Category Archives: Topics of Interest

PAST RELEVANT WORK & DISABILITY AFTER SSR 24-2p

November 15, 2024Alberts Law, Social Security Disability, Topics of Interest24-2p, Adult, alberts law, Disability, Past Relevant Work, PRW, Residual Functional Capacity, RFC, Social Security Administrationalberts

Past relevant work (PRW) almost always is an issue when the Social Security Administration makes a disability determination. Social Security Ruling 24-2p went into effect on June 22, 2024 in order to achieve more consistent application of regulations involving this issue. Due to the role that past relevant work has in disability cases, one needs to understand what SSR 24-2p says before filing a claim with the SSA.

The new ruling is titled “Title II and Title XVI: How We Evaluate Past Relevant Work.” More specifically, the SSA’s focus is on a person’s residual functional capacity (RFC) and the extent to which it permits the individual to perform PRW. This needs to be viewed in the context of the sequential evaluation that the Social Security Administration uses to decide if someone is disabled.

Past Relevant Work in the Sequential Evaluation Process

Looking at initial disability determinations in cases involving adults, the SSA employs a five-step sequential evaluation process to reach its decision. While a claimant can be found disabled after any step, she or he can only win a disability case after either Step 3 or Step 5.

Very few cases win at Step 3. To do so, a person must meet or equal a listing found in the SSA’s Blue Book, which details Listing of Impairments, with criteria for meeting each listing; the focus here is again on initial determinations for adults. In addition, an impairment that is medically equivalent to a listing’s criteria results in a finding of disability. The degree of difficulty inherent in equaling any specific impairment in Step 3 ensures that most claims pass Step 4 in order to have a chance of surviving Step 5, resulting in a favorable disability determination. Due to the importance of Step 4 as well as the SSR enacted in 2024 to explain how SSA makes its decision at this step, the following focuses on Step 4’s role in the sequential evaluation.

The Importance of SSR 24-2p

The Social Security Administration’s issuance of SSR 24-2p on June 22, 2024 defines how Past Relevant Work is to be evaluated from that date forward. A question-and-answer format was used to provide guidance on how a determination of whether or not claimants retain “residual functional capacity,” or RFC, to perform their PRW.

When this social security ruling went into effect, it rescinded and replaced SSR 82-61 (which looked at how a job or occupation is generally performed) and SSR 82-62 (which concerned a claimant’s PRW, in general). SSR 24-2p also rescinded Social Security Ruling 86-8 (“The Sequential Evaluation Process”), which basically means that the process returns to the status quo prior to SSR 86-8.

The importance of these changes is that the latest SSR now applies to new, as well as pending, claims that existed on June 22, 2024 – the new Step 4 now is followed in these claims. Only appeals in federal court that were decided under the prior rulings are to be decided as if the old rulings remained effective. However, if a federal court remands such a case, the SSA will apply SSR 24-2p to the claim on remand. The extent to which SSR 24-2p has supplanted the other ruling is important to understand because the former sets forth how Step 4 will be analyzed; the new ruling states the manner in which claims involving past relevant work and a person’s alleged disability are viewed together at this step of the sequential evaluation process.

Residual Functional Capacity & Past Relevant Work

However, before proceeding to Step 4, there is a term that is used in the last two steps that needs to be defined. As has been mentioned previously, the ability to do past relevant work is decided by applying a claimant’s residual functional capacity to the demands of the person’s past relevant work.

Essentially, RFC is what a person retains in terms of the ability to perform work-related activities despite all medically substantiated physical and/or mental impairments. If past relevant work cannot be done in light of the individual’s RFC, then Step 5 again applies the residual functional capacity to a determination, often developed with the help of testimony of a vocational expert, of the person’s ability to do any other work found in significant numbers anywhere in the national economy. If PRW is eliminated and no other jobs exist, the person would be disabled based on the sequential evaluation process.

Review of the Definition of Disability in Social Security Cases

Before taking a more in-depth review of the evaluation of past relevant work at Step 4, one needs to understand what disability means in the context of a Social Security case since this is the overriding issue of all of these cases. A claimant must be unable to engage in Substantial Gainful Activity (SGA) due to the presence of one or more medically determinable physical and/or mental impairments that would be expected to result in death or that has lasted or would be expected to last for at least 12 consecutive months.

SSR 24-2p and its 10 Questions & Answers regarding Step 4

At this point, attention will focus of Social Security Ruling 24-2p and how it will be used by the Social Security Administration to determine if a disability claimant retains sufficient residual functional capacity to meet the demands of the individual’s prior relevant work. In doing so, the 10 questions and answers found in SSR 24-2p will be reviewed, albeit not in the order that they are listed in the new ruling. The idea is to look at each one methodically to reach the ultimate decision regarding the ability to do PRW as it is decided by the end of Step 4 of the 5-step sequential evaluation process.

Question 1 Defines Past Relevant Work

The work must have been done in the last five years at Substantial Gainful Activity level for a period long enough to learn how to do it. As will be seen here, the underlined phrases are developed in the answers found in SSR 24-2p.

Questions 8 and 9 – How Work History is Determined for Step 4

For a disability claimant, Questions 8 and 9 may be the most crucial in terms of the ruling’s guide answers because they involve information primarily received from the claimant. These look at an account of the person’s work history and contain information to develop which jobs will be classified as past relevant work. In addition, the answers are used in the determination of whether or not the claimant retains residual functional capacity to perform any PRW at the time that the disability determination is made.

Question 8 involves evidence about work history. It also notes that the claimant generally is the primary source of this information. The individual must provide statements that sufficiently explain the work performed, including the skill level that was required. Question 9 stresses the need for the explanation of the mental and physical demands of the past relevant work. If the claimant provides a sufficient work history, then the SSA will not seek more information from third parties (including employers and co-workers). However, before the SSA contacts any third parties, the claimant must give permission. In general, a claimant is likely to be better off granting permission if asked, as opposed to relying on an insufficiently developed work history.

In addition, Question 9 summarizes what the SSA considers when determining the capacity to perform PRW. Residual Functional Capacity as well as a claimant’s statements about the reasons that he or she is unable to do the work are reviewed. Supplementary information about the requirements of the relevant jobs also is mentioned. As noted in Question 7 (which is discussed, below), vocational experts or specialists often are the sources here.

Question 2 Explains What Are the “Last Five Years” of Work

The Social Security Administration seeks the last five years of a person’s work history as well as jobs during that period that lasted for at least 30 consecutive days. The “last five years” of the work history is defined in the answer to Question 2 of SSR 24-2p. For specificity, one can consult the table with the answer, in which the meaning of “the last five years” is linked to specific fact patterns.

In general, the two most common definitions set the end of this period on the date that of the SSA determination or its decision regarding the person’s claim. There also is a footnote in SSR 24-2p that references SSR 18-1p. This deals with situations in an earlier date – the Established Onset Date – defines the endpoint of this critical five-year period. The guidance found in the new ruling must be applied so that a claim focuses on the correct period for a person’s work history.

Question 3: PRW Excludes Work Done for Less than 30 Calendar Days

Meanwhile, Question 3 looks at something that is excluded from Past Relevant Work. In general, a job held for less than 30 consecutive calendar days is not considered regardless of whether or not it would meet SGA or if it had been done on a full-time basis. The work started and stopped in for less than 30 consecutive calendar days is not viewed as PRW, according to SSR 24-2p.

The new ruling does make allowances for “gig economy” work often done by independent contractors and the self-employed in which there may be multiple work assignments throughout a 30-day period when the individual jobs were of the same type. Cumulatively, they are deemed sufficient to learn the work in question, even though no single assignment meets the time requirement. This recognizes the increasing contribution of freelancing, non-permanent workers to the national economy. According to Investopedia, 38 percent of the U.S. workforce in 2023 was comprised of gig workers – the Social Security Administration is aware of their prevalence and has made this adjustment to account for these jobs.

After the work history for the relevant five-year period has been developed, the SSA looks at the listed employment to see which jobs qualify as Past Relevant Work, which is the focus of this step of the evaluation process. For adults, PRW must meet the requirements for Substantial Gainful Activity (SGA). This was mentioned in passing, above. More specifically, SGA generally is defined by average monthly “countable earnings” that equal or exceed the amounts for a given year which are shown in the Earnings Guidelines in POMS DI 10501.015. While there are exceptions to the earnings requirement, this is the basic rule when applying SGA to a person’s work history to see what can qualify as PRW.

Question 4: How Long is “Long Enough to Learn?”

Also, as discussed above, even if done at SGA level, a job still has to last long enough for the individual to learn how to perform the work involved. The type of job determines how long is sufficient, with the shortest period being the aforementioned 30 consecutive calendar days. However, learning how to do a job entails acquiring the necessary information, skills, and sufficient facility to perform adequately. The time required to learn how to perform any work is based on the type of work and its complexity. The Social Security Administration looks at what is known as Specific Vocational Preparation (SVP) when determining how long this takes.

SVP is set forth in the Dictionary of Occupational Titles (DOT), which has long been a main source used by the SSA in its disability determinations. The DOT established nine SVP levels. SVP 1 and 2 represent unskilled work while jobs at SVP 3 and 4 are considered semi-skilled; those above SVP 4 are classified as skilled occupations. Specific Vocational Preparation levels correspond with the amount of time needed to learn particular jobs. The capacity to learn how to perform a job at SGA level for at least the length of time dictated by the job’s SVP determines which jobs, if any, in a claimant’s work history meet the definition of Past Relevant Work. This leads to the pivotal issue of a claimant’s ability to handle PRW despite averring that she or he disabled under the Social Security Act.

Questions 5 -7 Focus on the Issue of the Ability to Perform PRW

SSR 24-2p poses three questions (numbered 5 through 7) in making the decision about a person’s ability to perform Past Relevant Work. Question 5 is general in nature, summarizing how the individual’s ability to perform PRW is determined. The next two questions deal with the specifics of how this is analyzed.

Question 6 states the first consideration, which is if the claimant can perform PRW as this individual actually performed it. This acknowledges that there are occasions when functional demands of work as someone actually performed it differ from how the position generally is performed throughout the national economy. If Residual Functional Capacity exists to handle PRW as it actually was performed by the claimant, then the person is not disabled for Social Security purposes. This finding essentially ends the sequential evaluation process at Step 4.

When the individual lacks the RFC to perform Past Relevant Work as he or she actually performed it, SSR 24-2p moves to Question 7. This is similar to the previous question in that both focus on PRW; however, this analyzes PRW while considering how the work is generally performed in the national economy.

Use of “Reliable Sources of Information” to Describe Occupations (Question 7)

The Social Security Administration relies on “reliable sources of job information” to determine how a job is generally performed and then decides if the person retains the RFC to perform any PRW as generally done in the national economy. For reliable sources, the SSA often uses vocational experts to explain the job requirements as well as providing an opinion regarding the claimant’s capacity to perform the work in question. Ultimately, the Social Security Administration makes the final decision regarding whether or not the individual can perform Past Relevant Work. If the claimant can handle the work based on the answer to either Question 6 or 7, then Step 5 in the sequential evaluation process will become inconsequential.

Question 10: Summarizing Determinations Regarding PRW

Finally, there is Question 10 in SSR 24-2p. The answer actually is a concise summary of the determinations involving Past Relevant Work found in Step 4 of the sequential evaluation process. First, a claimant’s RFC must be defined. Then, PRW must be determined. Residual Functional Capacity is used to decide if the person still can do this work. If the RFC precludes the claimant from engaging in Past Relevant Work, the initial disability determination moves to Step 5 of the sequential evaluation, when the claimant could be found disabled under SSA rules if there is no job anywhere in the national economy that she or he has the RFC to perform at Substantial Gainful Activity level. However, the case does not reach Step 5 if the claimant cannot survive Step 4. Because it explains the evaluation of Past Relevant Work, SSR 24-2p must be understood by claimants and their representatives.

Grounds for a Will Contest

September 17, 2024Alberts Law, Probate & Estate Administration, Topics of Interestalberts law, estate administration, probate, testamentary capacity, undue influence, will contestalberts

A will contest can be a difficult and costly legal process so the will contestant needs strong grounds before taking this step. Various issues can be used to attack a proposed will. This is a look at some of the most prominent ones and the types of evidence that are needed for proof.

Burden of Proof in a Will Contest

The contestant attempts to weaken the position of the proponent of the will by offering clear and convincing evidence to undermine important facts that would support the probate of the will. This was defined in La Rocca Trust, 411 Pa. 633, 192 A.2d 409 (1963), as testimony by witnesses about the precise facts at issue that is credible, distinctly remembered, clear, direct, and weighty.

This goes beyond the usual “preponderance of the evidence” standard for the usual civil lawsuit. Such heightened scrutiny makes a will contest hard to win without careful, detailed preparation. What must be proven to this extent depends on the grounds on which the will contest is based.

When a Will Contest Might Succeed

Dating back to the 19^th century, there are numerous Pennsylvania cases, statutes, and rules that have defined what must be proven to successfully attack a will. The strength of the evidence and the elements of the law must come together to provide a compelling story against probating the proponent’s will. A look at some of the more likely arguments follows.

Testator’s Capacity and Will Execution

The major issue is what constitutes mental capacity in order for a will to be seen as valid. The Pennsylvania Supreme Court consistently has defined the test for testamentary capacity as “whether the testator, at the time he executed the will in question, had an intelligent knowledge regarding the natural objects of his bounty, of what his estate consists, and of what he desires done with his estate, even though his memory has been impaired by age or disease” (from Cohen Will, 445 Pa. 549, 284 A.2d 754 (1971)).

Basically, the person needs to understand her or his ownership of property and how it should be distributed after death, even if age has decreased the sharpness of an individual’s overall memory over the course of time. As for the natural objects of one’s bounty, this often is expressed as the closest living relatives – however, knowing their identities does not mean that the testator will leave any property to them.

A will contest also focuses on capacity at a particular point in time. As stressed in Wertheimer’s Estate, a 1926 decision that remains precedential, the evidence must cover “the period immediately before, at or after [the will’s] execution.” When an alcoholic executed her will at a time when no evidence of her being intoxicated existed, the court found her will to be valid. Furthermore, in Ryman’s Case, 139 Pa. Superior Ct. 212, 218, Judge Keller emphasized that “[o]ne’s mental capacity is best determined by his spoken words, his acts and conduct.” Unless the evidence undermines the presumption of mental capacity at the time in question, events that are not contemporaneous with the will’s execution will not undermine the document’s validity.

