In the latest decision on irrevocable trusts, Heyn v. Medicaid, the Appeals Court concludes that MassHealth erred in determining that property in an irrevocable trust was a “countable” asset and overturned the lower court’s decision affirming MassHealth’s holding. To learn more about this case and its implications for irrevocable trusts and Medicaid planning, click HERE.
Citation: TC Memo 2016-51
Overview: The Tax Court held that the value of investment assets transferred to a family limited partnership (“FLP”) by decedent must be included in the decedent’s estate without discount. The Tax Court determined that there were no legitimate and nontax reasons for transferring assets to the FLP, and that there was an implied agreement that the decedent retain the possession or enjoyment of, or the right to use the income from, the transferred property.
Summary of Facts: Decedent (through her son, who held her power of attorney), created a limited partnership in which she was the 99.9% limited partner, and her wholly-owned LLC was the 0.1% general partner. Approximately a week after creating the entities, decedent contributed nearly $6 million of marketable securities to the partnership. On that same day, she sold her entire membership interest in the LLC to her two sons, and gave 10% of her interests in the limited partnership to an irrevocable trust that she created.
Following all of the transfers, decedent owned 89.9% of the limited partnership, and also retained significant assets outside of the partnership.
The limited partnership agreement stated that one of its purposes was to provide “a means for members of the Holliday family to acquire interests in the Partnership business and property, and to ensure that the Partnership’s business and property was continued by and closely-held by members of the Holliday family.” Limited partners did not have a right to participate in the partnership’s business or operations, but the agreement did provide for distributions to limited partners to “the extent that the General Partner determine[d] that the Partnership ha[d] sufficient funds in excess of its current operating needs to make distributions.”
The partnership made one small ($35,000) pro rata distribution.
Decedent died two years after the creation of the FLP, and her estate claimed a 40% discount for her remaining 89.9% limited partnership interests.
Tax Court Analysis: The IRS argued that the transfer of assets to the partnership triggered §2036(a)(1), requiring that the partnership assets be included in decedent’s estate without a discount.
Inclusion under §2036(a)(1) requires that (i) the decedent made an inter vivos transfer of property, (ii) the decedent retained (either explicitly or by implied agreement) the possession or enjoyment of, or the right the income from the property, and (iii) the transfer was not a bona fide sale for adequate and full consideration.
Focusing on the second requirement of §2036(a)(1), the Tax Court found that decedent retained, by implied agreement, the enjoyment of the property. The Tax Court focused on language in the partnership agreement requiring the distribution of “distributable cash” (cash in excess of operating needs) on a periodic basis. The Tax Court also determined that that the decedent was entitled to distributions in certain circumstances, and that operationally, according to testimony of decedent’s son, if decedent needed a distribution, one would have been made to her.
Further, focusing on the third requirement of for inclusion under §2036(a)(1) – that the transfer was not a bona fide sale for adequate and full consideration – the Tax Court rejected the nontax arguments for the creation of the limited partnership. Specifically, the Tax Court rejected the following as legitimate and significant reasons for creating the partnership:
- Protection from litigators’ claims: The Tax Court noted that decedent had never been sued before, was not at high risk from “trial attorney extortion,” and in fact held other substantial assets that could be reached by any attempted extortion.
- Protection of assets from “undue influence of caregivers”: The Tax Court focused on the fact that decedent’s property was managed by her sons as evidence of her reduced susceptibility to this concern, and also cited a lack of evidence of any concern about this issue in forming the partnership.
- Preservation of assets for the decedent’s heirs: The Tax Court noted that the decedent was not involved in creating the entities, but that her sons did so as her power of attorney, and that other family assets were managed well without need for this structure.
The Tax Court made other determinations that undermined evidence of a bona fide transaction. The Tax Court found that this was not an arms-length transaction because no real negotiation or bargaining occurred. Further, the limited partnership did not maintain adequate books and records or follow other formalities that supported its operating as a meaningful stand-alone entity. Finally, the Tax Court noted that there was no active management of the assets, but rather only passive trading, which supported an argument that the transfers occurred only to obtain a valuation discount.
Topic: The Essex Division of the Probate and Family Court Department will be holding a seminar on the e-filing pilot program of Estate and Administration cases.
When: Monday, May 9th at 4PM
Where: The Essex Probate and Family Court, 45 Congress St., Salem, MA. 01970
Description: A representative from Tyler Group, the vendor of the new e-filing system, will be conducting this seminar and will be available to answer any question attendees might have on registration and use of the Tyler e-Filing Attorney Portal. All members of the bar are welcome.
