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    What Executors and Personal Representatives Need to Know About Basis Reporting

    With the March 31, 2016 deadline for estates required to report basis information now behind us, personal representatives, executors and their advisors are scrambling to make sure they properly comply. The new basis reporting requirement was created by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, effective for estate tax returns required to be filed after July 31, 2015, in an effort to ensure that estates and their beneficiaries are reporting the same values to the IRS. New Sec. 1014(f) requires consistent basis reporting between an estate and a beneficiary, and new Sec. 6035 imposes a reporting regime whereby an executor of an estate who is required to file a federal estate tax return must also provide statements to the IRS and to each beneficiary reporting the values of estate property.


    Since the legislation passed, and to provide additional guidance, the IRS delayed the initial deadline for estates required to report basis information to March 31, 2016; though, generally, the deadline would be only 30 days from the earlier of the date the estate return is required to be filed or is actually filed. On March 2, 2016, the IRS issued the guidance everyone was waiting for — proposed regulations (REG-127923-15), which may be relied upon. While many aspects of the legislation would be clarified in the proposed regulations, unexpected new burdens would arise should the proposed regulations be finalized. Here’s what executors and their advisors need to know when it comes to basis reporting:

    • Reporting: A final Form 8971Information Regarding Beneficiaries Acquiring Property From a Decedent, and its Instructions were issued at the end of January. An executor must file Form 8971, including all Schedules A, with the IRS. A separate Schedule A (but not a Form 8971) must be provided to each beneficiary receiving property from the estate. According to the proposed regulations, for trust, estate, or entity recipients, Schedule A would be provided to the trustee, executor, or entity, respectively.

    • Undistributed Property: As stated above, Form 8971 and Schedules A are generally due shortly after the filing or due date of the federal estate tax return. It is often the case at that point in time that estates have not yet distributed property and cannot yet identify the property that will be eventually distributed to each beneficiary. The proposed regulations would address this problem by requiring an executor to list on a beneficiary’s Schedule A all property that could potentially be used to satisfy the beneficiary’s interest. However, there is speculation among practitioners that without a better explanation on Schedule A, this reporting method could be confusing to beneficiaries and cause them to believe they are entitled to more property than they will be receiving. Once an estate’s distributions are determined, an executor would not be required to file a supplemental Form 8971.

    • Returns Filed But Not Required: The proposed regulations would clarify that basis reporting would not be required for estates that filed a federal estate tax return merely for purposes of electing portability, making a GST exemption allocation, or any other reason.

    • Excluded Assets: Under the proposed regulations, certain assets would be excluded from the basis consistency and basis reporting requirements, such as: (1) cash (other than coin collections); (2) items of income in respect of a decedent (IRD); (3) tangible personal property with a value of under $3,000; and (4) property sold, exchanged, or otherwise disposed of by the estate in a taxable transaction. While property that qualifies for the federal estate tax marital or charitable deductions would not be subject to the §1014(f) basis consistency requirement because it would not increase the estate’s federal estate tax liability, such property would still be subject to the §6035basis reporting requirement.

    • Subsequent Transfers: Perhaps the most significant proposed regulation would be the additional filing obligation for certain subsequent transfers of property that were subject to the basis reporting requirement. If the beneficiary receiving the property subsequently transfers the property to a family member or controlled entity, the beneficiary-transferor must file a supplemental Form 8971 with the IRS (and sometimes the executor) and provide the transferee with a Schedule A within 30 days of the transfer. The IRS explained in the preamble to the proposed regulations that it is concerned about opportunities to circumvent the purpose of the statute. However, many practitioners worry that those that would be affected by the rule, i.e., the original beneficiaries of the property, are unlikely to know they have a filing obligation.

    • Zero Basis Rule: Another surprising rule found in the proposed regulations would give beneficiaries a zero basis, rather than a step up in basis, for estate assets an executor fails to report on a federal estate tax return before the expiration of the statute of limitations, either because the property was later discovered or otherwise omitted. Additionally, where a federal estate tax return was never filed, the basis of property would be zero until the final value is determined.

    This likely will not be the last you hear on the proposed regulations. Comments on the proposed regulations were due June 2, 2016, and a couple of organizations made submissions to urge the IRS to further delay the initial reporting deadline. Stay tuned.....