In our society with an increasingly elderly population, we have to remember that the law does not look at such matters as physical age when determining testamentary capacity. For example, in Lawrence’s Estate, 286 Pa. 58, 65, 132 A. 786, 789 (1926), Pennsylvania’s Supreme Court stated that “[o]ld age, sickness, distress or debility of body neither prove nor raise a presumption of incapacity.” Additionally, failure of memory does not prove incapacity as long as it is not total or extended to the degree that incapacity becomes practically certain.

A Poor Memory Does Not Necessarily Equal Incapacity

A testator’s memory is not irrelevant in a will contest but its role can be overemphasized depending on the facts and circumstances involved. The Pennsylvania Supreme Court decided in Brantlinger Will from 1965 that a testator with a faulty memory still has capacity to execute a will. Other cases have stated that a complete lack of memory renders a testator incapable of executing a will. This is a matter of degree and is a reason that a will contest sometimes is necessary.

Incapacity Is Not Always Incapacity

One might think that the proponent of a will of a legally incapacitated testator is guaranteed to lose a will contest. 1964’s Lanning Will summarizes the applicable law: an adjudication of mental incapacity made prior to the execution of a will does not require the conclusion that the will is invalid for lack of testamentary capacity. Instead, one must look for the date that the will was executed. If the testator has not been adjudicated as mentally incapacitated, then the contestant bears the burden of proving this by clear and convincing evidence. On the other hand, if incapacity was determined prior to the will’s execution, the will could be valid if the testator can be proven – by clear and convincing evidence – to have had testamentary capacity of the date of execution. The will’s proponent shoulders the burden of proof here.

Eccentricity Is Not Insanity or Even Incapacity

In Higbee Will, 365 Pa. 381, 75 A.2d 599 (1950), those who brought the will contest proved that the testator was forgetful and, at times, confused and subject to rages and tantrums; that she had plenty of money but lived in poverty and filth; she was; she locked herself in her house while alone; that she refused medical attention even when she needed it; and that she was very ungrateful to people who did her favors.

Meanwhile, in her will, she left her property to an agnostic society instead of relatives. While this upset those relatives, two attorneys and a secretary of a trust company testified that she had clear and full testamentary capacity when she executed a will and two codicils. As a result, the testamentary documents survived the will contest.

This case also demonstrates that what appears to be an “unnatural” disposition does not prove an incapacitated testator. This principle is found in Morgan’s Estate, 219 Pa. 355, 68 A. 953 (1908), which states that a will is unnatural only if contrary to what a testator’s known views and intentions would be expected to produce.

Are Insane Delusions Relevant in a Will Contest?

Maybe, yes; maybe, no. Two cases from the 1950s show how the facts must be developed in order to answer this question. Duross Will, 395 Pa. 492, 150 A.2d 710 (1959) involved a testator who had insane delusions but still could have capacity to make a valid will, as long as any delusion did not affect the will’s dispositive scheme. Meanwhile, 1952’s Johnson Will, also decided by the Pennsylvania Supreme Court, stated that, when it appears that the will was the direct result of the delusion and that the will would have been different if the delusion had not occurred, then the will is rendered invalid.

Undue Influence in a Will Contest

Undue influence is a broad term that includes fraud; threats; misrepresentation; and coercion. This was summarized in Hollinger Will from 1945. It noted that, if sufficiently proven, any of these can undermine a will’s validity by prejudicing the testator’s mind, destroying freedom to act as desired, or acting as a present restraint upon the testator making the will.

Direct versus Indirect Proof

Undue influence can be proven directly or indirectly. With direct proof, the will contestant needs to show, by clear and convincing evidence, that acts which prejudiced the testator’s mind or destroyed the testator’s free agency occurred, resulting in the invalidity of the will produced for probate. In these cases, the presumption is in favor of the absence of undue influence.

However, in other cases, there is a presumption that undue influence existed. This “indirect” proof of undue influence arises in situations in which the law shifts the burden of proof to the will’s proponent, who must show the absence of undue influence for the will to be considered valid.

When is Undue Influence Presumed in a Will Contest?

The Pennsylvania Supreme Court followed a three-part rule regarding indirect proof of undue influence, leaving the will’s proponent with the burden of proving that undue influence did not exist. In Estate of Clark, 461 Pa. 52, 334 A.2d 628 (1975), the Court held that where (1) a person who is in a confidential relationship with the testator, (2) receives a substantial benefit under the will, and (3) at or around the time the will was executed the testator had a weakened mental intellect, a presumption of undue influence arises. The result is that the burden of proof shifts to the proponent to prove the absence of undue influence.

Confidential Relationships

In a will contest, a confidential relationship is considered a potential indication that parties are not on equal footing. In Leedom v. Palmer from 1922, Pennsylvania’s Supreme Court discussed such relationships and looked for “an overmastering influence” on one side or “weakness, dependence or trust” as indicators of a possible unfair advantage that leads to the presumption that a void transaction. Importantly, confidential relationships are not sufficient to create the presumption. In the 1975 decision in Estate of Thomas, which involved the probate of a will in Allegheny County, there was a recognition that a testator in a weakened state dealing with someone in a confidential relationship would result in a presumed unfair advantage. When these circumstances appear, the law presumes undue influence when the bulk of the estate is left to the will’s scrivener. Proving influence is not required to shift the burden of proof.

Various relationships can indicate the existence of confidential relationships. Kinship and marriage can serve this function; however, Aggas v. Munnell, 302 Pa. 78, 152 A. 840 (1930), specify that these relationships do not automatically equal confidentiality. A financial agent in a power of attorney has been given unequal power – if the agent is a will’s proponent, court believe that this clearly indicates there is a confidential relationship.

Meanwhile, a substantial benefit to will proponent is relevant. The previously mentioned Estate of Clark noted that a substantial benefit to a will’s proponent would establish a prima facie case in favor of the contestant. Cases have noted that no hard and fast rules exist to define a substantial benefit; instead, this is determined by facts and circumstances on a case-by-case basis. In this way, a will contest does not differ from other court actions – the situation must be investigated, with an understanding of what transpired being carefully explored before a rush to court.

Examples of Circumstances that Are Not Automatically Defined as Undue Influence

When a will’s contestant suggests that the will’s proponent being named as executor is a substantial benefit, the contestant likely will lose. Unless the will provides the power to dispose of an estate in a manner contrary to the will’s specific provisions, the proponent (and executor) reaps no substantial benefit. Attempts to persuade a testator do not pass the test. Any form of restraint of a testator must be contemporaneous with the creation of the will and, additionally, must directly affect the testamentary act. If a testator made statements that might have indicated undue influence, courts have found these to be admissible only when linked with more direct evidence for the purpose of corroboration.

For a will contest to succeed, contestants must understand what must be proven and how it can be proven in order to prevail. Unless they understand and can do this, they will fail in their objective and stand to learn an expensive lesson at the same time.

Undue Influence and Proving Fraud in a Will Contest

As previously noted, undue influence is broadly defined in the context of a will contest. As a result, it generally includes fraud as an element. However, fraud often plays an important role in a will contest so it merits being singled out.

A contestant who raises this issue must prove it directly. Pennsylvania’s Rosenthal’s Estate from 1940 established that the burden of proof does not shift so the contestant must produce clear and convincing evidence in order to prevail.

In re Paul’s Estate, 407 Pa. 30, 180 A.2d 254 (1962), dealt with fraud in the inducement regarding execution of a will. The case set forth two elements that the will contestant must prove. First, the testator had no knowledge of the concealed or misstated fact. Second, the testator would not have made the bequest had the truth been known.

A classic situation in which the Pennsylvania Supreme Court looked the possibility of fraud through nondisclosure occurred in Stirk’s Estate from 1911. This involved a testator who authorized the assistant trust officer of the Land Title & Trust Company to draft her will prior to an operation.

The will’s basic objective was to benefit charitable, educational and religious uses. However, there could be a question of the legality of these bequests if the testator died within 30 days after executing the will. As a result, the scrivener prepared a codicil to deal with the possibility that the bequests might fail and left blank spaces for who would receive the funds if she died during the 30-day period. The testator mentioned that the Land Title & Trust Company as the recipient of what were charitable bequests in the will, and the assistant trust officer from that company inserted this into the codicil for the testator.

She then executed the codicil but died within the 30 days after executing the will. The Court questioned why the codicil substituted a for-profit entity to receive the bequests that intended for charitable uses and also noted that the scrivener’s close connection to the land trust company. Additionally, the fact that the trust officer did not attempt to make sure that this drastic change was what the testator actually intended seen as very problematic. The Orphan’s Court judge called this situation “incomprehensible and almost incredible.” The high court agreed. It decided that the scrivener’s silence under this case’s facts amounted to constructive fraud and reversed the decree that awarded the fund to the Land Title & Trust Company is reversed and remitted the record for a distribution of bequest in accordance with its views as set forth in its opinion.

An Overview of Other Grounds for a Potential Will Contest

While lack of testamentary capacity and various forms of undue influence are grounds commonly raised by contestants, there are a number of additional issues that might be introduced in these cases in order to undermine a will’s validity. Among these are lack of testamentary intent; mistakes in execution; issues concerning lost wills; and forgery. These are summarized, below.

Did Testamentary Intent Exist?

The form and language of a writing are factors to be considered but are not determinative of whether a writing is a will. Instead, an informal instrument may be legally effective as a will if its language shows testamentary intent, which is indispensable to the finding that a document is a valid will. The language must be dispositive in character, and this disposition must be intended to occur after the testator’s death. Instructions and memoranda for use in drafting a will at a future time do not show the requisite intent.

Although form is not a determinative factor, it is an element which may be considered. For example, in In Re Estate of Ritchie in 1978, the Pennsylvania Supreme Court noted that the decedent previously executed a will which was not a sophisticated document but did show some knowledge of the customary form and style used for a will. When a later writing was submitted for probate, the Court gave weight to the writing lacking any elements of the customary form that the testator used previously.

The Court in Ritchie also set forth a long-standing principle that, if a further or additional act or writing is contemplated by an alleged testator in order to make a will or codicil, then the current writing is not testamentary in nature. The prior will as well as extrinsic evidence were considered in making this decision.

While extrinsic evidence is not permitted when the intent is unambiguous, the trial court believed that real ambiguity regarding testamentary intent existed so it heard testimony of individuals who were present when the second document was drafted. While it permitted the document to be probated, the Pennsylvania Supreme Court reviewed the testimony introduced by the will’s proponents indicated that the document was a list or memorandum contemplating a will that would be drafted in the future. It concluded that testamentary intent was not present and reversed the trial court’s decision.

Two years earlier, in In Re Estate of Sedmak, 467 Pa. 379, 357 A.2d 142 (1976), the Court stated that, if the instrument is in writing and signed by the decedent at the end, it must be given effect as a will or codicil when it contains a legal declaration of the writer’s intention regarding actions to be performed after the individual’s death. If there is no ambiguity of this intent, then extrinsic evidence is not admissible.

Mistakes in Execution

A classic example of this and how Pennsylvania courts approach the problem occurred in 1959’s Pavlinko Will. In 1949, Vasil and Hellen Pavlinko had their wills drafted by an attorney. The basic estate plan left the property of the first spouse to die to the other spouse. Hellen made the mistake of signing the will prepared for Vasil, who then signed the second will which was supposed to be executed by his wife. Hellen died in 1951, but no will was submitted for probate.

After Vasil Pavlinko’s death in 1957, the will that he signed was offered for probate at the Register of Wills in Allegheny County by the residuary legatee (Hellen’s brother who was identified in the will as “my brother”) named in the will executed by Vasil. Because the document stated that it was Hellen’s will while it was executed by her husband, the Register of Wills refused to accept this to be probated.

Eventually, the case went to the Pennsylvania Supreme Court. It cited Section 2 of the Wills Act of 1947, which stated that every will shall be in writing and shall be signed by the testator at the end thereof. This provision now is found at Section 2502 of the Probate, Estates and Fiduciaries (PEF) Code. The document that was to be submitted as Vasil’s will intended and purported to give Hellen’s estate to Vasil; as a result, it could not be his will but, instead, was a nullity.

The Court noted that the will would need to be rewritten in order to be probated as Vasil’s will, and it was not willing to take this action. The decision emphasized “[h]ow firmly and without exception the courts have carried out the provisions of the Wills Act, when the language thereof is clear and unmistakable” and cited other cases in which the execution of a will did not meet the essential requirements of the statute. The Court did acknowledge the seeming harshness of the result but stated that strictly following the Act was necessary in order to prevent “countless fraudulent claims” from succeeding. When someone submits a will in which mistakes in execution were made, a will contest – if the will would be accepted for probate – has a very good chance of success.

A Will Contest and a “Lost Will”

A “lost” will can be the basis for a will contest. Before doing so, an individual must understand what must be proven in order to proceed. The Pennsylvania Supreme Court’s decision in 1961’s In Re Murray’s Estate involving an unsigned copy of the will of Beatrice J. Murray provided the test for establishing the lost will’s legitimacy as the testamentary document to be probated. The necessary proof includes (1) the testator duly and properly executed the original will; (2) the contents of the executed will were substantially the same as those included in the copy of the will presented for probate; and (3) the testator did not destroy or revoke the will prior to death.

Burns v. Kabboul is a decision from Superior Court that has precedential value when a will contest centers on the status of a lost will. While the case has an interesting fact pattern, it also discusses a number of fundamental legal principles dealing with probate. It begins by noting that estate law in Pennsylvania favors testamentary dispositions of assets over intestate distribution. The policy in Pennsylvania stresses that a will should be interpreted in a way that avoids intestacy if this is feasible. To further this policy, if a later will is contested and determined to be the result of undue influence, a revoked prior will effectively is reinstated.

Burns v. Kabboul reviewed a will contest in which a lost will proved pivotal. Mae Kabboul was named the decedent’s agent in a power of attorney when he executed his final will in 1985. Kabboul was the scrivener and also was named the estate’s executor (who would receive the bulk of the residuary estate). The will was found to be a product of her undue influence and was determined to be invalid. At that point, the law of intestacy apparently would be applied to the estate, and Kabboul would inherit nothing from the decedent.

Then, Ms. Kabboul produced an unsigned copy of a will from 1982. As Pennsylvania strongly favors testamentary dispositions, there are exceptions that permit copies of lost wills to be probated. The test that shows what must be proven to overcome the presumption that a testator destroyed or revoked the lost will is set forth, above.

