In what has increasingly become a sign of spring in Maine, our legislature has once again made significant changes to the Maine estate tax system. We believe these changes will likely be more permanent in nature than some of the prior changes and we expect the Maine estate tax system to remain essentially unchanged for some time. The new provisions benefit married Mainers by allowing couples to fully utilize the entire federal estate tax exemption of the first spouse to die without paying any Maine estate tax at the first death.

As you may recall from earlier Newsletters, under the pre-2001 state and federal estate tax systems a married couple could avoid paying any federal or Maine estate tax on the death of the first spouse, and could maximize the overall tax savings over both deaths, by utilizing a so-called “federal plan” which employed a trust arrangement for each spouse. Such a couple could take full advantage of the first spouse’s federal estate tax exemption (by funding a credit shelter trust) regardless of which spouse died first. However, when Maine “decoupled” from the federal system in 2003 and began using lower exemption amounts, a federal plan could result in a Maine estate tax liability on the death of the first spouse, even if there was no federal estate tax liability.

By way of example, if a husband died in 2004, survived by his wife, with assets valued at $3 million and a typical federal plan, his estate would fund a credit shelter trust of $1.5 million and a marital deduction distribution (either outright or in a qualifying trust) of $1.5 million. Although this scenario would result in no federal estate tax, it would result in a Maine estate tax of $64,400. Alternatively, if that decedent had an estate plan in place which was linked to the Maine (rather than the federal) exemption amount, he could avoid both the Maine and federal estate tax upon his death. In that case, the credit shelter trust would be funded with the lower Maine exemption amount ($850,000 in 2004) and the marital deduction distribution would have equaled the balance of the estate ($2,150,000). This would have eliminated the Maine estate tax liability on husband’s death, but it would have increased the value of assets passing to his widow and could have potentially resulted in a larger estate tax liability (both federal and Maine) on her subsequent death. Essentially, couples were forced to choose: pay a Maine estate tax upon the death of the first spouse in order to fully utilize his or her federal exemption amount, or avoid the Maine estate tax upon the death of the first spouse to die, but run the risk of a larger estate tax liability at the death of the surviving spouse.

The recent change to the Maine estate tax system has eliminated the need to make this choice. Under the new law, retroactive to January 1, 2005, the State now recognizes a Maine-only marital deduction election. The State now allows couples to defer the tax that would have been due on the first spouse’s death without wasting any of that spouse’s federal exemption. The trade-off is that those assets (or what’s left of those assets) must be included in the surviving spouse’s Maine (not federal) estate when he or she later dies. This change is particularly important for clients whose combined assets exceed the size of two federal exemptions ($3 million in 2005). For couples whose estates are less than that, but require some tax planning, a two-part plan with a disclaimer potential (which is what we have been suggesting over the last year and which many clients have implemented) should be sufficient. To take optimal advantage of the new Maine system, however, couples with aggregate assets that exceed $3 million should employ a three-part estate plan which would include (1) a credit shelter trust, (2) a Maine marital trust, and (3) a marital deduction distribution (either outright or in a qualifying trust). The credit shelter trust would be funded with assets valued at the Maine exemption amount (currently $950,000 but increasing to $1 million in 2006). Assets in this credit shelter trust would avoid the Maine and the federal estate tax at the death of the surviving spouse. The Maine marital trust would be funded with assets valued at the difference between the Maine exemption amount and the federal exemption amount ($550,000 in 2005 but increasing to $1 million for 2006 through 2008). Assets remaining in the Maine marital trust would not be subject to federal estate tax at the death of the surviving spouse. Those assets would, however, be included in the surviving spouse’s estate for Maine estate tax purposes if the estate of the surviving spouse were still subject to a Maine tax. The marital deduction distribution would include the remainder of the first spouse’s assets. Those assets would be included in the estate of the surviving spouse, and would be subject to both federal and Maine estate tax, upon his or her later death. Again, an example may be helpful. If a husband were to die in 2005 with assets valued at $3 million and an estate plan that takes advantage of the new Maine marital deduction, his estate could fund three parts as follows: $950,000 to the credit shelter trust, $550,000 to the Maine marital trust; and the remaining $1.5 million as a marital deduction distribution. Upon the later death of his wife, the remaining assets in the credit shelter trust would not be included in her estate and would pass free of federal or Maine estate tax liability. Assets remaining in the Maine marital trust would pass free of federal estate tax, but could incur a Maine estate tax liability depending upon the value of wife’s own estate. Assets that passed via the marital deduction distribution would be included in the wife’s estate for both federal and Maine estate tax purposes and could, therefore, result in additional federal and Maine estate tax on her death.

