Nearly once a month a parent or single family member will contact our office and want to discuss adding the name of a child or family member to their bank account, home or other assets believing this will make it easier to manage their finances as they grow older and after they pass away.  Adding the name of a child or family member to the legal title to an asset is often not the best choice for the following reasons:

Tax Basis and the Loss of Using The Step Up in Basis Rules

The tax basis of an asset determines whether there will be a taxable gain or loss upon the sale or disposal of the asset.  The tax basis of an asset can be determined in a variety of ways the most simplistic being the cost of the asset plus the value of any improvements made to the asset over time.  If the recipient of a gift did not purchase the asset but instead received the asset as a gift,  then the recipient of the gift takes the the value of the percentage interest of the tax basis of the donor as the recipient’s  tax basis.

As an example assume a mother bought a lakefront property 40 years ago for $100,000 and made very little to no improvements to the lakefront property over time.   Now that lakefront property is worth $ 3.0 million.  The mother is evaluating whether  to add her daughter to the deed to the lakefront property as the sole co-owner of a fifty percent interest with the mother as a tenant in common.  If the mother added her daughter to the title of the lakefront property as a 50% co-owner the tax basis of the daughter in the lake front property is $ 50,000 plus any gift tax paid by the mother.  Assuming the mother paid no gift tax, the daughter’s tax basis is $50,000.  Following the death of the mother and assuming the mother’s 50% share in the lakefront property passes to her daughter who is the only other existing co-owner, if the daughter sells the lakefront property for a net sales price of $ 3.0 million after all expenses associated with the sale (realtors commissions, title insurance, surveys, attorney fees etc.) then the daughter will have a taxable gain of $ 1,450,000 upon which the daughter must pay federal capital gains taxes and state income taxes.  The state and federal taxes on the gain on this sale of the lakefront property could exceed $300,000.

If the mother had not added her daughter’s name to the title of the lakefront property but instead provided the daughter would receive the lakefront property pursuant to the terms of her mother’s revocable living trust or last will and testament, then under current tax laws the daughter would receive a step up in basis for the lakefront property to the fair market value of the lakefront property at the time of death of her mother.  By taking this approach the daughter would pay minimal capital gains taxes upon the sale of the lakefront property instead of the $300,000 + in taxes as outlined in the prior paragraph.

Ability of Creditors to Attach Gifted Property.

When an individual gifts property and adds the name of another person to the title to an asset the recipient of the gift becomes a co-owner of the asset and is presumed to own a fifty percent  interest in that asset unless otherwise designated.  As a co-owner of an asset in the form of a tenancy in common the creditors of the gift recipient can possibly attach and liquidate the gift recipient’s interest in the gifted asset to satisfy debts owed to the creditor of the gift recipient.   If the marriage of the gift recipient ends in marital dissolution proceedings a former marital partner may claim the value of the gifted asset as a marital asset for which the former marital partner may wants to claim fifty percent of the value of the equity in the the gifted asset as part of a property settlement agreement.  If the gift recipient whose name the donor  added to the title to an account or asset filed a bankruptcy petition, the interest of the gift recipient in that  gifted asset would be an asset of the bankruptcy estate and subject to assignment to the bankruptcy trustee for the payment of claims of creditors of the gift recipient.

Loss of Flexibility

As the sole owner of an asset an individual retains the most flexibility to control the use and disposition of that asset.  Over time circumstances often change within most families.  Some of these changes in family dynamics may be good and some may be not so good.  Often times the child who is most involved in assisting for the long term care of a parent or loved one is also the child who is most financially successful compared to their siblings.  The other siblings may need the monies more than the sibling who helps the parent out the most with long term care and the child who is also the most financially secure.  It is not unrealistic desire for a parent to want to give more monies or assets to one or more children who have greater financial needs than another child.  As an estate planning client recently commented to me, ” $250,000 is a lot of money to my daughters # 1 and # 2,  while to daughter # 3 who has her own professional career and is  married to a very successful business executive,  the sum of $ 250,000 is not as significant of a sum of money that is going to change the lifestyle of daughter #3 whether she inherits the $ 250,000 or not .”

Alternative Choices

Rather than limit your flexibility and expose your family to the payment of unnecessary taxes there are options to achieve wealth transfer and asset protection other than simply adding the name of a child to a property or account.

A durable power of attorney is a legal document that gives another person (i.e. your daughter) the authority to manage your bills, investments, transfers of real estate and other assets upon your inability to perform these tasks.  The individual who holds your durable power of attorney does not obtain an ownership interest in your assets but instead this person is conferred with the legal  authority to manage your assets upon the occurrence of a certain event (i.e. your disability as determined by a doctor).  A durable power of attorney can be drafted so as to limit the scope of authority and the acts which the holder of the power of attorney can or cannot engage in on your behalf.

A revocable living trust is another option to consider as far as the future administration of your assets.  The terms of a trust enable a fiduciary (i.e. the trustee who initially can be you as the creator of the trust) to hold title to property for you during your lifetime and after the death of the creator of the trust for the benefit of others (i.e. your children or trust beneficiaries).  A trust survives the death of the person who creates the trust and allows for the transfer of assets from one generation to the next.