Kabboul was able to navigate two prongs of the 3-step test with relative ease. There was testimony from witnesses that showed proper execution of the will from 1982. The third prong regarding lack of revocation has met when the 1985 will (which was found to be the product of Ms. Kabboul’s undue influence) was invalidated. The second prong involving proof that the 1982 will’s actual contents were substantially the same as the document purported to be a copy of that will.

The problem with the copy was that the fourth page was missing. The result was that the size of the residuary estate to be received by Ms. Kabboul, again, was uncertain without knowing the provisions on page four. This was why the trial court would not accept this lost will for probate. However, the appellate court chose to attempt to follow the policy that favors testamentary dispositions and ruled that the lower court erred in not examining the document to see if any portion could be salvaged in order to prevent a total intestacy in this case.

To do this, the appellate court looked for the portions of the 1982 will that were not dependent on what may have been stated in the missing page. If possible, it would give effect to those portions so that total intestacy could be avoided. This review revealed that the bequests on the first three pages as well as clause twenty-nine on page five were for determinate sums and merited treatment as valid testamentary dispositions. Meanwhile, the missing clauses only impacted two clauses which concerned the distribution of the residuary estate; since testamentary intent regarding the residuary estate could not be determined, those two clauses were declared void. The court decided that what was apparent from the will’s terms would be subject to probate while the remainder of the estate was distributed according to the intestacy laws of Pennsylvania.

Most will contests that involve lost wills are not as convoluted as Burns v. Kabboul, but the case does demonstrate the problems that can result when old wills are not revoked and destroyed. In this case, a partial copy was at issue. Ms. Kabboul was fortunate that she was able to produce it after a later will was invalidated based on her use of undue influence. If someone else had possession, the PEF Code states what to do. In Section 3137, a party in interest can compel a person having possession or control of a testator’s will to show cause why it should not be deposited with the Register of Wills.

Forgery

While forgery is related to fraud, it is more narrowly defined so it will be discussed briefly here. In 1961’s Kadilak Will, the Pennsylvania Supreme Court stated that the will contestant must directly prove forgery with evidence that is “clear, direct, precise and convincing.” What might be considered as forgery in a will contest?

While an unauthorized signature by someone other than the testator in violation of PEF Code Section 2502 probably would be the typical answer, there are other situations in which courts have invalidated wills and codicils on the basis of document forgery. The latter variation also may be referred to as fraudulent substitution.

The previously mentioned Kadilak Will dealt with allegations of forged signatures. However, there are numerous cases in which contestants have charged others with removing pages of testamentary documents and then replacing them with more favorable pages. For example, Kane’s Estate from 1933 concerned a document bearing the decedent’s signature in which it was alleged that one page had been substituted for the original page and that another page was subjected to alteration. As this occurred nearly 100 years ago, the courts that had to decide on the will’s validity had to scrutinize what was produced by a portable typewriting machine. In the end, the Pennsylvania Supreme Court’s examination of the machine’s output was the same as that of the trial court. The document submitted for probate was riddled with evidence of forgery.

Wide latitude is permitted regarding what can be offered to prove forgery. Over the course of time, the following are among the factors used as proof: comparisons to examples of the decedent’s handwriting which are positively identified as such and were made as close in time as possible to the date of the disputed document; differences in typing; the presence of extra staple marks; differences in paper used within the document as well as differences in ink; the validity of signatures of witnesses; and the amount of time that elapsed prior to presenting documents for probate as well as explanations for the delays if concerns were raised.

A will contest is a difficult and expensive undertaking. However, if there are reasonable grounds for disputing the validity of a document offered for probate, one can succeed in such an action. The grounds alleged and the evidence in support have to be weighed carefully before proceeding to court because the party with the burden of proof must meet this burden by producing clear and convincing evidence to support each element of the cause of action.

HOW TO AVOID SURPRISE MEDICAL BILLS

April 2, 2022Alberts Law, Topics of Interestalberts law, health insurance, no surprises act, surprise medical billsalberts

By Dan Weissmann
Kaiser Health News

Patients are no longer required to pay for surprise medical bills when out-of-network care given without their consent when they receive treatment at hospitals covered by their health insurance since a federal law took effect at the start of this year.

But the law’s protections against the infuriating, expensive scourge of surprise medical bills may be only as good as a patient’s knowledge — and ability to make sure those protections are enforced.

Here’s what you need to know.

Meet the No Surprises Act.

Studies have shown that about 1 in 5 emergency room visits result in a surprise bill.

Surprise medical bills frequently come from emergency room doctors and anesthesiologists, among others — specialists who are often outside a patient’s insurance network and not chosen by the patient.

Before the law took effect, the problem went something like this: Say you needed surgery. You picked an in-network hospital — that is, one that accepts your health plan and has negotiated prices with your insurer.

But one of the doctors who treated you didn’t take your insurance. SURPRISE! You got a big bill, separate from the bills from the hospital and other doctors. Your insurer didn’t cover much of it, if it didn’t deny the claim outright. You were expected to pay the balance.

The new law, known as the No Surprises Act, stipulates, in broad terms, that patients who seek care from an in-network hospital cannot be billed more than the negotiated, in-network rate for any out-of-network services they receive there.

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Instead of leaving the patient with surprise medical bills that insurance will not cover, the law says, the insurance company and the health care provi犀利士
der must work out how the bill gets paid.

But the law builds in wiggle room for providers who wish to try end runs around the protections.

Caution: The law leaves out plenty of medical care.

The changes come with a lot of caveats.

Although the law’s protections apply to hospitals, they do not apply at many other places, like doctors’ offices, birthing centers, or most urgent care clinics. Air ambulances, often a source of exorbitant out-of-network bills, are covered by the law. But ground ambulances are not.

Patients need to keep their heads up to avoid the pitfalls that remain, said Patricia Kelmar, health care campaigns director for the nonprofit Public Interest Research Group, which lobbied for the law.

Say you go for your annual checkup, and your doctor wants to run tests. Conveniently, there’s a lab right down the hall.

But the lab may be out of network — despite sharing office space with your in-network doctor. Even with the new law in effect, that lab doesn’t have to warn you it is out of network, which could result in a surprise medical bill.

Beware the “Surprise Billing Protection Form.”

Out-of-network providers may present patients with a form addressing their protections from unexpected bills, labeled “Surprise Billing Protection Form.”

Signing it waives those protections and instead consents to treatment at out-of-network rates.

“The form title should be something like the I’m Giving Away All of My Surprise Billing Protections When I Sign This Form, because that’s really what it is,” Kelmar said.

Your consent must be given at least 72 hours before receiving care — or, if the service is scheduled on the same day, at least three hours in advance. If you’ve waited weeks to book a procedure with a specialist, 72 hours may not feel like sufficient advance warning to allow you to cancel the procedure to avoid incurring a surprise medical bill.

Among other things, the form should include a “good faith estimate” of what you’ll be charged. For nonemergency care, the form should include the names of in-network providers you could see instead.

It should also inform you of an unfortunate catch-22: The provider can refuse to treat you if you refuse to waive your protections.

It is against the law for some providers to give you this form at all. Those include emergency room doctors, anesthesiologists, radiologists, assistant surgeons, and hospitalists.

To prevent being trapped by surprise medical bills, keep your antennae up on costs. Many patients report they are merely handed an iPad for recording their signature in emergency rooms and doctors’ offices. Insist on seeing the form behind the signature so you know exactly what you are signing.

If you notice a problem, don’t sign, Kelmar said. But if you find yourself in a jam — say, because you get this form and urgently need care — there are ways you can fight back against potentially being subject to surprise medical bills:

- Write on the form that you are “signing under duress” and note the problem (e.g., “Emergency medicine facilities are not allowed to present this form”).
- Take a picture of the form with your notes on it. Consider also shooting a video of yourself with the form, describing how it violates federal law.
- Report it! There is a federal hotline (1-800-985-3059) and a website for reporting all violations of the new law barring surprise bills. Both the hotline and website help patients figure out what to do, as well as collect complaints.

Speaking of that “good faith estimate” …

The new “good faith estimate” benefit applies anywhere you receive medical care.

Once you book an appointment, the provider must give advance notice of what you could expect to pay without insurance (in other words, if you do not have insurance or choose not to use it). Your final bill may not exceed the estimate by more than $400 per provider.

Theoretically, this gives patients a chance to lower their costs by shopping around or choosing not to pay with insurance. It is particularly appealing for patients with high-deductible insurance plans, but not exclusively: The so-called cash price of care can be cheaper than paying with insurance.

Also: It wouldn’t hurt to ask if this is an all-inclusive price, not just a base price to which other incidental services may be added.

It is not enough to ask: “Do you take my insurance?”

It still falls to patients to determine whether medical care is covered. Before you find yourself in a treatment room, ask if the provider accepts your insurance — and be specific since surprise medical bills can result when you do not obtain information that applies to your insurance plan.

Kelmar said the question to ask is, “Are you in my insurance plan’s network?” Provide the plan name or group number on your insurance card.

The reality is, your insurance company — Blue Cross Blue Shield, Cigna, etc. — has a bunch of different plans, each with its own network. One network may cover a certain provider; another may not.

Keep an eye on your mailbox.

Attention to details is crucial if you are to catch any surprise medical bills. To make sure no one bills you more than expected, pay attention to your mail. Hospital visits, in particular, can generate lots of paperwork. Anything billed should be itemized on a statement from your insurer called an explanation of benefits, or EOB.

Notice anything off? Make some calls before you pay — to your insurer, to the provider, and, of course, to the new federal hotline: 1-800-985-3059.

Dan Weissmann is the host of “An Arm and a Leg,” a podcast about the cost of health care. This column is adapted from his newsletter First Aid Kit.

KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism about health issues. Together with Policy Analysis and Polling, KHN is one of the three major operating programs at KFF (Kaiser Family Foundation). KFF is an endowed nonprofit organization providing information on health issues to the nation.

The S Corporation & Estate Planning

February 16, 2022Alberts Law, Estate Planning, Probate & Estate Administration, Topics of Interestalberts law, estate plan, gifting, qualified owners, S corporation, trustsalberts

When an estate plan includes an S corporation, a shareholder seeking to protect the Subchapter S election under the Internal Revenue Code (IRC) must be aware how the stock can be passed to others without jeopardizing this status. Restrictions limit the ways that the stock can be transferred, but – within these restrictions – one can find opportunities in the estate-planning context to protect the S corporation election while achieving objectives for the estate plan. Various possibilities will be introduced after a look at why a business owner would make this election in the first place and why its continued existence would be a focus of an estate plan.

WHY PROTECTING THE CORPORATE TAX STATUS MATTERS

In Subchapter S of Chapter 1 in the Internal Revenue Code, the statutes explaining the S corporation election, the purposes for deciding on this status, and limitations and restrictions that must be followed in protect this status are set forth. Small businesses may choose to incorporate, typically becoming C corporations. A hallmark of such entities is “double taxation.” This means that the average corporation is taxed on its profits (if any); then, after the corporate income tax is assessed, the profits that remain can be distributed as dividends, for example, to the entity’s stockholders. They must account for their shares of the corporate profits when they pay their personal income taxes. Since the corporate profits are taxed at these two levels, this is labeled as double taxation.

On the other hand, when a C corporation makes a successful election to become an S corporation, the problem of double taxation no longer exists because S corporations are taxed as if they were partnerships, which are treated as pass-through entities under the IRS’s income-tax laws. In partnerships, the individual partners receive their shares of the profits, and these are taxed only once – i.e., as shares of each partner individually.

While partnerships are not taxed at two levels, there are other problems, including the possibility of partners being personally liable for a portion of the partnership’s liabilities and debts. A major benefit of incorporation is the basic rule that individual shareholders are not legally responsible for the corporation’s debts and damages beyond their investment in the corporation. This look at partnerships and C corporations leads to the reason that the S corporation appeals to many business owners.

Meanwhile, another potential consideration regarding estate planning with an S corporation that has more than one owner of its stock is that a shareholder agreement often will exist. Due to the closely-held nature of the company, this agreement may contain restrictions on transfers of stock because these transfers can disrupt the continued operation of the business. It may require consent from any other shareholders, who want new members who are likely to act in the best interests of the corporation and the current shareholders. Any plan for the future must fit into the parameters of the shareholder agreement, in addition to the legal considerations.

Despite the various limitations and restrictions that S corporations face which result in making estate planning a precarious undertaking for a layperson, an S corporation is an entity that also has distinct advantage over the C corporation and over the partnership that lead many business owners accept these limitations and restrictions to achieve a tax advantageous position. The IRS treats S corporations as pass-through entities, despite their corporate status. This provides the benefit experienced by partnerships – there is no double taxation, and any profits only are taxed at the shareholder level. A shareholder of S corporation stock also does not pay self-employment tax.

Furthermore, as a corporation, this entity’s owners have the same protections that stockholders in any C corporation have regarding personal responsibility for corporate debts and damages. Of course, there is a price to be paid for receiving this favorable treatment. As noted earlier, estate planning with an S corporation presents difficulties that must be navigated in order to protect the corporate designation permitted by the Internal Revenue Code. Methods that can allow the transfer of S corporate shares while not causing the revocation of the S election exist and must be considered when an estate plan is being constructed.

LEGAL LIMITATIONS AND RESTRICTIONS TO WORK AROUND

The fact that business owners who successfully elect to benefit from the advantages of being an S corporation also must accept certain limitations and restrictions that are tied to this election has been noted. As these elements are a major concern when an individual prepares an estate plan, an introduction to the limitations and restrictions that exist is necessary. One needs to understand why the transfer of S corporation shares is not straightforward in the way that it is with an ordinary C corporation and then have some knowledge of what options are available as a result.

The Internal Revenue Code places restrictions on the number and types of shareholders that S corporations can have. For example, an S corporation faces a limitation on the maximum number of stockholders who can own its stock. Currently, this number is one hundred – exceeding 100 owners violates the law and results in a forfeiture of the S election. While a family-owned business might not be large enough for this to prove troublesome, any plans for succession and stock transfers must be set up in order to avoid allowing ownership to expand beyond this total.

In terms of the shares themselves, an S corporation can have only one class of stock according to IRC Section 1361(b)(1)(D). However, within this class, shares may be classified as voting or nonvoting. The use of nonvoting shares allows transfers of significant value to be made without also transferring control.