This is a substantial improvement in Maine law. Many clients have waited to update their estate plans until Maine law was further clarified, or opted to change to a two part plan that used the lower Maine exemption amount. Others have updated their plans to incorporate a potential disclaimer trust, which anticipated the recent changes to Maine law. If you are a married couple with combined assets over $1 million and you have not made any changes to your estate plan in the last 18 months, you should come in to review your plan. Similarly, if you are a married couple with combined assets over $3 million, you should schedule a visit even if you have made changes within the past year or so, because it will probably be most appropriate to implement the new three-part arrangement. All clients should feel free to contact us for additional information on this important development in Maine law.

Please click here to see a typical three-part plan in chart form.

Maine has adopted a modified version of the Uniform Trust Code (“the Maine UTC”) which took effect on July 1, 2005. Overall, this is a very positive development, as certain “gaps” in prior Maine law are now eliminated by well-designed provisions developed by the National Conference of Commissioners on Uniform State Laws. For example, the Maine UTC expressly validates a trust for the care of a pet, something that was never clearly addressed by prior law. It confirms that an agent under a durable power of attorney may, where expressly authorized in the documents, exercise a settlor’s powers to revoke or amend a revocable trust or request a distribution from such a trust. It provides that a trustee-beneficiary may exercise discretionary powers to make distributions to that trustee-beneficiary only in accordance with an “ascertainable standard,” thereby avoiding the inadvertent inclusion of trust assets in the estate of a beneficiary who is also a trustee; and it includes a new provision which renders voidable certain transactions between a trustee and a beneficiary where there are conflict of interest issues. All of these provisions are new to Maine law.

There are certain elements in this new uniform act which have sparked a considerable amount of controversy nationwide. One such element is the mandatory requirement (not applicable to pre-7/1/05 irrevocable trusts) that trustees must notify “qualified beneficiaries” (a defined term) over age 24 of (1) the existence of the trust, (2) the identity of the trustees, and (3) the beneficiaries’ right to receive a copy of the trust and informational reports from the trustees. Trustees of all trusts, including pre-7/1/05 irrevocable trusts, must also respond to the request of any qualified beneficiary for trustee accountings and other information reasonably related to the administration of the trust. The Maine version of the UTC modifies these provisions to allow the settlor of a trust (1) to waive such trustee duties during the lifetimes of the settlor and of the settlor’s spouse and/or (2) to designate a third party, called a “trust protector,” to receive such notices and information on behalf of qualified beneficiaries to whom the settlor does not want such information sent directly. Thus, the Maine version of the UTC adds flexibility to the uniform act that will allow settlors to keep certain beneficiaries from learning about the existence of a trust or receiving financial information relating to that trust. If you want to limit the rights of any beneficiary to obtain such information about your revocable trust following your death, then an appropriate revision to your existing trust document will be needed.

Another controversial provision of the uniform act creates a special class of creditors who can reach trust distributions to or for the use and benefit of a beneficiary even when there is a so-called “spendthrift clause” in the trust document. This provision was not adopted as part of the Maine UTC. In fact, the Maine statute clarifies our prior law by confirming that, whenever a trust contains a properly-drafted spendthrift clause, (1) a creditor may only collect from a beneficiary after the beneficiary has received a distribution from the trust, and (2) a creditor may not reach discretionary distributions made to a third party for the benefit of a beneficiary, such as when a trustee purchases goods or services for the beneficiary instead of making a direct distribution to that beneficiary. Although the Maine UTC contains certain provisions which are mandatory for all trusts, most of its statutory provisions are “default” rules which can be waived or modified in a properly-drafted trust document. We would be happy to review with you the mandatory and default rules of the Maine UTC, and the drafting options now available to deal with unique or special circumstances, whenever you are ready to consider updating your current estate plan.

MaineCare is the program formerly known as Medicaid which pays long-term care expenses for Maine residents who are impoverished. We advise people about the rules governing eligibility for MaineCare benefits, and steps that may legally be taken to achieve eligibility while preserving some assets for the family, if our client chooses to do so. In this year’s budget bill, the Maine legislature included changes in the rules governing eligibility for MaineCare benefits, and rules involving the “estate recovery” program that seeks reimbursement of MaineCare expenses after a recipient of benefits has died, or after his or her surviving spouse has died.

Eligibility. Generally, a couple can own a home and about $100,000 in countable assets and one spouse will be eligible for MaineCare assistance. A single individual can own a home and about $10,000 in countable assets and be eligible for MaineCare assistance. In an effort to become MaineCare eligible, many clients begin a gifting program to facilitate a spend-down of assets. For many years, an important aspect of MaineCare eligibility has involved the “penalty” that is imposed when a MaineCare applicant transfers assets within 36 months of his MaineCare application (where a trust is involved, the “look back” period is 60 months). Currently, when assets have been transferred within 36 months, the Department of Health and Human Services (DHHS) determines a “penalty period” by dividing the value of the transferred assets by $3,917, which was the average private-pay monthly nursing home cost in Maine in 1994 when this figure was last determined by DHHS. A transfer of $39,170 during the 36 months preceding an application would result in a 10 month penalty period, starting with the month of the transfer, during which the applicant remains ineligible for MaineCare benefits. If, during this penalty period, the applicant is actually in a nursing home, either the applicant or someone else in the family will have to come up with money to privately pay the cost of the nursing home stay.