Changing Tax Laws

Tax laws can change dramatically as reforms under the Trump Administration have shown.  In the coming year it is anticipated the new political administration will push forward to change some of the existing tax laws.   The step up in basis tax laws that have existed for several decades could be changed or limited in scope and size going forward as well as the amount of the federal estate tax exemption.

If you have questions about estate planning including trusts, power of attorneys or deeds as well as the tax implications please feel free to contact our firm.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE act) was signed by President Trump and became law on January 1, 2020.  The SECURE act has significantly altered the estate planning landscape for qualified retirement accounts, including but not limited to Individual Retirement Accounts (IRA’s) , 401(k)’s, 403(b)’s, 457(b)’s and Roth IRA’s.  Individuals should review and update their current estate planning documents and current beneficiary designations for their retirement accounts to make sure these documents will carry out their estate planning goals.  Prior to the passage of the SECURE Act individual beneficiaries of retirement accounts could establish inherited retirement accounts and withdraw the funds from those accounts over the life expectancy of the beneficiary.  This allowed the retirement account funds to grow without being subject to income taxation until they were distributed to the beneficiary ( and in the case of inherited Roth IRA’s and inherited Roth 401(k)’s, both the growth and the distributions were income tax free).  Younger retirement account beneficiaries with longer life expectancies could benefit from these Required Minimum Distribution (RMD) rules as they were only required to withdraw small percentages from their inherited retirement accounts each year and the remaining funds could continue to grow and defer income taxes (Roth accounts could completely escape income taxes).  Inherited retirement accounts that took advantage of this life expectancy payout method were known as “Stretch IRAs.”

The SECURE Act largely eliminates the Stretch IRA for retirement account owners who die after 2019.  The SECURE Act requires that an individual beneficiary (or a qualified trust for an individual beneficiary) to withdraw the entire inherited retirement account balance by December 31 of the 10th year after the retirement account owner’s death.  This new rule will significantly accelerate the payment of income taxes for most retirement accounts and will likely result in more income taxes as retirement account beneficiaries are pushed into higher tax brackets.

Certain categories of beneficiaries can use a Stretch IRA.  These beneficiaries include surviving spouses, disabled or chronically ill individuals (as defined by federal law) and individuals who are less than 10 years younger than the retirement account owner and qualified trusts for the benefit of these individuals.

Surviving spouses may continue to rollover inherited retirement accounts into their own retirement accounts under the SECURE Act.  Minor children of a retirement account owner, or qualified trusts for the benefit of such minor children children may use the child’s life expectancy for the RMD until the child becomes an adult after which the child must then shift to the 10 year rule.  The problem presented by the SECURE Act is that the entire balance of the retirement account becomes available much more quickly to a beneficiary than planned.  This could be problematic for those beneficiaries who do not manage money well as there will be less protection of the inherited funds from the creditors of a beneficiary who does not manage money well.

In light of the SECURE Act retirement account owners may want to consider modifying their retirement account beneficiary designations or the terms of the qualified trust that is the beneficiary of the retirement accounts in an attempt to prevent the distribution of significant assets to  a beneficiary who is not properly prepared to receive and manage these assets.

The Family First Coronavirus Response Act (FFCRA or Act) became law on March 19, 2020.  The law must be implemented on or before April 2, 2020.  This Act deals with growing health and economic concerns caused by the COVID-19 Pandemic.  Key points included in the law and how they will effect employers and employees include the following:

• The law will be effective from April 2, 2020 through December 31, 2020 unless extended further.
• The law applies to public employers and private employers with less that 500 employees where the employee has been on the job for at least 30 days.  These employees shall have a right of 12 weeks of job protected leave for a “Public Health Emergency.”
• A Public Health Emergency is defined as a situation where an employee is unable to work                 ( including the inability to telework) due to a need for leave to care for a son or daughter who is 18 years or younger if the school or place of care for such child has been closed or the child care provider for such child is unavailable due to an emergency with COVID-19 declared bya  federal, state or local authority.

Excluded Employers

The FFCRA does not apply to employers of health care providers or emergency responders if the employer elects to exclude such employees from the leave.

The FFCRA does not apply to employers of less than 50 employees if the leave requirement “would jeopardize the viability of the business as a going concern.”  The U.S. Department of Labor can provide regulations as to what would be the requirements to determine the qualifying conditions that would be deemed to ” jeopardize the viability of a business as a going concern.”