The estate plan also must be drafted with a clear idea of the types of individuals and entities that are permitted to own S corporation stock; without such careful consideration, an estate plan can undermine the objective of protecting the S election. Non-resident aliens cannot have an ownership interest; the owner’s estate should be set up so that all shares will pass to U.S. citizens, resident aliens, certain tax-exempt organizations, and certain types of trusts.

The restrictions on ownership ensure that profits, which pass through the S corporation to its shareholders, will not escape annual taxation by the IRS. The limited group of potential owners eliminates most corporations, partnerships, and LLCs, for example, from owning any stock in an S corporation if it is to retain its tax status under the Internal Revenue Code.

INCLUDE QUALIFIED OWNERS TO PERPETUATE THE BUSINESS

When developing an estate plan, a current owner of stock must focus on choosing “qualified” owners – these are individuals and entities who meet the requirements to own shares in an S corporation, which are set out in the Internal Revenue Code. Otherwise, the business could lose this status, meaning that any current shareholders are likely to suffer financially. While a large number of entities and individuals are eliminated from consideration by tax laws, there are specific categories of entities and individuals qualified under the tax code to be owners. When estate planning, an owner needs to understand this so that she or he can determine the choice that is appropriate based on the owner’s vision of the corporation’s future and the best course of action to turn the vision into reality.

Of course, for a business to survive as an ongoing concern, an individual owning shares in an S corporation not only must choose a new owner who falls within the group of qualified owners but also must choose a successor who can perpetuate the business. Beyond looking at individuals, the person could name a trust or a tax-exempt organization to receive the available shares from the estate. This becomes a difficult decision that involves considering multiple options.

THE CATEGORIES OF POTENTIAL SHAREHOLDERS UNDER THE IRC

While looking at these options, an individual must be sure that the any succession plan accounts for two major decisions that are vital to preserving S corporation status. First, the plan must avoid transferring any shares of the corporate stock to ineligible shareholders, the categories of which already have been reviewed. Second, the individual must detail necessary elections (e.g., the Qualified Subchapter S Trust or Electing Small Business Trust election) that protects against termination of the S corporate status when the grantor dies as well as post-mortem elections that may be required to prevent termination.

With these concerns in mind, the planner generally can look at only a limited number of possibilities. The choices for the transfer of stock ownership include the following: family members, “key persons” who are involved with the S corporation, the decedent’s estate (for a limited period of time), various types of trusts, and certain tax-exempt organizations.

TRANSFERS TO HEIRS OR BENEFICIARIES

With a family business that involves an S corporation, a number of options for ownership transfer can be available. If not specified in the estate plan, a decedent’s shares would pass to the individual’s heirs. This probably is not the optimal choice. For example, the heirs who receive shares based on laws of intestacy may not have the skills or interest to be involved in running a business. A will could be set up to transfer shares to beneficiaries chosen by the testator who had the will drafted to distribute her or his stock.

AN ESTATE CAN BE A QUALIFIED OWNER … FOR A LIMITED TIME

If stock is passed according to a decedent’s will or via a state’s intestacy laws, the ownership of the shares does not transfer to beneficiaries or heirs immediately. In addition, stock does not pass to a trust or a tax-exempt organization, both of which will be reviewed in more detail later, at the time of death. When going through the estate planning process, the shareholder needs to understand that her or his estate can own stock of an S corporation.

However, the length of time that this situation can exist is not open ended. Eventually, these shares will be owned by individuals (as noted above) or entities (as will be noted below). The estate’s personal representative can maintain ownership in the estate for a “reasonable” time. This is not defined in terms of days but is defined by the diligence of the personal representative, who cannot permit an unreasonable delay in transferring ownership from the estate to the new owner as chosen by the decedent or, if the decedent as not set up a comprehensive estate plan, by the defaults established under the law.

If the time frame is determined to be unreasonably long, then the S election may be terminated. What is “unreasonable” is not defined with precision. Instead, it depends on the facts of the case because, the more complicated the estate, the longer the period in which it can reasonably be the owner of the S corporation stock. In the end, though, no estate can last forever so, at some point, the stock must move out of the estate and go to a qualified owner pursuant to the Internal Revenue Code.

GIFTING SHARES COULD BE A USEFUL ESTATE-PLANNING OPTION

Of course, not every estate or succession plan calls for transfers to be made after death. There are ways that the current owner can look to transfer shares prior to death. One possibility is the use of gift giving during one’s lifetime. Often, a parent wants to pass interests in a business to the parent’s issue when they might be considered appropriate successors to the parent. These transfers could be made to individuals or, if distribution is to occur to those individuals in the future, to a trust for this purpose.

Using gifts to make the transition necessitates looking at gift-tax implications. The plan may avoid gift taxation by making gifts each year to each individual that are valued at no more than the annual exclusion for gifts, which is $16,000 per individual for 2022. Other possibilities exist, but the ones mentioned are used commonly to pass business interests from one generation of a family to the next.

BUY-SELL AGREEMENT: CURRENT OWNERS MAY PURCHASE STOCK

There may be reasons why a plan to bring new family members into the business might not be feasible. A shareholder may plan for the S corporation to have an agreement in place that permits a “key person” within the business to purchase a decedent’s shares. In conjunction with the buy-sell agreement, the current shareholder could facilitate this transition by arranging for a life-insurance policy to fund the purchase.

When setting up such a plan, the shareholder should have a qualified appraiser determine the fair market value of the stock since the shares are not publicly traded – valuation always is a concern when an S corporation is involved. Also, this plan only works when there are at least two shareholders in the corporation since the person buying the shares must be an owner at the time.

ESTATE PLANNING AND ELIGIBLE ENTITIES AS SUCCESSOR OWNERS

The current owner may determine that passing shares to individuals does not fulfill the intent behind the estate plan. As long as the shareholder is not bound by an agreement to offer the stock to particular individuals, she or he is in a position to consider specific entities as the new owner of S corporation stock via the estate plan. Some of these options exist prior to death while the others occur post mortem.

Trusts Are the Most Common Entities to Consider

Commonly, an owner in this situation will look at the various types of trust are allowed to own S corporation shares. This requires a thorough understanding of the different purposes that trusts can serve so that an informed decision regarding which is best suited to carry out the intent of the estate plan can be implemented. A brief review of the various possibilities follows.

There are numerous variations among the universe of trusts. However, while purposes may differ, they share common elements. For example, a trust is a legally distinct entity in which assets are managed for the benefit of a select group of beneficiaries. It is created when the grantor (sometimes known as of the settlor) provides trust property that generally should grow in value; this corpus (or principal) is intended to increase in value so that the beneficiaries, under specified conditions, will share in thus benefit. Finally, the trust property is under the control of a trustee – the legal owner of this property – who must manage and invest the trust’s principal on behalf of the beneficiaries.

There are a variety of reasons for using a trust, as opposed to an outright gift to beneficiaries, which is why different types of trusts exist – they have their own characteristics that establish their character and their usefulness in certain situations. The estate planner must be aware of this and select the type of trust(s) that fits with the grantor’s intent in setting up the trust.

Only a Few Trust Types Can Own Subchapter S Stock

Meanwhile, with an S corporation, only a handful of trust types can be used. The grantor has to understand the purpose of creating a trust as well as creating the type of trust that not only fulfills this purpose but also fits into one of the permissible categories.

In estate planning, an individual is limited in the types of trusts that can be established, and various options will depend on elections made after the individual’s death. The Internal Revenue Code includes the following among the trusts that can be eligible S corporation shareholders: grantor trusts; trusts established by the shareholder who also is the deemed owner of the trust at death can continue for two years after the date of death; testamentary trusts created within two years of receipt; Qualified Subchapter S Trusts (QSSTs); Electing Small Business Trusts (ESBTs); and voting trusts. The Internal Revenue Code spells out these choices within Section 1361, in which the IRS also defines what an S corporation is. Considerations regarding each of these are set forth below.

Grantor Trusts

The grantor trust can be relatively easy to establish, but there are certain requirements if it is to hold S corporation stock without jeopardizing the S election. The grantor who sets up the trust must be a U.S. citizen or resident. Additionally, the stock and other assets of the trust must be treated as owned by the grantor. This means that person who puts the assets into this type of trust maintains control over the trust, including the ability to determine distributions from the trust. As a result, the grantor is responsible for any income taxes incurred due to the operation of the trust, as opposed to the trust having any obligation for their payment.

As long as the trust meets these requirements when the grantor dies, it does not have to terminate at that time. Instead, the IRC permits the trust to continue its existence for up to two years after the death of the deemed owner. During this period, it remains eligible to hold S corporation stock, with the estate of the deemed owner becoming the new shareholder.

A grantor also can create a trust that is irrevocable, with control over the assets placed in the trust being surrendered by the grantor. By surrendering this control, the grantor generally is not responsible for paying taxes on the trust’s income. This would eliminate the use of this type of trust for the transfer of S corporation stock.

Intentionally Defective Grantor Trusts: A Twist on the Grantor Trust

However, trusts and the laws and regulations that pertain to them can be quite complex. There are trusts in which the grantor surrenders control over assets placed in the trust – which usually would lead to taxation of the trust for income that is generated and prevent it from holding S corporation stock – receiving some treatment by the IRS as a revocable trust. This is known as the “intentionally defective grantor trust” (IDGT).

This is one of the more complicated trusts among those that can be used with S corporation stock – it must be drafted very precisely to succeed here. An IDGT relies on specific rules in which the IRS permits an irrevocable trust to employ certain conditions that will allow an irrevocable trust to be treated as a revocable trust to a sufficient extent when a S corporation in involved. Usually, this starts with a grantor trust that is drafted with an intentional flaw that will require the individual to remain responsible for paying taxes on income produced by the trust.

The assets in the IDGT will not be part of the estate of the former S corporation shareholder – this is in contrast to a revocable trust in which the grantor remains the actual owner of the property held in the trust. These assets are transferred to an IDGT by either gift or sale. The typical beneficiaries will be the grantor’s children or grandchildren, who benefit by eventually receiving the trust’s assets without a reduction in value due to income taxation because the grantor already paid these. The intentionally defective grantor trust can be a useful tool when an S corporation is involved but only when enough care has been taken to structure it so that it does not run afoul of the applicable rules.

Time-Limited Usefulness of a Testamentary Trust

While an intentionally defective grantor trust can be rather complicated to include in an estate plan, a testamentary trust is simpler to establish. After the shareholder’s death, the estate’s personal representative must work to establish a functional trust. The trust must be funded, with steps taken to permit it to hold the S corporation stock without jeopardizing the corporation’s election. The problem with this option is that it is time limited by definition.

A testamentary trust can retain the stock for no more than two years after the shares are received. If this trust is intended to be an irrevocable trust, the language establishing it must be examined and modified, if necessary, so that the testamentary trust ceases to hold the S corporation stock beyond the time limitation.

Before this period has expired, the trust must qualify as a type of trust that the Internal Revenue Code permits to own S corporation stock. If the terms will not allow the steps required to turn this into an eligible trust to be taken, then the stock should not be placed in the trust in order to protect the S election.

Two Statutory Elections that Can Replace a Testamentary Trust

Assuming that an eligible trust can be created, there are numerous variations of trusts that meet the requirements set out in IRC Section 1361. Since grantor trusts are eligible, an estate planner could use the previously described intentionally defective grantor trust. There are two trusts set forth within Section 1361 that a testamentary trust could become with a timely election. These are the Qualified Subchapter S Trust (QSST) and the Electing Small Business Trusts (ESBT). A brief review of each follows.

A Qualified Subchapter S Trust Election and Its Effect on the Estate Plan

Section 1361(d) of the Internal Revenue Code introduces the Qualified Subchapter S Trust as a trust that can own stock of an S corporation. However, a trust that elects to have this subsection apply to it has to meet specific criteria. One of the requirements is that the trust can have only one current income beneficiary who can receive benefits from the S corporation stock.

Additionally, any distributions of the QSST’s assets can be made only to that beneficiary, who must be a U.S. citizen or resident. The current beneficiary’s interest ends with this individual’s death. However, if the trust terminates prior to this beneficiary’s death, then the beneficiary will receive all of the trust assets

The timing of a QSST election is important. For example, a testamentary trust that becomes the owner of S corporation stock must elect to be treated under this subsection within two months and 15 days after it becomes a shareholder. If this deadline is missed, then the opportunity to make this election is lost unless late-election relief under Revenue Procedure 2013-30 is obtained.

Electing Small Business Trust and the Impact of its Election

A second option that can be considered before the period that a testamentary trust can hold S corporation stock expires is found in Section 1361(e) of the IRC. Like the QSST, the Electing Small Business Trust (ESBT) must be a domestic trust; this means that a U.S. court exercises primary supervision over its administration and at least one U.S. person controls all of its substantial decisions (26 CFR Section 301.7701-7). It also has a period of two months, 15 days after the trust becomes an S corporation shareholder or the business becomes an S corporation to elect to be an ESBT.

QSST v. ESBT: Advantages and Disadvantages under the IRC

An area in which the Electing Small Business Trust differs from the Qualified Subchapter S Trust involves beneficiaries. A QSST is limited to one income beneficiary while the ESBT is more flexible, allowing there to be more than one “potential current beneficiary” (as defined in Section 1361(e)(2)).

The EBST also permits the multiple beneficiaries to receive income from the trust, but each is required to be eligible to be owners of S corporation stock. The list of possibilities includes U.S. citizens and residents, estates and qualifying tax-exempt organizations (see below).

While the ability to have more current beneficiaries than a QSST can have may be advantageous in terms of the estate plan, the income distributions to the trust’s beneficiaries are likely to face higher tax rates since the ESBT is taxed on this income and generally will pay at a higher marginal tax rate than individual beneficiaries. Meanwhile, the QSST’s income is taxed as income to its current beneficiary. The respective limitations of these two trusts have to be considered before choosing one in the context of an estate plan.

What are Potential Purposes of a Voting Trust?

There is another trust that can hold S corporation stock which is mentioned in Section 1361 that can hold S corporation to be considered here: the voting trust. It is not really an estate planning option because it involves owners of stock creating a trust via a written agreement that delegates their voting rights to one or more trustees. The individual owners of the shares are taxed on any income generated, and the trust is subject to termination on a specific date or upon the occurrence of a specific event. Such trusts can be important when an S corporation is facing a hostile takeover, loss of control, and potential conflicts of interest. The voting trust is mentioned in the interest of completeness since its purpose of pooling voting rights of shareholders would arise after the estate plan’s purpose of transferring ownership to the shareholders is fulfilled.

