December 2004

MEMBERS’ CORNER
BY STANLEY TEPPER, CPA, MBA

Section 529 Savings Account Plans – Business Week Magazine recently discussed a college break. If you own a Coverdell Education Savings Account or state-sponsored 529 savings account – both of which allow investments to grow tax-free-you’ll have an easier time qualifying for aid, thanks to a recent clarification of the federal aid formula. As long as a parent sets up a Coverdell, the U.S. Education Dept. now says it will be treated like a 529 and considered parental property. That’s important, since in calculating how much a family can afford to pay for college, the feds count up to 5.64% of a parent’s

assets, compared with 35% of a student’s assets. Before this ruling, the Coverdell-which caps annual savings at $2,000 per child, vs. total savings of as much as $300,000 in a 529-had been deemed student property. Better still, withdrawals from a Coverdell or 529 will no longer count against you.

Elder Law – The quarterly newsletter published by the law firm of Lamson & Petroff (212) 447-8690 is the source for the following Medicaid notes.

Nursing Home Personal Injury Award Exemption

Money received by a Medicaid applicant or recipient as the result of a legal action against a nursing home because of improper or inadequate treatment is not countable as income or asset for purposes of Medicaid eligibility.

Joint Bank Accounts Avoid Probate But Not Medicaid

Joint bank accounts (or other joint assets) are often created for convenience and to avoid probate. Normally, either joint owner may make deposits and withdrawals. Joint accounts are typically treated under New York State law as survivorship accounts, such as when one joint owner dies; the surviving owner becomes the sole owner of the account. But joint accounts are generally not valid tools when planning for Medicaid eligibility. In New York State, a joint savings account is presumed to belong entirely to the Medicaid applicant.

Transferring the Home

 An individual’s home – a house, cooperative or condominium apartment – is an “exempt” resource for purposes of determining initial Medicaid eligibility. Ultimately, however, Medicaid may place a lien on the sale proceeds of the home and take back from the sale the amount it spent on behalf of the Medicaid recipient. For this reason, the home must be considered an asset, and appropriate steps must be taken to transfer it. Transfers to a spouse and certain specified individuals will not trigger a penalty period for purposes of Medicaid nursing-home eligibility, but transfers to any other person will.

Generally, it is inappropriate to simply transfer ownership of a house or apartment directly to another person when planning for long-term care. Such a transfer may incur a substantial period of ineligibility, and it may trigger a costly capital – gains tax. The more attractive alternative is to transfer the home to a trust with the provision that the occupant or occupants have the right to continue to live there for the remainder of his, her or their lives. This provision will eliminate the tax liability and diminish the penalty period for nursing-home eligibility. The trust agreement will include instructions about how the home will pass to heirs after the death of the occupant or occupants. No probate will be necessary.

Executive Compensation – A recent article in Attorney David L. Silverman’s monthly newsletter cited “non compliance” in many companies, which the IRS has identified and intends to audit. (516) 466-5900.

Deferred compensation. The IRS will focus on timing issues involving employer deductions and recognition of income by the employee in nonqualified plans.

Stock-based compensation. The IRS will determine whether income was properly recognized at the time of vesting of nonqualified stock options and restricted stock.

Split-dollar life insurance. Emphasis will be placed on determining whether executives have reported the proper amount of income.

Golden parachutes. Payments made on a change in control of public companies, which could result in a denial of a deduction, will be examined.

$1 million cap on executive salary. Exceptions to the $1 million limit, such as performance-based compensation, will be reviewed.

Family limited partnerships. Deferral techniques, involving the transfer of corporate stock options to FLPs, which the IRS characterizes as tax shelters, will be scrutinized.

Employee leasing. The Service will attempt to target the improper use of a professional service corporation to avoid income and employment taxes.

Corporate benefits. IRS will determine whether the imputed value of (i) housing allowances; (ii) use of corporate aircraft and automobiles; and (iii) club dues has been or should be reported as income. IRS will also review issues involving proper allocation of expenses between personal and business use.

