“How to Apply for and Obtain Medical Assistance” Featuring PK Law Attorneys Kevin Bress and Kim Battaglia

August 7, 2014

We know you have questions.
We want to help you find answers.

The law firm of Pessin, Katz Law, P.A. (PK Law) presents monthly seminars on the first Thursday of each month at their Towson office seminar room located at 901 Dulaney Valley Road, Towson, MD 21204. These seminars are designed to help families understand the medical assistance application process along with other issues involving long term care in nursing homes.  They are conducted by Kevin F. Bress and Kimberly L. Battaglia, PK Law elder law attorneys with years of experience helping people with these issues.

There is no fee for this seminar. Simply reserve a spot at least one week in
advance. The seminars begin at 10:00 a.m. and last approximately one hour. Your questions will be answered and informational materials will be given out.

You will learn how to:

  • Qualify for Medicaid on your first attempt. 
  • Protect assets from being spent down at a nursing home.
  • Strategically transfer assets during the 5-year look back.
  • Protect virtually all assets for your spouse.
  • Insulate your house and property from Medicaid spend own.
  • Retain funds even after a loved one enters a nursing home.

Get your questions answered:

Feel free to bring copies of any of the following documents with you.
The attorney will review them and answer any of your questions.

  • Power of Attorney
  • Deed to Real Estate
  • List of Assets

To make a reservation contact:

Rhonda King at rking@pklaw.com or 410.938.8800
at least one week in advance of the next scheduled seminar. To learn more
about our Elder Law Services visit our website at pklaw.com.

Estate Planning and Elder Law Seminar To Discuss Wills, Trusts & Elder Law Featuring PK Law Attorneys Kimberly Battaglia and Cheryl Jones

July 17, 2014

PK Law attorneys Kimberly L. Battaglia and Cheryl A. Jones host monthly estate planning and elder law seminars in the PK Law Seminar Room located at 901 Dulaney Valley Road, Towson, MD 21204. Both are members of the firm’s Wealth Preservation Group and have years of experience helping families and individuals with their estate planning and elder law needs. There is no fee for the seminar. Simply reserve a spot at least one week in
advance. The seminars are held on the third Thursday of each month, begin at
10:00 a.m. and last approximately one hour. Your questions will be answered
and informational materials will be given out.

Estate Planning Attorney Cheryl A. Jones will discuss:

  • Trusts vs. Wills
  • Who Needs a Will?
  • Estate Tax Issues
  • Estate Planning Questions

Elder Law Attorney Kimberly L. Battaglia will discuss:

  • Protecting Your Assets From The Nursing Home
  • Creative Estate Planning Strategies
  • Tax Law Changes
  • Powers of Attorney
  • Healthcare Directives
  • Probate Avoidance

To make a reservation contact:

Rhonda King at rking@pklaw.com or 410.938.8800
at least one week in advance of the next scheduled seminar. To learn more
about PK Law’s Estate Planning and Elder Law Services visit our website at pklaw.com.

Control Is Everything

In Private Letter Ruling 201423043, (“PLRs” only apply to the taxpayer involved but are often used as “guidance”, and not “precedent”, by taxpayers and the IRS.) the IRS ruled that a surviving spouse could roll over her deceased husband’s Roth IRA payable to a trust into her own Roth IRA.  Consequently, she would be able, under current roll over rules, to avoid having to take required minimum distributions from the IRA and could name beneficiaries for the roll over to her own Roth IRA.

The decedent maintained two Roth individual retirement accounts; Roth IRA X and Roth IRA Y (the “Roth IRAs”). He designated a trust, Trust C, as the beneficiary of both.  Trust C provided that upon the decedent’s death, his spouse became the sole trustee of the Trust.  Furthermore, Trust C provided that it divided into two sub-trusts, the Marital Trust and the Family Trust.