Viewing Tax-Exempt Organizations Alone or Within a Trust

Another estate-planning option for an S corporation shareholder centers on certain tax-exempt organizations (see Section 1361(c)(6)) that are permitted to be shareholders under the Internal Revenue Code. These include Section 401(a) organizations (pension, profit-sharing and stock-bonus plans) as well as Section 501(c)(3) charitable organizations that are tax exempt under Section 501(a) of the IRC.

Some Section 501(c)(3) organizations merit further scrutiny because they are private foundations instead of public charities. Private foundations usually receive most of their contributions from a primary donor and are controlled by a small group of individuals. As a result, they lack public accountability, and this has led to them facing additional restrictions and excise taxes that can reduce the impact of contributions. This is worth considering if you would look at a private foundation to become an S corporation shareholder in an estate plan.

SOME CONCLUDING CONSIDERATIONS

When there is no shareholder agreement that specifies to whom or what an owner’s shares can be transferred, then an S corporation shareholder’s options fall into the above categories. The person looking at estate planning must work within the limited structure provided by the Internal Revenue Code. Gifting of shares those eligible under the Internal Revenue Code, passing ownership via will to eligible individuals and entities, and placing stock into certain types of trusts are the basic choices available for the estate planner here. Of course, there is no perfect solution, but one must start with well-defined objectives regarding an estate plan to be developed. Then, each of the possibilities can be reviewed to find the best way to meet the objectives. Often, the assistance of experienced professionals is crucial in order to navigate this complicated process to lead to the development of the desired estate plan.

SOCIAL SECURITY BENEFITS & EARNED INCOME

May 9, 2020Alberts Law, Topics of Interestalberts law, early retirement, earned income, Full Retirement Age, Social Security benefitsalberts

Many people work after they retire and start to receive Social Security benefits. If you are considering this possibility, you also need to be aware of the potential impact that earned income can have on these benefits. To the extent that your circumstances allow you to plan ahead, you should understand your options as well as the tradeoffs that making choices always entail. What follows is a look at common consequences of various paths that you might consider when eligibility for retirement benefits nears and also after you have begun to receive these benefits.

Your Full Retirement Age is the Key if You Work after Retiring

To figure out the impact of earned income on Social Security benefits after retirement, you need to know your Full Retirement Age (FRA). As a side note, the Social Security Administration (SSA) sometimes discusses Normal Retirement Age. Whenever you see that term, you need to realize that it actually is the same as Full Retirement Age, which is the term that will be used here. Now, assuming that you decide to take early retirement but decide that you want, or need, to supplement your benefits by continuing to work, you also should understand how your age and earnings will affect the monthly amount that you are entitled to receive from the SSA. Before looking at the specifics, some discussion of the meanings of the terminology used by Social Security should be set forth.

Your Full Retirement Age depends on your date of birth. If you review Social Security’s FRA chart, you will see that this term actually applies to eligibility for retirement, spouse’s, and widow(er)’s benefits. The focus here is on the worker so what follows is specifically about retirement (or “old-age”) benefits, but the underlying concepts can be adapted to the other categories as well. With this in mind, a worker’s Full Retirement Age can range from 65 to 67 years under the current law.

If you were born on January 1, 1938 or earlier, your FRA was reached on your 65th birthday. At this point, your age will not affect your Social Security benefits, but, as will be mentioned later, your earnings still could play a role. In fact, anyone born before 1954 will have reached the applicable Full Retirement Age prior to 2020. As the chart regarding FRA shows, a person born before January 2, 1955 has a FRA of 66. As of May, 2020, those born after this date will have a Full Retirement Age that increases by 2 months every year until it reaches 67 years for everyone born after January 1, 1960. With this in mind, we will look at who is eligible for early retirement and also consider the impact of earnings on their Social Security benefits.

Also, you should remember that, even if you do not earn income, you will receive reduced Social Security benefits if you choose to retire prior to your Full Retirement Age. How this is calculated will not be detailed here. However, if you want to see how the SSA determines the reduced benefits, you could review RS 00615.001 of the POMS regarding Reduced RIB (i.e., Retirement Insurance Benefits).

Criteria for Eligibility for Early Retirement Benefits

If you want to retire prior to reaching your Full Retirement Age, you must be at least 62 years old and fully insured to be eligible for early payment of your Social Security benefits. You also must file an application with the Social Security Administration. If you turn 62 on the first day of the month, you could be entitled to early retirement benefits for that month. Otherwise, you could apply and be entitled to your Social Security benefits for the following month (POMS RS 00201.001). Finally, with this overview of early retirement as a foundation, we can explore the ins and outs of earned income for Social Security recipients.

For Years Prior to the Year When FRA is Reached

For a person who will not reach Full Retirement Age during the current calendar year the Social Security Administration uses two formulas for calculations when there is a cost-of-living adjustment for Social Security benefits announced in December of the preceding year. Of the two calculated figures, the larger monthly amount is multiplied by 12 to determine what is called the Lower Exempt Amount, which is used during the years prior to the year that you reach your FRA. As the calculations involved can be difficult to follow, Social Security publishes a chart of the Lower Exempt Amounts through the current year. For example, in 2020, the applicable amount is $18,240.

Simply put, your Social Security benefits are not affected if your earned income would not exceed $18,240 for all of 2020. However, as soon as you earn your first dollar above this amount in this year, your retirement benefits will be reduced. It should be noted that the reduction in benefits before you reach your Full Retirement Age are not permanently forfeited. Instead, after reaching your FRA, your retirement benefits will be adjusted to an increased amount that repays the amounts that your Social Security benefits were reduced due to earnings in any prior months.

In any calendar year prior to the year in which you reach your FRA, you are permitted to earn up to the Lower Exempt Amount while still being entitled to receive your entire early retirement benefit amount. For every $2 in earned income above the Lower Exempt Amount, you will lose have $1 of your Social Security benefits. Since the annual earned income limit is $18,240 in 2020, this is what you can earn without retirement benefits being affected.

As an example, if you would receive $12,000 in Social Security benefits during the year but also earned $42,240 from working, then – after subtracting the $18,240 from your total earnings – you would have $24,000 in income remaining. The remaining amount will lead to a reduction in these benefits. Since the amount is $24,000, this would result in a reduction of $12,000 in your Social Security benefits for 2020. In the end, you would not be entitled to any of payments from the SSA for 2020.

However, this reduction begins with the month that you first are eligible to receive Social Security benefits. In other words, in the year that you start to receive these benefits, your earnings prior to the month that your Social Security starts are not included in the calculation of the reduction of your benefits. Whenever you receive benefits throughout the entire year, then the Social Security Administration tracks your earned income for all 12 months of the calendar year and will base any reduction in Social Security benefits on all of your income for the year. If you began to get Social Security in July, then the SSA looks at earnings for July through December when determining if you exceeded the Lower Exempt Amount.

In Year that You Reach FRA

In the year of your birthday when you reach your Full Retirement Age, the Social Security Administration approaches earned income from a different perspective. Annually, it calculates a Higher Exempt Amount, which is the earned income that a person can receive before work could lead to a reduction of your Social Security benefits. For 2020, this equals $48,600 (according to the chart of exempt amounts since 1984 on the SSA website) – this amount is adjusted every December based on any cost-of-living increase announced by Social Security. In 2020, you can earn income up to $48,600 during the months prior to the month of your birthday when you will attain your FRA. As an example, if your birthday is in September, you would face a reduction in your Social Security benefits only if your earnings through August exceed $48,600. Provided that this occurs, the SSA also uses a different formula to calculate the benefit reduction. In this situation, the reduced Social Security benefits will equal the loss of $1 for every $3 of earned income.

In the Month that You Reach FRA and the Rest of the Year

As of the month that you reach Full Retirement Age, your earnings no longer can have a negative effect on the amount of your Social Security benefits. Put simply, no matter how much you earn after this point, the Social Security Administration will pay the entire benefit amount to which you are entitled.

In Any Year After You Have Reached FRA

For every calendar year after the year that you have reached your Full Retirement Age, you do not have to worry about reductions due to earned income. Under the current law, you are not subject to any annual earnings limit that will reduce your Social Security benefits.

Income Always Can Indirectly Reduce Social Security Benefits

Taxation of benefits can apply whenever you receive Social Security benefits. The IRS looks at unearned as well as earned income. Its basic definition of “income” will focus on your adjusted gross income plus nontaxable interest income plus half of your Social Security benefits. The Internal Revenue Code has two income brackets that determine when income taxes are levied on Social Security benefits due to income. Under the current Internal Revenue Code, individuals with income between $25,000 and $34,000 and married couples filing jointly whose combined incomes range from $32,000 to $44,000 can have up to 50 percent of their benefits subject to income taxation. Additionally, if an individual’s income (as defined above) exceeds $34,000 or a married couple filing jointly has income exceeding $44,000, the IRS can tax up to 85 percent of Social Security benefits. For a more detailed look at this subject, Publication 915 from the Internal Revenue Service is a good source.

Can Work Have a Beneficial Effect on Social Security Benefits?

The answer is yes, and the reason is that your future benefits can increase when FICA taxes are deducted from your earnings and then credited to your work record by the Social Security Administration. The key is the level of earnings in any year that you worked while receiving benefits.

Generally, the SSA determines your Social Security benefits using earnings from your work history before you retired. However, if your earnings during a post-retirement year are more than what you earned in a year used in the initial calculation, the post-retirement year is substituted for the year with lower earnings, and the SSA will undertake a recomputation of retirement benefits. Payment of the new higher amount actually begins in January of the year that follows the year when you had the post-retirement earnings so you also may receive retroactive benefits equal to the increase in benefits starting from that month to the present time.

A Final Note: Contacting the SSA about Changes in Earned Income

If you decide to retire early, you should contact the Social Security Administration whenever there are changes in your earned income. This will reduce the possibility of overpayments that the Social Security Administration may attempt to recover when delays in adjusting your benefits after your earnings rise, which would cause your Social Security benefits to be overpaid. When the SSA realizes that this has happened, it will seek to recover this amount. Because the SSA changes its benefit payments to you based on the amount that you expect to earn in a given year, you would want to report updated (and more accurate) earnings information during the year. This particularly is true if you underestimate your income at first since this would lead to an overpayment of Social Security benefits during the year, and that excess amount will be deducted from your benefits during the following year. Bear in mind that, when the Social Security Administration determines that you have been overpaid, it might keep at least part your monthly Social Security benefits until the amount that has been withheld equals the amount of the overpayment. Quick reporting of changes of your earnings is your best bet for avoiding these problems.

Can a Third Party File Bankruptcy for Another?

October 11, 2019Alberts Law, Debt Relief & Bankruptcy, Estate Planning, Topics of Interestagent, alberts law, bankruptcy, power of attorney, third partyalberts

A third party may be able to file a bankruptcy for someone else. For example, a Power of Attorney may be used to start a bankruptcy action party, but bankruptcy courts have limited the authority of individuals to take this step. The third party in this situation is the agent named by the principal (the would-be debtor in the bankruptcy) in the principal’s Power of Attorney (POA). Since the Bankruptcy Code does not prohibit a third party from taking this action but does require the debtor to be involved in the bankruptcy case, such a filing relies on factual determinations and legal interpretations by the Bankruptcy Court where the case was filed, which is the focus here.

Power of Attorney and State Law

With state law playing a large role in what powers can be granted through a POA and the language that is needed in the document, the courts that have interpreted the filing by a third party via a Powers of Attorney using similar ideas but oft times have reached divergent decisions. Pennsylvania is the primary focus here, but opinions from other states cannot be ignored as they are considered by courts during their decision making.

The principal for whom a Power of Attorney is drafted needs to have the language fit the law that will be applied in the individual’s state. If the agent is supposed to be able to file a bankruptcy for the principal, the Bankruptcy Court looks at the intent from the POA’s wording. At this point, a review of various approaches in different jurisdictions may give a clearer understanding of how the law evolves from jurisdiction to jurisdiction.

Interpretation Left to Bankruptcy Courts

As in Pennsylvania, the courts that have been responsible for determining what a given state’s law requires have been hesitant to prohibit the use of a Power of Attorney regarding bankruptcy in all circumstances. Fairness has been a concern that actually has resulted in positions from state to state that can support a given POA in one state while finding that it is not sufficient in another state. This can make the choice of law to be applied perhaps the most important decision in this area of law – in fact, this is a reason why a Power of Attorney should clearly indicate which state’s laws formed the foundation for the drafting of this legal instrument if it is to be used to file for bankruptcy by a third party.

Various jurisdictions over the years that have addressed the POA issue. There have been influential decisions from bankruptcy courts in Virginia, Missouri, and Pennsylvania. These will be highlighted to show how the issues has been approached by the federal judiciary and to demonstrate how the standards for what constitutes an acceptable document tend to differ, despite some commonalities overall.

Important Decisions from Virginia

A number of the opinions have been authored by judges within the Bankruptcy Court for the Eastern District of Virginia. A 1980 decision looked at when, during a bankruptcy action, an agent might be able to proceed in place of the principal. Specifically, In re Killett revolved around a third party seeking to appear at a reaffirmation and discharge hearing when the debtor, who was an active member of the Armed Services, was in England and was unable to return for this hearing. Section 524(d) of the Bankruptcy Code was at issue.

The Court pointed to its language stating that a debtor shall appear at this hearing. The law views “shall” as is a word that communicates a duty so that the individual has no choice about what must be done. However, despite this, the Bankruptcy Court noted that, as a court of equity, it had to weigh the facts to determine its decision, despite the use of “shall” within the Code’s provision. The Judge concluded that, under the circumstances that existed, the debtor would and could rely on the counsel of his attorney and allowed a third party to appear in the debtor’s place. The Court noted that “any loss of rights is on [the debtor].”

Subsequent cases from Virginia seemed to take a harder line against the use of Powers of Attorney in bankruptcy courts, however. These opinions – like In re Killett – often came from the Bankruptcy Court for Virginia’s Eastern District. 1981’s In re Raymond involved spouses in which only the wife was present at the time of filing. Since the husband had to be out of the area and could not be easily reached, the wife decided to file a bankruptcy on behalf of herself and her husband via a Power of Attorney in which he named her as his agent. The Court refused to permit this to proceed as it emphasized that bankruptcy is the personal exercise of a privilege – not a right – that has serious implications. The Court stated that, too often, a third party will abuse the POA in general and would not permit this to occur in bankruptcy actions.