    Expanded Estate Recovery: Negative Impacts of Proposed Legislation


    MassHealth (our state Medicaid program) pays for nursing home care when your assets are spent down below the applicable financial limits. Federal and state law allows MassHealth to seek reimbursement for this benefit by making a claim after death against the individual’s estate. Presently, MassHealth estate recovery is limited to so-called “probate assets.” Probate assets are those held in the decedent’s sole name; without a joint owner or beneficiary. This means that MassHealth can only recover against assets held in the decedent’s sole name.  All other assets held at death are protected from MassHealth under current law. Governor Baker’s House budget proposal for Fiscal Year 2017 seeks to change this rule and expand estate recovery for MassHealth members to property in which the decedent had “legal title” or an “interest” in immediately before their death.

    This would include jointly held assets, life estates in real estate, and even some assets held in trust.  The law would also allow the recovery of Medicare Part D pharmacy payments made to the federal government. The laws as it stands now makes logical sense; “estate recovery” should be limited to assets in a decedent’s “estate.” Recovering from assets outside of a decedent’s estate is unfair to the most vulnerable population, unworkable administratively, will add additional burdens on the already taxed judiciary and therefore should not be supported.   

    This proposed legislation was previously enacted by the Massachusetts legislature in July 2003, but was subsequently repealed (after public uproar) due to the significant delays and confusion it caused to many families. All the money collected was ultimately refunded, resulting in an excess cost to the Commonwealth rather than the cost savings that the legislation sought. The administrative costs of this proposed legislation would be truly detrimental to the Commonwealth and its residents. Other states, including New York, have enacted similar legislation only to repeal it for lack of success.

    Families often own property jointly with survivorship rights for a variety of reasons including the management of the assets of an incapacitated family member, the avoidance of probate, and assisting in the support and needs of the extended family. This legislation would effectively allow MassHealth to seek reimbursement from these jointly held assets and expose property that would otherwise pass by rights of survivorship to MassHealth estate recovery. This result would be especially problematic for spouses who most commonly own their homes jointly. Under the proposed legislation, the surviving spouse would be unable to sell or mortgage their property without first going through the burdensome process of addressing the estate recovery claim. Other groups that will likely suffer from this legislation are the poor and uninformed who are unaware that their property interests have left them vulnerable to estate recovery. It is easy to see how this legislation would cause already grieving family members undue stress, costs and confusion. Aside from the personal aggravation it will surely cause, this proposed legislation undermines the laws that govern how property is owned and transferred and also impact the family homestead.

    Lastly, the proposed legislation will complicate the probate process for everyone in Massachusetts, regardless of whether they received MassHealth benefits. Remember, every probate as a matter of course has to provide notice to MassHealth. Expanded estate recovery will delay pay-outs on insurance and real estate transactions as families and financial institutions are forced to comply with these complex rules.  In addition it leaves families who planned to avoid probate in a state of confusion as to how ensure that there is no lien issue upon property conveyance. 

    This proposed legislation would cast even more uncertainty over long term care and special needs planning. Without laws that clearly define what is and what is not subject to estate recovery, special needs planners will be unable to effectively plan for their clients and assure them that they will be protected.

     If you oppose this legislation please contact your state legislators and let them know how you feel.   


    Benefits of Forming a Limited Liability Company for Commercial Real Estate or Rental Property Owners

    Have you recently inherited real estate which you intend to rent to the public? Do you own a small business which operates out of real property which you own personally? Perhaps you have invested in rental properties. In all of these scenarios, we have all too often seen clients who hold the real estate in their own personal names. Owning commercial real estate personally can be a risky proposition because once an individual does business with the public and/or has an employee, he or she is opening himself or herself up to legal liability, including tort claims (e.g. personal injury) and contract liability. This article discusses forming a limited liability company to own and hold title to the real property to protect the owner’s personal assets.

    What is a limited liability company?


    A limited liability company is a relatively new form of business organization that has been growing in popularity for small business owners and owners of real estate properties. It is a flexible legal entity that combines the pass-through taxation of a partnership (or sole proprietorship) with the limited liability of a corporation. Limited liability companies do not have the same “corporate formalities” as a corporation. For example, there are no requirements to hold annual meetings of equity owners, operations may be placed under the control of one or more individuals (known as “Managers”) rather than having a board of directors. So operating and managing property out of a limited liability company generally would not place much administrative burden on property owners.