The Massachusetts Probate & Family Court recently released part 2 of a 2-part update to its estate forms. A link to the Court’s April 15th “Decoder” (with further links to the new forms and instructions) is found HERE.
By Amanda L. MacGee, J.D. of Burns & Levinson LLP
In Estate of Weaver (Case 15-P-714) (March 2, 2016), three siblings appealed an order of the Probate and Family Court. The Weaver siblings were children of the decedent’s first marriage. During the decedent’s second marriage he and his wife executed reciprocal Wills, leaving their estates to each other, with the decedent’s step-daughter as the alternate recipient. In challenging the Will, the siblings claim undue influence as well as alcohol and drug use by the decedent and his second wife as factors. Decedent’s second wife predeceased him and he did not change his Will prior to his death leaving his entire estate to his step-daughter on his death.
The Appeals Court affirmed the decision of the Probate and Family Court, striking the decedent’s children’s affidavits of objection to his Will. The court found that had his Will been influenced by his deceased wife and estranged step-daughter, enough time had passed in which he could have changed his Will if he so desired.
Regarding the accusations of drug and alcohol abuse, the Appeals Court found there was no evidence that the decedent was under the influence when he executed his Will or the he did not understand its contents. The Appeals Court further found the decedent was in contact with his children after his wife’s death, and that he was aware of the terms of his Will. The court found “ample opportunity” to update his Will, if he so desired.
By: Sarah Roscioli (BCLS 3L)
Overview of Governor’s Proposed Changes to MassHealth Estate Recovery. The Governor’s proposed FY 2017 budget would have, among other things, expanded MassHealth estate recovery to include non-probate property for those becoming eligible for Medicaid (nursing facility benefits) on or after July 1, 2016.
Legislative Update. On April 13, 2016, the House Committee on Ways and Means made its recommendations for the FY 2017 budget, which do not include the Governor’s proposed expanded definition of “estate” for purposes of recovery against the assets of a deceased MassHealth long-term care benefits recipient.
Broadening Definition of “Estate.” Currently, M.G.L. Ch. 118E, Section 31(c) defines “estate” as all real and personal property and other assets included in decedent’s probate estate. The Governor’s proposed language would have redefined the term “estate” to include: (1) joint property, including joint tenancy and tenancy by the entirety; (2) life estates; (3) funded revocable trusts; and (4) other property passing by beneficiary designation. The Governor’s proposed language specifically excluded annuities and life insurance, with the exception of payments otherwise includable in the decedent’s probate estate.
Recovery Deferred for Surviving Spouse. It is important to note that the Governor’s proposed budget would not have hastened the Division’s recovery when the decedent is survived by a spouse, i.e., under Chapter 118E, Section 31(b), recovery may not commence until after the death of the surviving spouse.
Overview of Budget Approval Process. On January 27, 2016, Governor Baker and Lieutenant Governor Polito filed their budget proposal for the Fiscal Year 2017 (FY17). In mid-April, the House Ways & Means Committee reported its budget to the full House for debate and vote. Then, in mid-May, the Senate Ways & Means Committee will report its budget to the full Senate for debate and vote. The House and Senate budgets will then be reconciled into a single budget which will return to each chamber for a vote. Once the House and Senate pass the reconciled budget, it will go to the Governor to be signed. Following any legislative overrides, the final budget would go into effect for the fiscal year beginning July 1, 2016.
Program Date: Wednesday, April 6, 2016
Materials: Click HERE for the panelists’ materials:
Program Topic: Real estate is an essential part of most family’s financial portfolio and is the perhaps the most common asset an estate planner will need to consider in creating an estate plan. Real estate also requires many considerations in the estate planning context including tax planning, asset protection and conveyancing options. This program examined these issues and the most common estate planning techniques to deal with them.
Program Date: Friday, March 18, 2016
Materials: To view the program materials, click here.
Summary of Program Topic: The program provided an overview of estate planning with retirement benefits, including a discussion of the most effective ways to make retirement benefits payable to trusts, traps for the unwary, the practical issues that arise when it comes time to implement beneficiary designations, and ideas to fix issues that come up during estate administration.
Program Title: Trust Accountings and Terminations: Identifying Options and Addressing Risks
Program Date: Wednesday, February 24, 2016
Materials: Because of file size, the handouts are broken into the following four parts:
Summary of Program Topic: The program explored various methods to render trust accounts, including final accounts. The discussion included accounting requirements for testamentary trusts, accounting clauses in trust instruments, options under the MUPC and MUTC, and managing risks in rendering final accounts. The panelist reviewed the trustee’s options to render accounts and ways to minimize the trustee’s liability upon termination of a trust.