The surviving spouse’s decision as to the property to be allocated to the Marital Trust would be final and conclusive and binding upon all beneficiaries, with certain exceptions not relevant to the PLR.  The surviving spouse wished to allocate Roth IRA X and Roth IRA Y to the Marital Trust.

Under the terms of Trust C, the surviving spouse, as Trustee, is to pay all net income of the Marital Trust to herself. In addition, she may distribute to herself, or use for her benefit, any portion or all of the principal of the Marital Trust (in cash or in kind) as she deems desirable for her support, comfort, and welfare, in her accustomed manner of living, or “for any other purpose [she] believes to be for [her] best interests.” The provision further states that the decedent’s primary concern is for his spouse’s well-being and happiness and she need not consider the interest of any other beneficiary in making distributions to her or for her benefit.

As sole trustee of Trust C, the surviving spouse proposed to make a distribution of the Roth IRAs to herself as beneficiary of the Marital Trust under her power to do so “for any purpose” because to do so is in her “best interest.” She advised the IRS of her intention to roll over the distribution into one or more Roth IRAs created and maintained in her own name.

Under Reg. § 1.408-8, Q&A 5, a surviving spouse of an IRA owner may elect to treat the spouse’s entire interest as a beneficiary in an individual’s IRA as the spouse’s own IRA, but only if the spouse is the sole beneficiary of the IRA and has an unlimited right to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust.

 The PLR stated that:

“Generally, if the proceeds of a decedent’s IRA are payable to a trust, and are paid to the trustee of the trust, who then pays them to the decedent’s surviving spouse as the beneficiary of the trust, the surviving spouse is treated as having received the IRA proceeds from the trust and not from the decedent. Accordingly, such surviving spouse, in general, is not eligible to roll over the distributed IRA proceeds into her own IRA.

However, the general rule will not apply where the surviving spouse is the sole trustee of the decedent’s trust and has the sole authority and discretion under trust language to pay the IRA proceeds to herself. The surviving spouse may then receive the IRA proceeds and roll over the amounts into an IRA set up and maintained in her name.”

The PLR recited the following conclusions by the IRS:

  • The Roth IRAs will not be treated as inherited IRAs respect to the surviving spouse.
  • The surviving spouse is eligible to roll over or have transferred, by means of a trustee to trustee transfer, a distribution of the proceeds of the Roth IRAs into a Roth IRA created and maintained in her own name, as long as the rollover of such distribution occurs no later than the 60th day from the date said distribution is made from the IRA.

In sum, the IRS concluded that the facts set out above satisfied the requirements of Reg. § 1.408-8, Q&A 5, set forth above.  Since the surviving spouse met those requirements she fell under the exception for the creation of a roll over Roth IRA in her own name.

The rules regarding pension and IRA estate planning and distributions are complex.  PK Law Estate Planning Attorneys can assist with your pension and IRA estate planning and distribution issues. 

 

This information is provided for general information only.  None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.

Rochelle S. Eisenberg Selected as Recipient of Carl W. Smith Excellence in Education Award Recipient

Pessin Katz Law, P.A. (“PK Law”) pleased to announce the selection of Rochelle S. Eisenberg, Esq., as the first recipient of the Maryland Association of Boards of Education’s (MABE) newly-created Carl W. Smith Excellence in Education Award.

As a practitioner in education law, Eisenberg has worked with 22 of the 24 Maryland schools systems. Board members nominating Eisenberg stated, “The work done by Eisenberg on behalf of local boards has been thoughtful, detailed and effective. She is humble in nature, diligent in her work, positive in her outlook, and a committed member of any team. Her training and seminars provided to school board members as well as to superintendents and staff across the state have provided an invaluable service by educating individuals who have direct and substantial impact on the lives of students, parents, staff, and community members.” The submission also praises Eisenberg for her work in drafting legislation that impacts Maryland school systems, and for co-authoring the Maryland School Law Deskbook, which provides essential information and guidance to board members and school system employees

The Carl W. Smith Excellence in Education Award was established in 2012 by the Maryland Association of Boards of Education to honor then-retiring executive director Dr. Carl W. Smith. It is presented to an individual who has demonstrated exemplary leadership and service to excellence in public education in Maryland.