    Formation of a limited liability company.

    In Massachusetts, limited liability companies are relatively easy to form. A Certificate of Organization must be filed with the Secretary of the Commonwealth, Corporations Division and a $500 filing fee must be paid. The Certificate of Organization must state the name of the entity, the address of the limited liability company in Massachusetts, the name and address of the resident agent for service of process (which must be an individual resident of Massachusetts, a Massachusetts corporation or a corporation qualified to do business in Massachusetts), the date of dissolution, the name and address of any managers, the general character of the entity’s business, and the name and address of any other person who is authorized to sign documents and recordable instruments in real property. Once a limited liability company is formed, minimal annual maintenance (annual reports with a $500 filing fee) is required.

    Protects Personal Assets

    Limited liability companies provide limited liability protection to their owners (or members). Under Massachusetts law, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are generally solely the debts, obligations and liabilities of the limited liability company. Further, no member or manager of a limited liability company is personally liable, directly or indirectly, including, without limitation, by way of indemnification, contribution, assessment or otherwise, for any such debt, obligation or liability of the limited liability company, solely by reason of being a member or acting as a manager of the limited liability company. Note, however, that there can be certain exceptions to the general rule that members are not liable for the obligations of the limited liability company, including, for example, liability for payroll taxes due to the IRS and/ or liability for fraud.

    Assume for example that a real property owner (an individual) is sued by a renter for a slip and fall accident on a property for which the owner (individual landlord) was responsible for the upkeep. If the property were held by the individual, the renter would be able to pursue the owner’s personal assets, such as his or her house and savings accounts, etc. However, if the property were held in the name of a limited liability company, that same individual would not be personally responsible and the renter would not be able to pursue the individual’s assets. The exposure of the individual would be limited to losing any assets contributed to the limited liability company (such as the real estate).

    Limited Liability Formalities

    In order to avail oneself to limited liability, it is essential that the owner(s) and the limited liability company maintain separate identities. In this regard, it is important to keep the affairs of the limited liability company and the managers and members separate. Assets and liabilities of the limited liability company should always be separate from the assets and liabilities of its members and managers. The limited liability company’s funds should not be used for the personal benefit of its owners. The managers of the limited liability company should open and maintain separate financial books and records, and open and keep separate bank accounts for the LLC. Intermingling of personal and limited liability company funds, property and transactions should be avoided. The managers should only use the business checking accounts and business credit card accounts for business expenses and should not pay personal expenses out of the company checking accounts. Efforts should be made to ensure that the limited liability is adequately capitalized to pay its basic expenses. There should be paper trails for any contributions or distributions of capital by and/or to the members and such transactions should be tracked by an accountant in the members’ capital accounts. All contracts and leases involving the real property and the limited liability company should be signed in the name of the limited liability company. Insurance policies should be held in the name of the limited liability company and paid for by such company. If individual owners have owner’s title insurance policies, a change endorsement naming the company as the new owner of any real estate property should be reported to the insurance company.

    Transfer of the Deed

    In the event you hold real estate in your name individually and would like to avail yourself of better personal protection, you will also need to transfer the property from yourself to the limited liability company. If there are no mortgages on the property, this would entail a straightforward deed recording at the appropriate Registry of Deeds with the changes in the insurance policies and title insurance as noted in the paragraph above. In the event that there is a mortgage on the property, the lending institution will need to be contacted in order to alert them to the transfer and, in such cases, the lending institution may require additional agreements be put in place.

    We are available to assist business and property owners form new limited liability companies and transfer their real property into such entities in order to help protect the assets of the property owners. If you need assistance or would like to discuss these matters, please contact us at any time.


    The Importance of Estate Planning for Young Adults

    Although your child may have only just recently left for freshman year of college, if your son or daughter is over the age of 18, then he or she is considered an adult by the Commonwealth of Massachusetts and by the majority of other states. As an adult, your child is entitled to medical and financial independence. He or she is also entitled to privacy. This means that, should your child suffer physical or mental impairment, even temporarily, it will be difficult – if not impossible – for you to make important medical and financial decisions on his or her behalf. 