Then, there was a 1990 case (In re Smith) from the same Bankruptcy Court, with another spouse seeking to file a joint bankruptcy case but, again, having to rely on a Power of Attorney to do so because the husband was physically disabled and could not execute the necessary documents. Again, the Court would not allow this filing. It also pointed to some considerations regarding third party filings, such as the lack of language in the document that set forth a specific power that authorized such a bankruptcy filing.

Notably, the Court would not point to the absence of this language for its denial and wrote that a guardian or a “next friend” could possibly file such a bankruptcy if a court with the necessary power issued an Order regarding this appointment and also included sufficient authorization to the third party filing. A “next friend” is someone who applies to a court based on an individual’s medical incapacity or minority.

The next friend would have to be in possession of evidence (usually an opinion letter) from a licensed, qualified physician to show medical incapacity. Then, the Bankruptcy Court would require the next friend to have the all of the information needed to file a bankruptcy; after this party filed the petition, schedules, and related forms, the Court would proceed with the naming of a guardian (who could be the next friend) to handle the remainder of the case. These decisions did not appear to view a Power of Attorney as sufficient by itself to justify a third party filing.

Other State Courts Also Have Looked at POAs

Courts continued to struggle with the issue of a Power of Attorney being sufficient to allow third party filings. For example, In re Harrison, a 1993 bankruptcy case from Florida, stated that a Power of Attorney could provide authority for a bankruptcy filing in unusual circumstances, such as someone in the service during an active conflict, or in a hospital, or in a state of incapacitation. The court went on to note that a non-debtor cannot be granted authority to sign a verification under oath unless this person has personal knowledge of the facts involved. This is due to Rule 9011 of the Federal Rules of Bankruptcy Procedure, known as the “certification rule.” The Court scheduled a hearing about the possibility of sanctioning the third party for signing the statement that verified facts known only by the debtor.

Courts throughout the United States have continued to struggle with the effect of the Power of Attorney in the context of a bankruptcy filing. Before getting to Pennsylvania, a few other decisions show how what begins as a similar perspective can lead to further confusion among the federal bankruptcy courts. Vermont was the source for an opinion from 2001 that bears similarity to the reasoning found in some leading Pennsylvania cases. The Bankruptcy Court in In re Curtis decided that an agent can file for relief for a debtor under 11 U.S.C. Section 109 but required something more than a simple general Power of Attorney.

In this case, the debtor actually came forward to oppose the agent’s action after the latter filed the petition. The Court’s decision was that the agent lacked authority from the time of the original filing because the Power of Attorney did not include specific language that permitted the bankruptcy filing or allowed the agent even to pursue any litigation or legal proceeding while it had language involving business transactions, gift giving, and other matters. The authority on which the third party relied was seen as too general, resulting in the case’s dismissal. Courts commonly discuss the requirement of “specific language” in such cases, but the problem is practice is that different courts have different ideas about what words are specific enough to be necessary words.

Then, In re Eicholz, a decision from the Western District of Washington state in 2004, opined that, under Rule 9001(c) of the Federal Rules of Bankruptcy Procedure, an agent can file for bankruptcy on behalf of the principal under appropriate circumstances. The language within the Power of Attorney again was crucial to whether or not a bankruptcy filing was within the POA’s scope. Here, the language had to expressly grant authority to start a bankruptcy action. Otherwise, the principal had to ratify the third party’s actions, which looked at the passage of time as well as the acceptance of a benefit from agent’s act or the assumption of an obligation imposed by this act.

One last opinion before reviewing how Pennsylvania is consistent with the overarching idea about the need for specific language comes from the middle of the country. In re Sapp from the Northern Division of Missouri’s Eastern District in 2011 looked at a joint bankruptcy in which the wife was found to be mentally incapacitated and physically disabled (which was defined to mean that she would be prevented from participating in the case in person, by phone, via the internet, or in any other manner). While the case actually involved a guardianship, the Court still stated in this decision a Power of Attorney could not justify a third party filing a bankruptcy action unless the POA specifically set out the agent’s power to file for bankruptcy for the principal. Again, the exact language that would meet this standard did not appear.

Pennsylvania: Third-Party Filings and Powers of Attorney

As noted previously, Pennsylvania decisions are basically consistent with the reasoning found in other jurisdictions. The Bankruptcy Court for the Eastern District of Pennsylvania has two decisions that date back to the 1980s but remain important even now. 1987’s In re Zawisza dealt with a Chapter 13 action filed by a “next friend” and determined that a next friend or guardian ad litem could pursue a bankruptcy under appropriate circumstances.

However, In re Sullivan from 1983 focused on the use of a POA, making it more relevant here. The situation involved a monk who was a Pennsylvania domiciliary but would be in Holland for approximately five years. Meanwhile, he faced financial difficulties in Pennsylvania, which led him to give his brother a Power of Attorney that contained a specific right to sell his real property. Unfortunately for the monk, the language was limited to this action and did not mention bankruptcy. Despite this, the brother – as the monk’s agent – filed a Chapter 7 bankruptcy on behalf of the monk to prevent further deterioration of his financial position. In response, the Bankruptcy Court dismissed this filing because the limited POA that existed did not provide legal authorization for a third party filing. From Holland, the monk amended his Power of Attorney to include a specific grant for his agent to pursue personal bankruptcy on his behalf.

The brother now was authorized to do whatever the unavailable principal could do if he were personally present. Furthermore, in addition to filing the bankruptcy that originally was to be dismissed, the agent also could attend the §341 Meeting of the Creditors in his brother’s place, despite the mandate in the Bankruptcy Code that the debtor must attend this meeting. Being that the Bankruptcy Court is a court of equity, the decision from the Eastern District of Pennsylvania permitted the monk’s agent to attend the meeting while the monk was deemed unavailable due to his five-year commitment in Holland.

Thoughts about the Power of Attorney & Bankruptcy in PA

This case probably sets forth the best blueprint for an agent’s use of a Power of Attorney to file a bankruptcy in Pennsylvania. The POA needs to have specific language that authorizes the agent to file an action under the Bankruptcy Code. The principal also must be unavailable. The cited case involves a debtor who is unable to be physically present to pursue relief under the Code.

Although no definitive statement can be made with absolute certainty, the bankruptcy courts in Pennsylvania are likely to seriously consider and, quite possibly, permit a third party to pursue a bankruptcy for the principal using a Power of Attorney containing language specifically authorizing such a filing under very specific circumstances. These would include debtors who can be proven to be mentally incapacitated or physically unavailable (either due to a significant physical disability or due to inaccessibility). The reasoning behind this is that this facts would prevent meaningful (if any) participation by the debtor and also would amount to a denial of due process if a third party with authority (e.g., through a valid POA) would be prohibited from pursing this matter.

Limited Liability Company & Personal Debt in Pennsylvania

July 15, 2019Alberts Law, Debt Relief & Bankruptcy, Topics of Interestalberts law, debt relief & bankruptcy, limited liability company, llc, member, Pennsylvania, personal debtalberts

The Limited Liability Company (LLC) is a creation of state law. Depending on the state, the applicable law may be more business friendly, as it is in Delaware and Nevada, for example. However, Pennsylvania is not in this category, and its laws – like those of states with similar views of business – tend to be less specific in certain areas. This ambiguity means that many of the laws applicable to LLCs can be interpreted differently by different courts. The result is that, at the moment, how certain situations will be handled is somewhat of a guessing game. When looking at financial difficulties of a member of the company, the impact on the LLC itself can be difficult to predict right now.

Single Member and Multiple Member LLCs

As will be seen, Pennsylvania provides more direction and clarity for a Multiple Member Limited Liability Company (MMLLC) than it does for the Single Member Limited Liability Company (SMLLC). Both will be reviewed in the context of the law that was enacted in 2016 to provide some idea of where a member in the LLC stands when this individual or another member suffers from a financial downturn.

Look to State Laws Regarding LLCs Currently

One must bear in mind that, while federal law can preempt state law, this does not as yet apply to a member of an LLC. Federal bankruptcy law does not have any provisions that deal with LLCs specifically so this has left bankruptcy courts faced with issues regarding these entities to handle these matters on an ad hoc basis.

The LLC is becoming an increasingly popular type of business entity because of its hybrid nature. It is a pass-through entity in terms of income in the same way that a partnership is. Meanwhile, like the corporation, it generally is viewed as a separate entity, which serves to protect from liability for the business’s debts. Due to the increasing popularity, this area of law is likely to become more uniform in the future, as federal law adjusts to the changing landscape. At the moment, though, state law controls for the most part so one must consider where to establish the business – and also needs to realize that, if the LLC operates in multiple states, no state is bound to apply the law of a different state to a legal dispute that arises in its jurisdiction.

What is a Member?

Before looking at SMLLCs and MMLLCs, one should understand some definitions that are important for a Limited Liability Company. While an organizer often is employed to form the LLC and the operating agreement may specify that it will be run by a manager instead of its members (15 Pa.C.S. Section 8847), the member of the LLC is the most important component in the formation of the business. In the general definitions of Pennsylvania’s law, a “member” is defined; however, this definition is rather vague. Among the other definitions, one can gain a better understanding of what a member is. A person must provide a contribution that can consist of “property transferred to, services performed for or another benefit provided to the limited liability company;” an agreement to transfer property, perform services, or provide another benefit to the company; or a combination of these (Section 8842). In return, the individual gains a transferable interest to receive distributions from the Limited Liability Company (Section 8812).

The Importance of a “Transferable Interest”

The member is most easily viewed as an owner, but what does the member own? Section 8851 specifies that a transferable interest, which is what a member of an LLC actually owns, is personal property. This could be viewed as analogous to shares of stock in a corporation and, as will be seen, can play a large part when a member is forced to consider personal bankruptcy.

Personal Debt and Charging Orders

A brief review of the Pennsylvania Uniform Limited Liability Company Act of 2016, particularly the parts that are relevant to members with personal debt, is the necessary starting point. As already noted, Pennsylvania defines a member’s transferable interest as personal property. This is linked in the statute to potential consequences of a member’s personal debt. In Section 8853, the risk of a “charging order” and its negative implications for an LLC member is set forth. Basically, judgment creditors with unsatisfied judgments against a member can apply to the court for a charging order, which amounts to a lien on the member’s transferable interest.

Furthermore, the court has the authority to make all necessary orders regarding the charging order so that the creditor will be paid in full. If the judgment creditor can make a showing to the court that the charging order will not result in the debt being satisfied within a “reasonable time,” Subsection (c) of Section 8853 allows the court to foreclose on the lien and to order that the transferable interest be sold.

MMLLC’s Advantage If a Member Has Financial Problems

This produces a different outcome for a MMLLC and a SMLLC. As long as the Limited Liability Company has more than one member, the purchaser does not become a member. The former member would be forced to dissociate from the LLC, however; Section 8863 explains the implications. When an SMLLC is involved, the same judgment debt can be fatal to the member’s business because, if the sole member of the LLC is dissociated, ownership will change if the Limited Liability Company is to continue. A member of an SMLLC cannot afford to be in a situation that could result in foreclosure if the individual wants to continue in business.

“Dissociation” as Dictated by Pennsylvania Law

In Section 8861 (“Events causing dissociation”), Pennsylvania lists various situations in which a member of a member-managed LLC will be required to withdraw from the company. Subsection (8)(i) states that a debtor in bankruptcy must dissociate from the Limited Liability Company. How this would work with a MMLLC is fairly straightforward. However, this is a provision in which there is a need to interpret how it would be implemented when there is a single member. If applied as written, whenever the sole member of an SMLLC would seek protection under the bankruptcy laws, this person automatically must dissociate from the LLC. This leads to a scenario in which no one would be in position to manage business as soon as a bankruptcy is filed.

A more reasoned approach is necessary because the SMLLC can be a significant asset in the bankruptcy estate so leaving it rudderless is of no benefit to anyone involved in the bankruptcy. As previously noted, a member of an LLC owns a transferable interest, which is not the business itself; instead, this is considered personal property that could be viewed as similar to corporate stock. The transferable interest becomes part of the bankruptcy estate, to the extent that it cannot be exempted. If a Chapter 7 trustee holds the entire transferable interest of the Limited Liability Company, then the trustee could step into the shoes of the debtor, with the same management rights in addition to the ability to sell the LLC’s property to acquire funds to pay the debtor’s personal debts.

Should the SMLLC Consider Adding Another Member?

To protect the SMLLC from this fate, the member can look at potential actions that could be effective. However, none of them come with any guarantees of success, and they certainly have potential downsides. For example, when the individual has a significant personal debt load and realizes that action must be taken on the personal and business fronts, the person may think about bringing in a second member, who would have to have sufficient funds to pay fair market value for interest being transferred – it cannot be a sham transaction. Of course, this is not without risk. After all, a person establishes an SMLLC with a vision in mind that could be undermined when an additional member is recruited to participate in the Limited Liability Company.

Bankruptcy Could Equal Liquidation for SMLLCs

Bankruptcy itself is an option with obvious risks as well as possible opportunities for an attempt to save the business. When the member files for bankruptcy, the individual’s interest in the LLC will be part of the bankruptcy estate. Liquidation of its assets is a distinct possibility. On the other hand, this is not a foregone conclusion. Since the Limited Liability Company actually has not filed for bankruptcy, its equity position is a major factor in the trustee’s decision regarding what should happen to the business.

An Option to Consider when Liabilities Exceed Assets

The debtor could decide to explore ways to achieve a result that salvages the business entity. The first step is preparing balance sheet with a good methodology underlying its numbers. If the document reveals that liabilities exceed assets, then the trustee would not be fulfilling a trustee’s duty of paying the creditors as much as is feasible to limit what they would lose based on the impact of the bankruptcy. There is no positive value in liquidating the LLC so the bankruptcy trustee lacks an incentive to take pursue this approach. This leaves open the possibility that the debtor may be able to arrange to continue running the business depending on the circumstances that exist with the company and the ability to make a good-faith argument in its favor.

An Option to Consider when Assets Exceed Liabilities

Even if the balance sheet that the debtor presents to the trustee reveals that equity exceeds liabilities, the debtor still has nothing to lose by approaching the trustee before the trustee starts to liquidate the Limited Liability Company. Again, the member must have well-prepared balance sheet that the bankruptcy trustee will believe is sufficiently accurate when making the decision about the business’s fate. The debtor, if possible, could offer to pay the LLC’s liquidation value to the trustee – this is roughly is the dollar amount by which the assets exceed the liabilities.