Until July 1, 2005, DHHS disregarded fractional months, so a transfer of less than $3,917 produced no penalty period. A transfer of slightly less than twice this amount, say $7,500, produced a one-month penalty period, not two months. Consequently, it has made sense for people to transfer $7,500 every month (incurring a one month penalty period each time), instead of transferring a single, larger lump sum amount.

The new Maine law will change this strategy. First, DHHS is directed to re-determine the current average private-pay cost of nursing home care in Maine, and then to re determine this amount annually. Although we will not know for sure for some time, the consensus among practitioners is that the new private pay cost will be about $6,000 per month. Second, the new Maine law provides that fractional months will be rounded up instead of being disregarded. As a result, a transfer of any amount up to the private pay cost (say $6,000) will produce one month of ineligibility. A transfer of $1 more than the private pay cost (say $6,001) will produce two months of ineligibility. Under the new rules, lump-sum transfers will work just as well or better than a monthly gift strategy.

If you have been engaged in the MaineCare strategy of transferring $7,500 per month, please get in touch with us immediately. Depending on the new private pay cost, this strategy may become very disadvantageous because each transfer could make the person ineligible for two months, and each two-month block of the penalty period will be tacked onto the prior two-month block. Effective immediately, clients should cut back the monthly transfer to $3,900 (less than the current monthly figure of $3,917), and when the new DHHS monthly amount is announced, clients can increase the transfer to coordinate with that figure, or make a single lump-sum transfer. If you have made a transfer in excess of $3,917 in the month of July, please contact us immediately so we can take remedial action if appropriate.

The new law also limits the ability to make gifts to achieve Medicaid eligibility for a person who is incapacitated. The new law bars Maine’s probate courts from authorizing a conservator to make gifts for the purpose of achieving Medicaid eligibility, and bars the courts from approving “single transaction authority” for this purpose. Consequently, gift strategies to achieve Medicaid eligibility will work only if the elderly person is competent to make gifts or has issued a power of attorney with broad, explicit gift-making authority. If a power of attorney is silent about gifts, it does not grant the authority to make gifts. Also, many powers of attorney limit gifts to the gift tax annual exclusion amount of $11,000 per year per recipient. Gifts to achieve Medicaid eligibility may need to be for larger amounts so this type of restriction in the power of attorney would be disadvantageous. If you or a member of your family may at some point want to consider pursuing a Medicaid eligibility strategy, it is critical that you have an appropriate power of attorney to facilitate this strategy in case of incapacity.

Estate Recovery. Other changes in MaineCare law involve the Estate Recovery Program. Historically, after the death of a MaineCare recipient, the state pursued claims for reimbursement of the expenses it incurred on the recipient’s behalf. Typically the only asset in his estate was his house, and the State would seek reimbursement and force the sale of the house after the person died. If, however, the house was owned jointly with a surviving spouse, or if the house passed via the recipient’s will to a surviving spouse, the State would not seek a sale of the house. Additionally, where a couple was involved, Maine did not pursue recovery against the surviving spouse or her estate. The new Maine law directs that if assets pass to a surviving spouse or if the house is owned jointly, DHHS must seek to recover MaineCare expenses when the surviving spouse dies. The Department is also directed to pursue estate recovery against other kinds of non-probate transfers, such as life estate/remainder assets and trusts. Joint tenancies created prior to July 1, 2005 are grandfathered and the State will not seek recovery from the surviving joint owner.

Annuities. Additional changes in MaineCare law involve annuities. A traditional annuity in pay-out status will not count as a resource as long as benefits can go only to the MaineCare applicant or his spouse, or to a minor or dependent child. If the annuity provides for a possible payment of benefits to anyone else, such as adult children who are not disabled, the annuity will be treated as a resource and may prevent MaineCare eligibility. This creates a problem with “term certain” annuities because an annuity with a “term certain” may provide payments to someone other than the original recipient of the annuity. For example, if an annuity has a ten-year term certain, then payments will go to the original beneficiary for his lifetime, even if this is longer than ten years. However, if the original beneficiary dies within ten years, the annuity payments will continue to go to designated beneficiaries for the balance of the original ten-year term. Payments under a straight annuity would stop on the original beneficiary’s death. We expect that existing “term-certain” annuities will be grandfathered and will not count as resources in determining MaineCare eligibility. However, new term-certain annuities after July 1, 2005 with adult, competent children as beneficiaries will count as resources, and may prevent MaineCare eligibility.

