by Linda Suzzanne
Griffin
No doubt many of you know that under HIPAA, beginning April 14, 2003, there are specific provisions for use and disclosure of protected health information ("PHI"). Before any PHI can be released a HIPAA medical release must be provided. This is extremely important to health care providers and to individuals who have durable health care powers of attorney for their patients.
Advice:
Advise your clients to review their durable health care powers of attorney and durable powers of attorney to be certain that the attorney-in-fact can receive information under HIPAA. Revise your documents to provide for same.
Qualified Domestic Relations Order ("QDRO")
When benefits from certain qualified plans, such as a 401K Plan, Pension Plan, Defined Benefit Plan or Profit Sharing Plan are distributed to a spouse pursuant to a marital settlement agreement a QDRO must be prepared to transfer the property out of such a plan for the benefit of the recipient spouse. Otherwise, there will be adverse tax consequences to the participant. A QDRO does not have to be prepared for the division of an individual retirement account ("IRA"). If a split of the IRA is pursuant to a divorce or separation agreement, then under Section 408(d)(6) of the Internal Revenue Code of 1986, as amended, (the "Code"), then the transfer is not a taxable transfer.
Bourgas v. Commissioner, T.C. Memo 2003-194, is a case which indicates what happens when the attorney and the taxpayer have no comprehension of the IRA or QDRO provisions. The divorce decree indicated that Mr. Bourgas was to be the sole owner of his IRA but was required to make certain payments to his former wife. The IRA was the only way he could make those payments. There were no provisions in the divorce settlement regarding IRAs or QDROs. Mr. Bourgas distributed money from the IRA to his former wife and reported the distributions as income to him but did not pay the additional 10% tax penalty for early distribution. Because there was no language in the agreement splitting the IRA the distribution of money from the IRA had adverse tax consequences. The court was trying to find a way to have Mr. Bourgas comply with the "spirit of the law" but found there was no "substantial compliance" with any requirements. Mr. Bourgas argued that, because he was directed by the court to pay his former wife the money, he should not be penalized. The court order, however, did not require Mr. Bourgas to pay his divorce obligations from his IRA.
Advice:
When a divorce attorney is drafting an agreement giving a spouse benefits from an IRA or a qualified plan he or she should [1] provide in the agreement the specific name of the plan; [2] provide the percentage or procedure as to how the benefits are to be calculated; and [3] be certain that the parties understand that the QDRO, if necessary, must be prepared. In this author's experience, if the recipient spouse of the QDRO benefits has to prepare the QDRO, then the recipient spouse should receive the money to pay for the QDRO "up front" because after the agreement is signed the participant spouse is generally slow to respond. Furthermore, the recipient spouse should obtain written authorization from the participant spouse to talk with the participant's employer about the qualified plan.
Family Limited Partnerships ("FLP")
Many individuals transfer assets to an FLP to take advantage of discounted gifts and discounts at death. In the past FLPs have generally survived IRS attack if operated and formed properly.
In the recent case of Estate of Strangi, TC Memo 2003-145, on remand from the Fifth Circuit Court, the Tax Court originally held that various IRS arguments did not apply to FLPs. However, on remand, the Tax Court determined that Section 2036 of the Code required the estate to include the assets transferred by Mr. Strangi during his lifetime to a family limited partnership. Prior to the remand the Tax Court held that [1] the family limited partnership was valid under state law; [2] that the special valuation rules in Code Section 2703(a) did not apply; and [3] the transfer of assets to the partnership were not a taxable gift.
On remand the Tax Court found that the assets were includable in the name of the estate and no discounts were allowed. Reasons which contributed to the inclusion were [1] 98% of decedent's wealth, including the residence, was contributed to the FLP and the corporate general partnership; [2] a 99% limited interest was retained by the decedent; [3] a 1% general partner corporation was owned 47% by decedent and 53% by the children; [4] the corporation and decedent's son-in-law, who was also decedent's power of attorney, entered into an agreement to manage the FLP assets; and [5] FLP assets which were used to pay personal expenses of the decedent. Other discussions in this case included the Byrum case and Section 2036(a)(2) which is not included here because of space limitations.
Advice:
For drafters of family limited partnerships this is an extremely important case to review. The factors in the Strangi case were egregious but there are still commentators who state that this case is the "death knell" of family limited partnerships because Section 2036 of the Code is so broad. Others disagree. Nevertheless, this case should be carefully reviewed before drafting future limited partnerships.
Qualified Personal Residence Trust ("QPRT")
Revenue Procedure 2003-42, 2003-23 IRB provides a sample declaration of a trust and alternate provisions for a QPRT with one term-holder. A consideration before setting up a QPRT is the Save our Homes (SOH) cap for a homestead. Under SOH the increase in real estate taxes is limited to3% per year; providing that the legal or equitable title remains in the same person. Unfortunately, at the end of the term of the QPRT, the property is usually distributed to the children and/or lineal descendants upon such a termination. Thus, the SOH cap comes off and the real estate taxes are substantially more. Many QPRT term-holders are surprised (and angry) to find this out after the QPRT has been established.
Advice:
Carefully review your existing QPRTs and advise your term-holders when the 3% SOH cap is to come off. On any new QPRTs thoroughly discuss this issue before transferring the home into a QPRT.
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Contents © Copyright Linda Suzzanne Griffin,
P.A.