Of course, the trustee does not have to accept, but, again, the trustee has a duty the debtor’s creditors to attempt to recoup as much money as possible to pay them for the debts that they are owed. The debtor would take the position that this duty is best met by agreeing to the amount proffered by the debtor. If the trustee agrees, then the debtor can be well positioned to salvage the Limited Liability Company and also be in a good position for a “fresh start” after a discharge is granted in a personal bankruptcy filed under Chapter 7.

LLCs Can Survive Personal Debt, But There’s No Guarantee

In the end, there are no guarantees regarding what will become of a Single Member Limited Liability Company in Pennsylvania when its sole member faces dire financial straits on a personal level. The future is easier to predict if the LLC has multiple members. However, in either situation, there are times when a person has run out of options other than bankruptcy, and this will affect the Limited Liability Company to some extent. Especially with an SMLLC, one must look at what potentially viable strategies exist and – if feasible – pursue an option that can allow both the debtor and the business opportunities to survive a bankruptcy positioned to make fresh starts and avoid facing a similar situation in the future.

A PAPER STREET AND PROPERTY TITLE

June 1, 2018Alberts Law, Topics of Interestalberts law, paper street, quitclaim deed, real property, title searchalberts

A paper street does not exist, but many can be found particularly on older subdivision plans. This could be a road or alley for which the developer set aside property that never was used for this purpose. It is an unopened street that shows up in recorded plans but, in reality, ends up being used as part of a yard or a wooded area next to your property. Since it does not appear in your deed, the question of actual ownership cannot be ignored because this affects what you can do with this property and who buys or sells it, for example.

The problem of the paper street is one that municipalities, townships, boroughs, and similar governmental bodies have come to recognize during the last 50 years or more, which is why paper streets tend to be found only in older subdivision plans. Most municipalities, for instance, have enacted ordinances regarding the creation of subdivisions that generally prevent the creation of paper streets, but this does not affect ones that already exist.

DRAFTING A SUBDIVISION AND “CREATING” PAPER STREETS

After you check the plan recorded for your subdivision at the Recorder of Deeds or similar county office, you can figure out if you live next to a street that is you never saw before. This was not the intent of the developer, who expected that the street or alley would be used. The paper street started out on paper but was supposed to become a real street. So, one might wonder what went wrong during this process.

The developers simply planned too much – the system of streets in the subdivision included more streets than were needed. You drive on some of the streets every day, and you watch weeds grow on others. The way that is developed usually involved the recording of the subdivision, in which the planned streets were dedicated to the municipality or borough, which would have to accept formally or informally the street as its own.

As set forth in Section 1961 of Title 36 in the Pennsylvania Statutes and enacted in 1889, municipalities and other governing bodies have 21 years to accept the land for the dedicated street after the plan has been recorded. See 36 P.S. §1961. When this is not formally accepted and is not used by the public for the 21-year period, which basically is a statute of limitations, then the local governing body is deemed to have abandoned the property, and a reversion occurs.

WHAT REVERSION OF OWNERSHIP MEANS HERE

One might expect that abandonment returns ownership to the original developer. However, the problem with this is that many developers did not remain in the community so, if they owned the reverted interest, they might not be around to be held accountable for the upkeep of the property that becomes a paper street. As spelled out in Rahn v. Hess, 378 Pa. 264, 269-270 (1954), the purchaser who acquires the property from the developer owns the reversionary interest unless the developer specifically retained that interest.

As a result, trees and other conditions on the paper street become the responsibility of the abutting property owners in the subdivision. With reversion occurring automatically, the abutting owners may not realize that they have this responsibility. In Pennsylvania, property owners whose lots abut a paper street generally own the street to its center line, even though there is no official record of this. Again, this is a principle confirmed in Rahn v. Hess, 378 Pa. 264, 270 (1954).

GOVERNMENTS: VACATE OR ABANDON AN UNWANTED PAPER STREET

Local governments can vacate paper streets before the 21-year period ends – they don’t have to accept the dedicated property and can make this official by adopting an ordinance, for example, in which the street is not accepted and any interest in the land is vacated. The only time that a municipality or borough can’t do this is when the paper street contains utility lines, for example, that it has to maintain and repair. On the other hand, the property owner cannot build a structure on the paper street that obstructs access to municipal water and sewer lines. Meanwhile, the abutting owners remain responsible for the property’s upkeep.

After abandonment, a municipality cannot decide to use the land without getting approval from the abutting owners. This is another indication of who really owns the property, but there still is nothing recorded, which limits possible uses by the actual owner.

PRIVATE EASEMENTS AND PROPERTY OWNERS IN A SUBDIVISION

Another limitation on the abutting owners is that all owners of lots within the subdivision have an easement that allows them to use the paper street as a right of way. Usually, this is of no consequence because the street never was laid out so there is no reason to use it when traveling by vehicle or foot through the subdivision. Additionally, as explained in Rahn v. Hess, 378 Pa. 264, 271 (1954), the Pennsylvania Supreme Court stated that this is a private contractual right that does not go away after a period of time.

Abutting owners who want complete ownership of their part of a paper street would have to get all other lot owners on the subdivision to sign waivers in which they give up their rights of way over the property. As explained in Estojak v. Mazsa, 522 Pa. 353 (1989), there are times that courts in Pennsylvania have recognized a doctrine similar to adverse possession has been recognized as a means of extinguishing easements when access to the right-of-way is blocked for 21 years, but attempts to get private agreements or to obtain court orders are time consuming and expensive. This has a role in title that an abutting owner may try to record, as will be discussed below.

BEGINNING THE PROCESS TO RECORD YOUR REVERSIONARY INTEREST

How would you take action to turn your reversionary interest into a recorded interest? Even if more than 21 years have passed since the original dedication was made, leaving the paper street abandoned by the local government, you would be wise to contact the local body in charge of zoning and related matters in order to find out if there will be any problems with moving toward having a deed drafted and recorded.

In these situations, there often is not much opposition, but you want to cooperate and attempt to gain cooperation in return. It could help to get an official declaration that the government has abandoned any interest in the property – this really isn’t required when the Statute of Limitations has expired and no interest involving utilities remains, though.

Then, you should approach all owners with property abutting the part of the street that you are claiming. Their consents are helpful, especially if the municipality suggests that you need to present a petition to vacate as the starting point. After taking the necessary actions here, you should be in position to move forward with the final steps.

Perhaps, the strongest factor motivating the owner of at least part of a paper street to obtain title that is recorded in the appropriate government office is to have the ability to do something with the property. While municipalities and townships that have abandoned these streets do not have a role in determining ownership rights in paper streets, the owner may need a permit to improve or repair a driveway that extends onto what was a paper street, for example. Having record title makes this easier to accomplish.

SECTION 1961 OF TITLE 36: THE STATUTE OF LIMITATIONS

With a street created and dedicated before May 9, 1889, the situation would be handled differently based on the date that the subdivision was laid out. If a street within a subdivision was opened prior to §1961’s enactment, then property owners cannot argue for this law’s retroactivity. In other words, the 21-year statute of limitations does not apply to this situation. For example, if a street was dedicated to a municipality in 1848 and then opened in 1888 (before §1961 became law), a property owner had no case against the municipality before or after the statute was passed because the street was opened before there was a limitation of 21 years for doing so.

However, after the Act of 1889 was passed, §1961 would apply. This was decided in Quicksall v. Philadelphia by Pennsylvania’s Supreme Court in 1896 when a street was dedicated in 1848 but not opened until 1892. While the gap of 44 years between dedication and opening was acceptable prior the Act of 1889, Philadelphia (in 1896) had to accept and open the dedicated street within 21 years of its creation in the recorded subdivision. Section 1961’s limitations period of 21 years now was applicable so there no longer was a right to open the street in question. Much more recently, the Commonwealth Court in Borough of Edgeworth v. Lilly in 1989 found that this principle from Quicksall still applies to streets dedicated before but opened after the Act of 1889 became law.

Once the governmental body acknowledges that sufficient time has passed for it so that, by the operation of this statute, it has abandoned any potential interest in the proper威而鋼
ty, then an abutting owner can consider the remaining actions required for a deed to be recorded since ownership reverts to the abutting owners, generally to the center line of the street, under Pennsylvania law.

While title goes to the owner, there is no record of this, which is the purpose of the deed. You could ask the municipality to pass an ordinance officially abandoning the property, but this would not be the first choice – after all, doing this is bound to be noticed by other lot owners in the subdivision, making the easement issue more obvious. The preferable way does not extinguish the private easements but does not call undue attention to them, either.

ESTABLISHING THE CENTER LINE

The owners of the abutting properties can work out an agreement to handle the issue. The important step involves having the property surveyed according to the new property line, which can be at the center of the unopened street or a different line to which the parties consent. Zeglin v. Gahagen, 812 A.2d 558 (Pa. 2002), provides a good overview of the Doctrine of Consentable Lines, which has some similarities to adverse possession, although they are not identical.

GETTING A NEW SURVEY TO DRAFT A NEW DEED

The survey provides a legal description that is used in a new deed. Because the property added to the old deed actually is part of the original lot, the drafter of the new deed may list the owner as the grantor and grantee, with the end result that the property of an abutting owner is combined into one parcel in a deed that then is recorded.

Due to the nature of this deed, you need to make sure that specific language is included. First, at the end of the legal description (also known as the recital), the deed would contain wording explaining how ownership reverted after 21 years based of 36 P.S. §1961 by operation of law and providing a corrected legal description of the property that uses the statute as the basis.

After the survey establishes the boundaries for your property that includes what was formerly the paper street, you would have a new deed that is drafted so that the title to all of the property owned by you can be recorded. This would give you formal title that would be found in a title search. The type of deed is important; with the other owners in the subdivision possessing a right of way over what has been a paper street, you only convey whatever interest you possess in the land that you are conveying to yourself at this point. The entire interest in the property cannot be transferred due to the easements.

FINAL STEPS AND CONSIDERATIONS

Unless you have taken whatever action is necessary to extinguish the easements, this outcome is the best that you can obtain. You end up with the property interest that you purchased in the subdivision originally as well as the property interest that reverted to you when the governmental body abandoned the property comprising the paper street, generally when the 21-year Statute of Limitations expires after the subdivision developer originally dedicated this land for a specific purpose to the governing body, such as a municipality or township, which did not accept and use the property as intended.

The Annuity: A Flexible Financial Tool

March 18, 2018Alberts Law, Estate Planning, Probate & Estate Administration, Topics of Interestalberts law, annuity, estate planning, flexible, probate & estate administraton, retirement, usesalberts

An annuity is a flexible financial tool that can be tailored to meet your needs and, possibly, have a role in your estate plan. The ability to deliver a stream of income makes annuities popular retirement planning tools. However, due to the variety of types and the multiple structures that can be used, the right match for a person’s needs can be created for other reasons as well.

What is an Annuity?

A basic definition of this financial tool is a good place to start when considering its use in financial planning. In the Internal Revenue Service’s Publication 575 (“Pension and Annuity Income”), an annuity is defined as a contract for a series of payments to be made at regular intervals over a period of more than one full year. You can choose to have the payments be either fixed so that you receive a definite amount each time or they can be variable, fluctuating based on investment performance or other factors. These payments could be immediate (the income payments are not delayed after the annuity is created) or deferred (payments are subject to an “accumulation” phase before the “payout” phase provides the income stream).

Also, you can buy the contract on your own, but these often are offered through a person’s employer. The latter are considered “qualified annuities” because they are components of tax-advantaged retirement plans. The first type of contract creates a “nonqualified” annuity as it is privately obtained from insurance companies or financial institutions, in general. There are differences in tax treatment between these two types, and the reasons for obtaining one that is nonqualified is not necessarily related to concerns regarding retirement income. The focus here will be on the nonqualified annuity purchased by an individual.

Who Are the Key “Players” in its Creation?

Some basic definitions of the main “players” when an annuity is created is a good starting point because they are important in determining the way that this tool will be set up. The annuity owner, the annuitant, and the beneficiary are the three categories essential to consider when planning.

The annuity owner purchases the contract that creates this investment. She creates the terms for the annuity with the insurance company or financial institution that issues it. Key decisions include choice of the definition of the “annuitant,” the designation of beneficiaries, and the determination of who would have the right to sell the contract.

While the annuity owner is the purchaser of the annuity, this person may not be the annuitant, who is the individual over whose life expectancy income is paid. Owners commonly name themselves as the annuitants, but there are considerations that can lead to different choices. For example, the annuity owner might want someone younger as the annuitant since the longer life expectancy leads to smaller payments that are paid over a longer period, which extends the tax liability and reduces the taxable income on a yearly basis.

Many annuities are set up with only one annuitant (a “single life” annuity), but others may have a second annuitant, who is to receive payments at regular intervals after the first annuitant’s death. These “joint and survivor” annuities often involve spouses, but this is not always true. Since the second annuitant can be considered a beneficiary, the joint and survivor annuity will considered in more detail later.

Although the periodic payments are calculated based on the annuitant’s life expectancy, the annuity owner must remember that actuarial tables do not dictate an individual’s lifespan. If the annuitant dies sooner than would be predicted, this would leave some of the assets remaining to be distributed. The annuity contract needs to include provisions for who receives what would remain in this circumstance. Beneficiaries are important for this reason.

The beneficiary is the third key “player” when the annuity is being created. Two points to bear in mind are that there can be multiple beneficiaries and that organizations can be beneficiaries. In addition, although an owner can name himself as the annuitant, he cannot be a beneficiary of his own annuity.

Unless the contract requires the naming of an irrevocable beneficiary, the owner usually can change beneficiaries. Furthermore, the owner may be wise to have multiple beneficiaries because, if there are remaining investments after an annuitant’s death, the owner probably would want to be sure that someone is alive to receive these assets.

Some Considerations regarding Beneficiaries

With no beneficiary, an annuity can go through probate or estate administration, but the assets that it still holds may be surrendered to the insurance company or financial institution that issued the contract. Therefore, even without multiple primary beneficiaries, the annuity owner should consider possible contingent beneficiaries, who receive the primary beneficiaries’ payments when the annuitant outlives these beneficiaries.

When multiple beneficiaries are included, the annuity contract can provide for the death benefits to be divided into equal shares or by specified percentages among the beneficiaries. The owner could decide to go in a different direction when choosing a beneficiary, as well. Beneficiaries do not have to be individuals, but the contract owner should consider the legal implications here.

