contain a provision to direct the trust to pay back the state’s Medicaid agency for any assistance provided. This is known as a “Payback Provision.”

The Third-Party SNT is not required to contain this provision and any assets remaining in the trust at the time of the beneficiary’s death may be passed on to residual beneficiaries.

Many estate planning attorneys (ourselves included) us a “standby” SNT as part of their planning, so their loved ones may be protected, in case an unexpected event occurs and a family member requires benefits.

References: Mondaq (May 27, 2022) “Protecting Government Benefits using Supplemental Needs Trusts”



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