Tapping an IRA – Business Week quoted our chapter’s member Ed Slott in revealing a “Little-Known Internal Revenue Service regulation.” A recent change makes it easier for IRA beneficiaries to extend the benefits of such accounts. The change applies to named nonspouse beneficiaries when the account owner dies before the required age to begin distributions (generally age 70 ½). Before, such beneficiaries had to withdraw all funds within five years unless they specifically opted for payments based on their own life expectancy. With the rule change, the beneficiaries automatically get the benefit of life-expectancy payouts unless they choose the five-year rule- something Ed Slott, editor of Ed Slott’s IRA Advisor newsletter, says you should never do. Remember, he says, you can always take more than the minimum under life expectancy – withdrawing everything in five years, or even fewer, if that’s what you want. You just don’t have to. Instead, you can let the money continue to grow tax-deferred.

Student Loan Interest- Medical Economics Magazine discussed a good deed that won’t pay off. If you help your child repay a student loan, you probably won’t be allowed to deduct any interest on it, say new IRS regulations. Parents can make the deduction only if they cosigned the loan. But your kids might be able to deduct any interest payments you made for them, as long as you don’t claim them as dependents on your federal tax return. The new rules became effective on May 7, 2004.

Real Estate Tax Law Change- A quarterly newsletter from CAPELL & VISHNICK, LLP, (516) 437-4385, a firm, which has furnished speakers for our chapter’s tax seminars, discusses New York Tax Law Changes.

Effective September 1, 2003, New York State Tax Law Section 663 imposed an estimated personal income tax upon all nonresidents of New York State who sell or transfer real property located within New York. All sellers must be aware of this new law because failing to follow its requirements will mean that your closing will be adjourned and the county clerk will not be able to record your deed.

How the Law Works Prior to the new law, the seller or transferor of real property located in New York State was required to pay a state transfer tax of $4 per $1,000 of consideration received. Now, in addiction to that tax, a seller or transferor who is not a resident of New York State is required to pay an estimated personal income tax of 7.7 percent of the profit from the sale at closing. The estimated personal income tax is calculated by multiplying the gain from the sale of the property by the highest applicable rate of New York State personal income tax in effect for the taxable year. Even it the sale resulted in a loss, the necessary forms must still be completed and submitted.

Although this law appears to burden only sellers, purchasers should also be familiar with it because a deed will not be accepted for recording unless the seller either certifies that he or she is a resident or pays the estimated personal income tax at closing. Therefore, if a seller is not aware of this new law, the closing could be adjourned or delayed until the necessary documentation is prepared.

To Whom Does the Law Apply? The law applies only to transfers of a fee simply interest by an individual, estate or trust. Therefore, entities such as corporations and limited liability companies are not subject to the new tax requirements. In addition, the law does not apply to the transfer of any interest that is less than a fee simple interest. Therefore, the transfer of a life estate will not trigger the new tax. In certain circumstances, nonresident sellers are exempt from the new tax. Among those exclusions are sales in lieu of foreclosure without additional consideration and situations in which the seller used the property as his or her principal residence for two of the prior five years. These exclusions highlight the importance of defining the term “resident.” For purposes of this law, resident is defined as a person who is domiciled or maintains a permanent place of abode within New York State. For trusts and estates, the residence of the fiduciary (i.e., trustee, executor or administrator) is irrelevant. Rather, the state looks to see if the decedent was a resident of New York in the case of an estate, or if the property was transferred into a trust by a New York resident, in which case the estate and trust are considered residents and therefore not subject to the tax.

Bequeaths to Grand Children- A Florida newspaper reminded its readers that bequeathing property can be expensive for large estates. Amounts of $1.5 million or more are subject to the generation skipping transfer tax, as well as the estate tax. To help minimize the impact, a grandparent can make an annual gift of up to $11,000 to a grandchild, tax-free.

Levy on Social Security Benefits- One of our chapter member’s client received a “Final notice before levy on Social Security Benefits.” The law allows the Internal Revenue Service to levy (take) up to 15% of social Security benefits on account of unpaid Federal Income Taxes.

States Without a State Income Tax- According to The New York Teacher Publication there are nine states currently without a state income tax- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.