Entities are subject to different requirements as the beneficiaries of annuities. A possible choice for the annuity owner is to assign any remaining payments to a trust. However, after the trust receives this amount, it has five years to pay out these funds. This means that spreading out the taxation based on life expectancy is not possible, while this option does exist when payments are transferred to an individual as the beneficiary.

Choices that Depend on Why You Want an Annuity

While the “players” now have been defined, this does not answer what an annuity is good for. With its flexibility as a contract between the owner and an insurance company or financial institution, there could be a number of reasons that annuities may be appealing. However, we will look at common categories (and choices) that are considered when it is being set up.

One choice is between an immediate annuity and a deferred annuity. A person could decide on a deferred annuity in which taxation is deferred. This is a benefit when retirement planning and may be a good choice if you have made the maximum contribution to a 401(K) plan or an IRA. It would not be subject to any IRS contribution limits and can create a guaranteed stream of income payments during retirement. There would be taxation at ordinary income rates at that time, and there could be annual charges from the financial institution or insurer that issued the contract. They also are likely to be subject to a 10-percent penalty from the IRS for withdrawals prior to the age of 59½.

The choice of deferred payments can be paired with either variable or fixed income payments. A deferred variable annuity is one in which the issuer of the policy places your assets in riskier investments. People with longer time horizons are better candidates for this type of annuity because they have the ability to weather market fluctuations that tend to occur during shorter investment periods. Payments from this annuity type depend on the success of the investments made with the assets that were traded to establish it.

A more conservative investor who is looking to set up guaranteed payments for a number of years after she retires probably would lean toward a deferred fixed annuity. Typical of all fixed annuities, this is not subject to market risk but instead makes regular periodic payments of specified amounts to the annuitant. It could produce earnings that compound on a tax-deferred basis, although withdrawals prior to 59½ years of age might incur the IRS’s 10-percent penalty.

Choosing an immediate annuity results is smaller periodic payments. It may appeal to someone who is or soon will be retired because the wait for the payment stream to begin is not an issue here. The tradeoff involves the acceptance of a smaller amount of guaranteed income for life or, at least, a set period of time (if a “fixed-period” annuity is chosen). Generally speaking, the owner should have a large lump sum of money to trade for a cash flow that extends into the future when creating an immediate annuity. However, there is an example below in which this asset “rule” does not hold.

This often is paired with a fixed income stream. However, the owner may be able to set up cost-of-living adjustments for the income stream over the annuity’s timeframe by paying an extra cost for this benefit.

Annuities May Help Even People of Modest Means

While an annuity can provide a stable source of financial support during retirement for many individuals, it is flexible enough to be adapted to individual circumstances. This can involve tailoring the annuity based on such variables as age, income, and net worth. Also, the amount available to invest will dictate the options that are realistic – even a modest investment might be used to create a workable annuity. Remember that reasons beyond increasing retirement income can be met through this financial instrument, and they should be examined to determine if such an investment might be desirable depending on a given situation.

For instance, one possibility that may be overlooked concerns Medical Assistance. The individual on Medical Assistance would have a relatively low income. This person might look at a single-premium immediate annuity since one often can be obtained even when there are rather limited assets available. To be used to supplement income in this situation, the annuity has to be irrevocable, actuarially sound, and – importantly – payable to the Medical Assistance agency that would be designated in Pennsylvania as the beneficiary after the recipient’s death.

Single-premium immediate annuities also could be useful for retirees who are over the age of 59½ but not yet 70½. If an individual wants to delay the payment of Social Security benefits as well as any tax-deferred distributions for as long as possible, then he or she might consider this type of annuity to provide a stream of income to realize this goal.

Increasing Usefulness by Purchasing Riders and Other Options

As has been noted previously, an annuity is a flexible tool. This flexibility can be increased when the owner purchases various riders or other options. For instance, a person might want to have a rider that provides for accelerated payouts in the event of a diagnosis of a terminal illness.

Riders and options often are added on behalf of beneficiaries. The decision to create a deferred or immediate annuity can influence this choice. With deferred annuities, beneficiaries receive the total amount contributed to the account if the annuitant dies during the accumulation phase and receive the amount remaining in this account after payments that were made to the deceased annuitant have been subtracted during the payout phase.

However, with many immediate annuities, such as a lifetime immediate income annuity, the issuing company keeps any money that remains at the annuitant’s death. The owner might purchase a refund option or a rider for a term certain regarding the annuitant’s life so that beneficiaries can get whatever remains if the annuitant dies when the option or rider would be effective.

A standard death benefit rider may be desirable when it is needed to designate beneficiaries for the annuity if the remaining funds after an annuitant’s death would be forfeited to the issuing company. This is the most basic rider of this type. Other death benefit riders can be used to affect the amount received by beneficiaries, as well. Examples include “return of premium” riders (this equals greater of the market value of the contract and the sum of all contributions minus fees and withdrawals) and “stepped-up” death benefit riders (beneficiaries receive the highest amount using the values of the contract on the anniversaries of the purchase date, with fees and withdrawals subtracted). The basic rule to remember is that a rider which increases the amount going to beneficiaries also will increase the annuity owner’s cost to add it.

A Look at Death Benefit Payout Options

Death benefit payout options involve how the benefit will be paid to beneficiaries instead of how much can be paid. Three options commonly exist for beneficiaries who are not spouses of the annuity owner. The lump-sum distribution transfers the designated funds in a single payment. A “non-qualified stretch” payout provides beneficiaries with minimum payments stretched out over their life expectancies. Finally, the five-year rule payout option allows beneficiaries to make withdrawals during a five-year period or receive the entire amount in the fifth year.

A surviving spouse who is a named beneficiary has an additional option here. The spouse could continue the annuity contract as the new owner and – if the deceased spouse was the annuitant – step into that role, taking over the stream of payments, which delays immediate tax consequences that other beneficiaries face. This is known as “spousal continuation.”

The Joint and Survivor Annuity

This leads again to consideration of “joint and survivor” annuities. It is important to remember that the beneficiary does not have to be a spouse. However, non-spouse beneficiaries again have less flexibility than a surviving spouse would have.

With a joint and survivor annuity not involving a spouse, the beneficiary has the right to receive a payment stream instead of a lump sum of what assets remain upon the death of the annuity owner. This beneficiary lacks the ability to change any terms of the annuity contract, though. As a result, any access to the annuity’s funds continue to be controlled by deceased owner’s contract.

When the surviving spouse is named as beneficiary of a joint and survivor annuity, she can transfer the contract into her name and assume all rights from the initial agreement. Based on the terms of the original contract, the spouse may have the ability to accept all remaining payments and any death benefits, as well as the right to choose beneficiaries (if the predeceasing spouse could have done so).

An Overview of the Topic of Taxation

Taxation of nonqualified annuities is complicated so what follows merely provides information to raise awareness of things to review. While employer-sponsored programs and commonly recognized retirement programs make payments that are not taxed, nonqualified annuities provide payments that are taxable income in Pennsylvania, as well as for federal income tax purposes. To the extent that the distributions that are taxable for federal income tax purposes, they also are taxable as interest income in Pennsylvania.

Nonqualified annuities must use what is termed the “general rule” for federal taxation. Under this rule, payments can consist of a tax-free part of an annuity payment that is based on the ratio of the cost of the annuity contract to the total expected return, which is the total amount that the annuitant expects to receive. The expected return is calculated from IRS life expectancy (actuarial) tables. You can look at IRS Publication 939 for more details regarding this rule.

Beneficiaries also face income taxation. They owe income tax on the difference between the principal paid into the annuity and its value at the annuitant’s death (minus the principal that was paid to fund the annuity initially). If a beneficiary receives this amount as a lump sum, then income tax is due immediately on this amount. If the payments are arranged to be spread out over time, then the taxation will be spread out as well.

When a single premium was paid for an annuity with named beneficiaries, then the annuity represents a return on an investment, which is subject to inheritance tax in Pennsylvania. It would be listed on Schedule G (Inter-Vivos Transfers and Miscellaneous Non-Probate Property) of an inheritance tax return. Notably, the $3,000 exclusion for transfers within one year of death that is mentioned in the instructions to this schedule would not apply in this situation.

When an annuity fund creates the future interests that are reported on Schedule K of the inheritance tax return, the value of the fund creating these interests is reported as part of the estate assets on whichever schedule from Schedule A through G of the tax return is appropriate. As always, you probably want to consult a tax expert about up-to-date information on the various ways that annuities can face taxation, of course.

* * * * *

With the extensive varieties of annuities that are available and the ability to customize these contracts by working with annuity experts who have a solid understanding of how to tailor this financial tool to meet a client’s needs, an annuity can be fashioned for someone who possesses only modest assets to apply for this purpose. If the size of any death benefits also is a concern, the contract owner also needs a well-crafted annuity that provides for a better future for a beneficiary for whom financial protection after the owner’s death is a goal. Remember that there are numerous possibilities that can be discussed in order to make the right choice for your specific circumstances.

Elder Law and Estate Planning

August 25, 2016Alberts Law, Estate Planning, Topics of Interestalberts law, elder law, estate planning, special needs lawalberts

Elder law and estate planning are not two terms for the same area of law. However, they are related. Estate planning is an important part of the work that an elder law attorney does. At the same time, the attorney generally takes a broader, more holistic approach in an elder law practice.

To paraphr威而鋼
ase the National Elder Law Foundation’s definition of elder law, this area of practice involves counseling and representing of older persons and their representatives in matters regarding the legal aspects of health-care and long-term care (LTC) planning. Additionally, the attorney educates clients about and helps them to obtain public benefits. The definition includes discussing the possible need for surrogate decision-making while addressing the issue of legal capacity. The attorney and client also need to talk about the conservation and, ultimately, disposition and administration of estates. After the consideration of tax consequences, the attorney looks at how to implement the client’s decisions about these estate issues.

As the diversity within the definition suggests, the elder law attorney needs good resources in numerous non-legal fields. This may include access to medical professionals, financial advisors, and social workers, for example. The legal goals often cannot be achieved without first addressing non-legal issues. The lawyer needs to deal with them successfully for the overall result to be positive. Often, topics include resolving family conflicts, understanding a client’s illness, and adapting to any consequences of those health problems.

Elder law is a challenging legal area. To help the client, an attorney must focus on aging, disability, and incapacity, as well as the difficulties that a person faces with each problem. Then, the attorney has to assist the client in creating a plan to deal with all of these. They need to work together to plan for health-care issues. Meanwhile, they have to look at long-term care since the client may require this at some point. The attorney must review obstacles to LTC financing and look for ways around these. In addition, barriers to essential assistance and services will exist. To overcome these, the attorney works with the client and family members to find solutions. Due to all of the issues that an individual may face, this practice area involves a powerful need for comprehensive estate planning.

In general, the elderly have a greater sense of urgency to prepare documents that are necessary due to serious illness or death (as with a Last Will and Testament). At the same time, attorneys in elder law often have clients who have special needs caused by disabling diseases. This makes sense because the issues often are similar. Both need to deal with possible incapacity in the relatively future while many younger people in good health may not view these matters as important at the moment. At this point, I will look at the elder law issues that have been raised from the perspective of individuals with special needs since they have to plan for the same types of problems regardless of age.

Special Needs Planning and Multiple Sclerosis

The National Academy of Elder Law Attorneys (NAELA) teamed up with the National Multiple Sclerosis Society and the Stetson University College of Law to prepare a video series for people with MS. This disease tends to strike people between the ages of 20 and 50. In addition, women get MS at a much higher rate than men do. Its progression is not predictable. However, MS often becomes disabling over time because it attacks a person’s central nervous system. This results in the flow of information within the brain, and between the brain and body, being disrupted.

Since the disease’s progression is unpredictable, the individual diagnosed with MS and family members need to look at the complex legal and other issues that may arise. To do this, they should seek the assistance of an attorney with experience in elder law and special needs law.

These videos focus on planning for possible incapacity and accessing LTC benefits. As a result, they can help not only people with special needs, such as those caused by MS, but also the elderly. In addition, anyone interested in an introduction to various estate planning documents can find benefit.

The Video Series on MS – Looking at Legal Issues & Plans

The five videos in this series are:

How Elder & Special Needs Law Attorneys Can Help People Diagnosed with MS (Presented by Craig C. Reaves, CELA, Fellow, CAP)
Legal and Care Planning for Younger People with MS (Presented by Robert Brogan, CELA, CAP)
Coordinating Attendant Care and Available Resources (Presented by Stephen Dale, Esq., LLM)
Family Law and Divorce: When a Partner Has MS (Presented by Patricia E. Kefalas Dudek, Esq., CAP, Fellow)
Property and Health Care Decision-Making Agents: An Overview (Presented by Mary Alice Jackson, Esq., Fellow)

I have placed two of the videos dealing with the types of issues that I mentioned earlier below. They also discuss a number of legal documents that are useful when these issues arise. The presenters review various kinds of trusts and the purposes they serve. Additionally, they talk about medical and financial powers of attorney, which can benefit everyone. A person with MS understands some of these benefits more than the average person. For example, powers of attorney can make a guardianship, which strips a person of at least some civil rights, unnecessary. While a debilitating disease may make the possibility of a guardianship seem more real, anyone can be in an accident that results in incapacity and the need for a substitute decision-maker. Powers of attorney fill the void here.

These two videos also look at other tools for planning for events that can occur during anyone’s life at some point. This includes what commonly is called a Living Will in Pennsylvania. A Living Will permits you to make end-of-life choices while you still are able express your preferences.

This video provides an overview of Property and Health Care Decision-Making Agents:

I also included the video about Legal and Care Planning for Younger People with MS:

NAELA: A Useful Resource for Elder Law & Special Needs Law

All of the videos in this series can be viewed on the NAELA website. In addition, you can find a lot of other useful elder law materials by visiting this website at www.NAELA.org.

This video series highlights some of the benefits provided by attorneys experienced in elder law and special needs law. As the population in Pennsylvania and elsewhere ages, people increasingly will need attorneys who are well versed in elder law and special needs law. An attorney who can help you handle the often overlapping legal, medical, and financial decisions as you plan for an uncertain future can be very helpful. The National Academy of Elder Law Attorneys is a good source for this legal assistance. Remember that estate planning is a major part of elder law so NAELA attorneys can be good resources in this area. They also can provide information about long-term care options and how to access these services. Considering what you may need and want whenever you might become incapacitated is important. Having a documented plan in place to deal with this possibility is essential.