According to MABE Executive Director Frances Hughes Glendening, “Rochelle’s long-time connection to MABE, her dedication to and work with local boards and school staff, and her leadership and service to public education throughout Maryland make her an ideal choice for the Carl W. Smith Excellence in Education Award.”

The award will be presented at the Maryland Association of Boards of Education Annual Conference in Ocean City, Maryland, in October 2014. 

Income Tax – Transfers of Family Business To Children Tax Free

In Bross Trucking, Inc., TC Memo 2014-10, the United States Tax Court ruled that a taxpayer’s wholly-owned corporation that ceased operations due to its difficulty with regulatory authorities had no goodwill. As a result, even though the taxpayer’s sons started a new business that had performed some of the same services and had some of the same customers as the father’s corporation, there was no taxable distribution of goodwill from the father’s corporation to the father and no gift from the father to the sons.  The case involved substantial amounts of tax deficiencies, penalties and interest.

Mr. Bross organized Bross Construction to engage in various road construction projects. Its primary customers involved the highway departments of several states. As the road construction projects grew, he organized several other companies to provide services and equipment to the construction projects.

Mr. Bross was extremely knowledgeable about the industry and contributed to nearly all facets of the Bross family businesses. He was responsible for arranging and completing the projects in which Bross Construction participated. He personally developed relationships with the necessary entities to work in the road construction industry. Further, Mr. Bross was responsible for fostering and maintaining relationships under the Bross family business umbrella to ensure that projects were successfully completed.

Mr. Bross organized Bross Trucking. He owned 100% of the Company directly or through his revocable living trust. He had no employment contract with Bross Trucking; and he never signed a non-competition agreement that would prohibit him from competing against Bross Trucking if he dissociated from the company. Further, none of Bross Trucking’s employees signed non-competition agreements with the company. None of Mr. Bross’s sons ever worked for Bross Trucking.

Bross Trucking engaged in hauling construction-related materials and equipment for road construction projects. The Company would also haul coal in the winter for other customers, but owned very little trucking equipment. Instead, it leased most of its equipment from another wholly owned Bross entity, CB Equipment, through yearly leases. Bross Trucking paid for all the fuel and maintenance for the leased trucks and used independent contract drivers to provide the hauling services.

When Bross Trucking started business in Missouri, entry into the trucking business was highly regulated and entry into intrastate trucking was not easy.  Subsequently, the high regulation of the industry was relaxed and it became easier for competitors to enter the market.

Bross Trucking became embroiled in a series of investigations and complaints by Federal and state regulatory authorities.  A decision was made by Mr. Bross based on legal advice to cease Bross Trucking’s activities but remain a “viable company” to deal with any future regulatory issues and obligations.

Mr. Bross and his sons met with an attorney to discuss the best way to ensure that the Bross family businesses had a suitable trucking provider. To meet their goals, the attorney recommended that the Bross sons start a new trucking business. The Bross sons agreed and decided to organize a new company called LWK Trucking, seeking their own counsel in so doing, which provided more services than Bross Trucking.

LWK Trucking was organized on October 1, 2003. Its stock was divided into two classes when it was organized: class A voting stock and class B nonvoting stock. Class A stock represented a 98.2% interest in LWK Trucking and class B stock represented the remaining 1.8%. In December of 2003 each of the three Bross sons established a self-directed Roth IRA. Later that month, each of the Bross sons directed his respective Roth IRA to acquire 2,000 shares of class A shares in LWK Trucking. Together, the 6,000 shares acquired by the three Roth IRAs represented all of the class A shares in LWK Trucking, giving the three sons a combined 98.2% interest in LWK Trucking.  The remaining class B shares were acquired by an unrelated third party.