Please call us if you have questions about these new MaineCare eligibility rules and how they would apply to you or a member of your family. If you are currently using the $7,500 per month transfer strategy, please get in touch with us immediately.

As a result of the Terry Schiavo case and coverage of associated issues in the press, we have received many calls from clients asking whether or not their health care documents are sufficient. Maine has traditionally been fairly progressive in this area of the law and has revised its statutes a number of times over the past decade to permit much flexibility. There are several forms of health care documents that would be sufficient in Maine. Effective health care documentation can range from an old fashioned living will or a simple proxy that names an agent but does not provide the agent with any guidance (thus relying completely on the discretion of the agent for health care decisions including end of life decisions), to detailed advance directives. An advance directive can give the agent guidance about your wishes regarding health care and end of life decisions but leave the ultimate decision to the agent; or alternatively, it can mandate how you want end of life and health care decisions handled and thus limit your agent’s discretion in such matters.

If it has been a number of years since you executed a health care document and you have a simple living will, you may wish to update the document to make certain that it incorporates some of the more recent provisions of Maine law. If, alternatively, you have signed a document recently, it may be quite sufficient for your purposes. The critical question in these documents is their clarity, followed by communication between you and your agent(s) and your health care professionals prior to any illness, so that they understand your desires and can implement them at the appropriate time. Please do not hesitate to contact us with any questions you might have in this regard.

At the end of June, a revision of Treasury Circular 230 imposed new requirements on professionals, including lawyers, rendering federal tax advice. Although the publicized intention of these new rules was to address abusive situations that are found in certain tax shelters, the rules are broader; and the government has declined to narrow them in any meaningful way. Consequently, at this point they apply to federal tax planning that may be a component of many typical estate planning situations. All tax practitioners, including the lawyers at LeBlanc & Young, must follow these rules in providing written statements about certain federal tax issues. The penalties for not following these rules include disbarment or suspension from practice before the IRS, so we have no choice but to comply. We expect all responsible tax practitioners to follow these new requirements. Circular 230 covers much more than formal legal opinions. It applies to written communications by letter, memorandum, e-mail, and fax transmission.

Circular 230 will be most burdensome for writings that concern federal tax issues that have anything other than the clearest support under the Internal Revenue Code. Tax strategies supported only by cases and rulings will now be problematic. The new rules would apply, for example, to what otherwise may have been a fairly short letter describing the basic use of an irrevocable life insurance trust, because some of the tax techniques in such an arrangement are supported by case law that interprets the Code. On the other hand, the new rules would not necessarily apply to a description of a typical estate plan with a credit shelter trust and a marital trust or bequest, because those concepts are basic principles under the Code. Circular 230 would also not apply to changes we might make to your documents to comply with the new Maine estate tax rules discussed elsewhere in this newsletter, because those changes do not involve federal tax concerns.

In order to comply with Circular 230, a traditional legal opinion on federal tax matters not limited to very basic concepts under the Code will have to include a substantial exposition of all relevant facts, a discussion of the law, including potentially applicable judicial doctrines, an application of the law to the facts, and a comprehensive discussion of all related federal tax issues. We anticipate that situations in which a formal comprehensive opinion is the only appropriate written work product will be relatively rare, but in those situations it is clear that the Circular 230 rules will increase significantly the cost of such opinions. We may have to discuss the cost with you, and make sure it is really important that an opinion be issued, before we undertake such work. In the more common situations where clients do not need a formal legal opinion under the Circular 230 structure, we can utilize new disclaimer language in our written communications to avoid the more burdensome requirements of the new rules. If we include in a prominent place in the written communication a warning or disclaimer that nothing stated therein may be relied upon to avoid penalties under the Code, and that our written statements may not be used to promote or market any federal tax transaction, then the written communication will not be subject to some of the more extensive (and expensive) requirements of Circular 230. Accordingly, we have started to add such disclaimer language to many of our written communications dealing with federal tax issues. You will see such language, not only in letters, but also in memoranda, e-mails, and fax transmissions.

Please be assured that it is our intention to continue to deliver the highest quality services to you in the most cost-efficient manner. Changes that you may see in our communication pattern with you are designed to meet the requirements of Circular 230 without creating undue expense to you or penalty exposure for us. Please contact us if you have any questions about how these new rules may affect our client-attorney relationship.

Disclaimer: Nothing in this Client Alert should be taken as legal advice for any individual case or situation. The information in these articles is intended to be general in nature and should not be relied upon for any specific set of circumstances. You should consult with an experienced attorney before applying the information in this Client Alert to your own situation.

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