Paid vs. Unpaid Leave

• The first 10 days of leave from work for a Public Health Emergency can be unpaid ( unless an employee elects to use existing Personal Time Off (PTO).  If an employee has available other paid leave from the employer then the employee can substitute that paid leave.  However, an employer cannot require substitution of paid leave.
• After the first 10 days until the 12 weeks has expired, the employee is entitled to additional leave for a Public Health Emergency that shall be paid to the employee at rate equal to two-thirds (2/3) of the employee’s regular pay.  The employee must be paid for the hours the employee would otherwise be normally scheduled to work.  There is a cap on the pay to be paid to the employee of  $ 200 per day and not greater than $10,000 in total.  The provisions of the Emergency Paid Sick Leave Act, described below can apply during the initial 10 days.
• Employee benefits shall continue to accrue for the employee for the entire leave period.

Business Slowdown or Closure

If a business puts it employees on leave due to a decision to temporarily close or slow down operations, the leave would not be for a Public Health Emergency and therefore no family leave would be owed.  As an employer it is important to be careful to avoid only placing on leave those employees who would qualify for leave under the FFCRA as this could lead to a claim for violation or interference with rights under the FFCRA.

Return to Work after Taking Leave

Employees who take leave under the FFCRA must be returned to their position (prior to taking the leave).  However there may be special circumstances that do not obligate employers of less than 25 employees to comply with this requirement.

Emergency Paid Sick Leave Act

Public and Private employers with less than 500 employees must provide up to 80 hours of Emergency Paid Sick Leave to full time employees and the average number of hours worked over a two week period to part time employees.  This paid leave benefit is available for immediate use, regardless of how long the employee has been employed by the employer.

This Emergency Paid Sick Leave can be used for any of the following reasons

1. The employee is subject to a federal, state or local quarantine or isolation order related to COVID-19.
2. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19.
3. The employee is experiencing symptoms of COVID-19 and is seeking a medical diagnosis.
4. The employee is caring for an individual who is subject to a quarantine order as described in subparagraph (1) above or is advised to self quarantine as described in subparagraph (2) above.
5. The employee is caring for a son or daughter if the school or place of care for the son or daughter has been closed, or the child care provider for the son or daughter is unavailable due to COVID- 19 precautions, or
6. The employee is experiencing a substantially similar condition specified by the Secretary of Health & Human Services, the Treasury Secretary or the Secretary of Labor

The amount of Emergency Paid Sick Leave depends on the employee’s classification.  Full time employees get 80 hours of paid sick leave.  Part-time employees get paid sick leave in the “number  of hours that such employee works, on average, over a 2- week period.  In the case of a varying schedule where an employer cannot determine the number of hours with certainty, the amount of paid sick leave is equal to a 6-month average (… the average number of hours, that the employee was scheduled per day over the 6-month period ending on the date which the employee takes the paid sick time, including hours for which the employee took leave of any type.)  If the paid leave is being taken for the employee’s own condition (1-3 above), the employee must be paid their regular rate of pay subject to a cap of $511 per day and $ 5,110 in total. If paid leave is being taken to act as a caregiver  ( 4-6 above) the employee must be paid 2/3 of their regular rate of pay (or minimum wage, whichever is greater) subject to a cap at $ 200 per day or $ 2,000 in total.

The paid sick leave provided by FFRCA is in addition to any employer provided PTO.

Employers cannot required that other paid leave be exhausted before the Emergency Paid Sick Leave provided under the FFRCA is taken by the employee.  However, employers can now change their sick leave policies.

Exclusions to Emergency Paid Sick Leave Rule

The Emergency Paid Sick Leave rules do not apply to employers of health care providers or emergency responders if the employer elects to exclude such employees from this rule.  The Secretary of Labor can issue regulations excluding “certain health care providers and emergency responders from the definition of employee” and allowing such employers to opt out.  These regulations have not yet been drafted.

Employee is Furloughed or Placed on Unpaid Leave Because of Business Slowdown or Closure:

If  a business puts its employees on leave because of a decision to temporarily close or slowdown operations, this would not qualify the employee for Emergency Paid Sick Leave.

Notice.

Employers must post the notice of the FFCRA  in a conspicuous place.  If you need a copy of the Notice prescribed by the Secretary of Labor please contact our office.

Retaliation

An employer may not retaliate, discharge, or discipline an employee who takes leave under the FFCRA.

An employer who does not adhere to the FFCRA can face stiff penalties.  The government can determine that an employer has not paid minimum wages or has engaged in an unlawful act under the Fair Labor Standards Act (FLSA) which can subject the employer to risks of an audit, fine or civil action.

Employers may not discharge, discipline, or in any other manner discriminate against any employee who:

1.  Takes leave in accordance with the FFCRA, and
2. Has filed any complaint or instituted or caused to be instituted any proceeding under or related to the FFCRA ( including proceedings that seek enforcement of the Act), or
3. Has testified or is about to testify in any such proceeding.

Tax Credits

The FFCRA provides employers with the ability to seek tax credits “each calendar quarter for an amount equal to 100% of the qualified sick leave wages paid by such employer with respect to such calendar quarter.   These tax credits will be subject to limitations.

 

This communication from Farina & Wojcik, P.C. is intended for general information purposes for our clients and friends.  This article highlights a specific area of the the law and is not intended to convey legal advice.  The reader should consult with an attorney to determine how this information applies to a specific situation.