LWK Trucking was a new and separate entity from Bross Trucking. Mr. Bross was not involved in managing LWK Trucking. LWK Trucking chose to independently satisfy all the regulatory requirements instead of switching insurance and licenses over from Bross Trucking. In other words, nothing was transferred from Bross Trucking to LWK Trucking and LWK Trucking met all of the regulatory requirements surrounding its formation and business on its own. As a result, Bross Trucking remained a viable entity, complete with insurance and its original trucking authority issued or authorized by the State of Missouri. It had valuable assets, accounts receivable, and cash.

On August 22, 2001, Mr. Bross, Mrs. Bross, and their three sons organized Bross Holding Group. Initially the Brosses owned Bross Holding Group in the following percentages: Mr. Bross, 37.5%; Mrs. Bross, 25%; and each of the three Bross sons, 12.5%. Shortly after organization, Bross Holding Group acquired sole ownership of Bross Construction and CB Equipment. Later it acquired CB Asphalt (the asphalt provider for Bross Construction). Mr. Bross never conveyed Bross Trucking to Bross Holding Group.

In 2006 Mr. and Mrs. Bross gave portions of Bross Holding Group to their three sons. The gifts included both class A voting shares and class B nonvoting shares. All of the underlying assets were appraised, and a valuation was timely prepared. Mr. and Mrs. Bross used the valuation, and each timely filed a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Mr. and Mrs. Bross reported gifts for tax for years 1995 and 2006, but they did not report any gifts for tax year 2004, the year LWK Trucking began to do business.

The Tax Court stated that the key issues to be decided were whether Bross Trucking distributed appreciated intangible assets to its sole shareholder Mr. Bross, whether Mr. Bross then gave those assets to his sons, and whether the gifts should have been reported for tax year 2004. 

The IRS contended that Bross Trucking distributed the company’s “operations” to Mr. Bross. Further, the notice of deficiency to Bross Trucking dated April 14, 2011, explained that the deficiency was based on distributed intangible assets related to intangible assets with the following “attributes”: (1) goodwill; (2) established revenue stream; (3) developed customer base; (4) transparency of the continuing operations between the entities; (5) established workforce including independent contractors; and (6) continuing supplier relationships. (It was not clear to the Tax Court whether each of the foregoing was a separate “intangible asset” or all of them were aggregated as “goodwill”.  However, the Court treated the sole asset distributed as “goodwill”, with the intangibles aggregated, based on the brief filed by the IRS.)

Internal Revenue Code Sec. 311(b)(1) generally provides that if a corporation distributes appreciated assets to a shareholder, the corporation recognizes gain as if the property were sold to the shareholder at its fair market value. Gain is recognized to the extent that the property’s fair market value exceeds the corporation’s adjusted basis.

The Tax Court opinion cited the established fact that a business can distribute only corporate assets and cannot distribute assets that it does not own. Specifically, it cannot distribute intangible assets that are individually owned by its shareholders.

Previous cases involving personal goodwill and corporate goodwill “suggest” there are two regimes of goodwill: (1) personal goodwill developed and owned by shareholders; and (2) corporate goodwill developed and owned by the company. The Tax Court ruled that Bross Trucking’s goodwill was primarily owned by Mr. Bross personally, and the company could not transfer any corporate goodwill to Mr. Bross in tax year 2004.  Consequently, there was no taxable distribution to Mr. Bross and no gift from Mr. Bross to his sons.

The Court relied on the following factors in reaching its conclusion as to the transfer of corporate goodwill to Mr. Bross:

  • Bross Trucking’s goodwill was limited to a workforce in place at the time of the transfer.
    • While the Company may have had some goodwill in place at one point in time, it had evaporated by the time of the transfer due to its regulatory troubles and negative publicity associated therewith.
    • LWK Trucking felt it necessary to disassociate itself from Bross Trucking by hiding the Bross name on LWK’s trucks with magnetic signs. Such action showed that any transferred corporate goodwill was not valuable and may have actually been detrimental to LWK Trucking.
    • The remaining attributes assigned to Bross Trucking’s goodwill all stemmed from Mr. Bross’s personal relationships. Bross Trucking’s established revenue stream, its developed customer base, and the transparency of the continuing operations were all spawned from Mr. Bross’s work in the road construction industry.
      • According to the Court’s opinion, a company does not have any corporate goodwill when all of the goodwill is attributable solely to the personal ability of an employee.  Bross Trucking’s products did not contribute to developing the goodwill. In other words, it was not Bross Trucking’s product which enticed customers to use its services because the services were not unique.   This is in contrast to a another Tax Court holding that a single-shareholder-owned professional corporation possessed all of the goodwill because the corporation’s services were unique and was not based on the ability of the shareholder.  The Tax Court concluded that the expectation of continuing patronage must have been a result of the unique relationships between Mr. Bross and the customers.
      • Mr. Bross did not transfer any goodwill to Bross Trucking through an employment contract or a non-competition agreement.  As the Court’s opinion states, a key employee who develops relationships for his or her employer may transfer goodwill to the employer through employment contracts or non-competition agreements. The transfer is evidenced by the employee’s covenant to not use his or her goodwill to compete against the employer.
      • The only aspect of corporate goodwill that Bross Trucking displayed was a workforce in place, but Bross Trucking did not transfer an established workforce in place to Mr. Bross.  In rejecting other “attributes” cited by the IRS of goodwill the Court stated:
        • The IRS contended “repeatedly” that “most” of the Bross Trucking employees became LWK Trucking employees. The evidence, however, showed that only about 50% of LWK Trucking’s employees formerly worked at Bross Trucking so the Court remained “unconvinced” that most of a workforce in place was transferred
        • LWK trucking demonstrated it had new key employees and services offered by LWK Trucking such as Global Positioning Services and third–party maintenance services. Mr. Bross’s sons managed LWK Trucking, not Mr. Bross.
        • There was no evidence of a “transfer” of employees between Bross Trucking and LWK Trucking.  Because of its use of independent contractors, Bross Trucking did not perform LWK Trucking services and could not have provided employees to start the separate service lines. 
        • Bross Trucking did not transfer a developed customer base or revenue stream to LWK Trucking. Instead, Bross Trucking’s customers had a choice of trucking options and chose to switch from Bross Trucking to LWK Trucking. There was no evidence of an “organized” transfer of a customer base or revenue stream. 
        • Bross Trucking did not distribute any cash assets and retained all the necessary licenses and insurance to continue business. Further, Mr. Bross remained associated with Bross Trucking and was not involved in operating or owning LWK Trucking. He was free to compete against LWK Trucking and use every cultivated relationship in order to do so. In other words, the fact that Bross Trucking could have resumed its hauling business supports the view that it retained any corporate intangibles. Accordingly, there was no transfer of intangible assets because Bross Trucking’s customers chose to use a different company and Bross Trucking remained a going concern.
        • LWK Trucking did not benefit from any of Bross Trucking’s assets or relationships. LWK Trucking was independently licensed and developed a wholly new trucking company. LWK Trucking did not take a transferred basis in any assets such as property or purchased authority. There is no indication that LWK Trucking used any relationship that Mr. Bross personally forged.

The Chief Judge of the Tax Court decides whether an opinion in a regular case will be issued as a Memorandum Opinion or as a Tax Court Opinion.  Generally, a Memorandum Opinion is issued in a regular case that does not involve a novel legal issue. A Memorandum Opinion addresses cases where the law is settled or factually driven. A Memorandum Opinion can be cited as legal authority, and the decision can be appealed.  Bross Trucking is very factually driven, but it clearly is a lucid discussion of personal shareholder and company goodwill and factors to be considered in reaching a determination as to the nature of each type of goodwill.

PK Law business services attorneys are familiar with issues surrounding the transitioning of family businesses.  Contact one of them for advice on the topic of the treatment of goodwill in any business transaction.

 

This information is provided for general information only.  None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.