    You may even be unable to obtain medical information about your child without a court order. Thus, while no parent enjoys thinking about his or her child being involved in such a crisis, it is important to prepare for the unthinkable. A college-age child can prepare effectively by signing each of the following three legal documents:

    1. Health Care Proxy

    2. A Health Care Proxy is a document in which your child appoints a person or persons, typically a parent or parents, to make important medical decisions on the child’s behalf in the event that he or she is unable to do so. A Health Care Proxy can be enhanced by a Living Will (also known as an Advance Directive), wherein your child may express his or her wishes regarding treatment decisions.

    3. HIPAA Authorization

    4. A Health Care Proxy is of limited value without a Health Insurance Portability and Accountability Act (“HIPAA”) Authorization. Without a HIPAA Authorization, your child’s physician may not disclose his or her medical information to anyone, including you as parent. This is true even if your child is covered under your medical insurance and even if you will be paying the medical bills. Consequently it is imperative for your child to sign a HIPAA Authorization to give health care providers permission to disclose privileged information to you.

    5. Durable Power of Attorney

    6. A Durable Power of Attorney is a document in which your child can give you the ability to act on his or her behalf regarding financial and legal matters, regardless of whether he or she is able to make such decisions. Should your child become unable to manage his or her financial and legal affairs, including bank accounts, lease agreements, student loans, and filing of taxes, a Durable Power of Attorney enables you to step in and handle such matters directly.

      In addition to being invaluable in case of emergency, a Durable Power of Attorney may also be a source of great convenience for a college-aged child. Students frequently travel across the country or even abroad during college, and in such situations a Durable Power of Attorney ensures that a parent is able to transfer assets, access bank accounts, speak with school finance departments, contact local embassies, and manage any other issues that may arise in the child’s absence.

      If your child does not wish to give you such sweeping, immediate authority, a Springing Power of Attorney provides the same protection, but only “springs” into power under circumstances set forth in the document. Most frequently, a Springing Power of Attorney will spring into effect when two doctors have certified in writing that your child is incapacitated. However, though a Springing Power of Attorney may sound more attractive to your son or daughter, it has some disadvantages. Specifically, third parties may be reluctant to rely upon the document and it may be difficult to obtain the necessary doctors’ certifications, as many physicians are reluctant to make such an important determination.

      If your child has not signed these important documents, you should consider having him or her do so the next time he or she comes home for a long weekend or school vacation. Please contact us for more details and information on implementing these important steps.


    Long-Term Care Cost Concerns

    According to a poll by Harris Interactive, most Americans are anxious about how they will pay for nursing home or at-home care.  In Massachusetts, monthly nursing home care costs can exceed $12,000.  While 68 percent of the respondents said they were very or somewhat worried about the costs of long-term supports and services, they were unclear on how these costs are paid for today and what should be done about it.

    A majority of those surveyed held misconceptions about how most of these costs are currently financed. Less than a fifth knew that Medicaid is the country’s major funder of long-term care. One third mistakenly thought Medicare was responsible for long-term care services, even though the program pays for almost none of the costs.  About half were under the impression that the majority of costs were paid privately by individuals. Two-thirds of the respondents believed most people should buy long-term care insurance, even though less than 10 percent of Americans actually have policies in place to cover long-term care.   In reality, very few Americans can save enough money to pay for long term care in their final years.

    The public confusion over long-term care shown in the poll is consistent with past surveys. However, nearly all the respondents agreed that paying for seniors’ long-term care needs is a serious issue, especially in light of America’s aging population.  Most responded favorably to the idea of more public support through a new government program. The problem of rising costs of senior care was not addressed by the Affordable Care Act, despite mounting frustrations over the current system’s shortcomings.  The federal Long Term Care Commission, a congressional panel, issued recommendations on how to improve the delivery of long term care.  However, not surprisingly they could not reach a consensus on how to finance any of their recommendations.

    The poll’s findings highlight the looming long-term care crisis facing our nation. Baby boomers are aging in massive numbers, creating what is known as the “Silver Tsunami.” There are currently 12 million Americans receiving some form of long-term care and that number is expected to double within the next 20 years.  It is estimated that more than two-thirds of those aged 65 and over will need some type of long-term care. 

    Unfortunately, this growing population has done little to prepare for their long-term care needs. In addition, many are planning based on misconceptions, as reflected in these survey responses. Now more than ever, it is critical for clients to plan for long-term care with an elder law attorney and consider long-term care insurance or, when appropriate, implementing a Medicaid asset protection plan.