A Unique Opportunity

The new tax law (2010 Tax Relief Act) creates an once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.

 

Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax (GSTT), an onerous tax equal to the maximum gift or estate tax rate.  The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.

 

The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax.  This is because, under the new law, the tax rate is zero for any generation skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers with be 35%.  In two short years the rate goes back to 55%.

 

There are three common scenarios offering planning opportunities.  First, make gifts before December 31, 2010 to Skip Trusts.  These are trusts that you create for grandchildren, great grandchildren or more remote generations.  There will be no generation skipping transfer tax.  The gift tax is 35%, after use of the $1 million lifetime gift exclusion.  This strategy is most effective for large taxable estates.  On the gift tax return, you will want to elect out of automatic Generation Skipping Transfer (GST) allocation rules.  For 2010, you will allocate nothing to the GST Exemption because there is no estate tax.  Use a Trust Protector with the power to add beneficiaries (e.g. children/spouse).

 

The second planning scenario deals with the unique planning opportunities for those who are beneficiaries of trusts that will be subject to GSTT upon distribution from the trust.  Distributions should be made from these trusts before December 31, 2010 because the tax rate is 0%.  After this year, the distribution will be subject to at least a 35% tax rate.  Sometimes, there is concern about beneficiaries getting outright distributions.  Some of these concerns may be alleviated if the trustee invests trust assets in limited partnerships or limited liability companies (LLCs) and then distributes the partnership interests or LLC membership interests.

 

The third planning opportunity deals with clearing any loans made to trusts.  The most common scenario involves Irrevocable Life Insurance Trusts.  Until the passage of the 2010 Tax Relief Act, there was no way to allocate the GSTT exemption, so loans were used.  With the new act, you can now allocate the GSTT exemption on a timely-filed gift tax return.  If you unwind the loans now, you can save the 2010 annual exclusion that would otherwise be lost.

 

I strongly encourage you to take advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren.  We can help you structure these gifts so that they meet your goals and objectives, regardless of amount.

Foreclosure Moratoriums – What are they about and what does it mean to you if I you are facing a foreclosure?

In the last couple of weeks, a number of banks have announced moratoriums on foreclosures citing problems with their paperwork.  Newly-named personnel, “robo-signers”, were under fire for not reviewing files and submitting false affidavits to courts.  Even with years of experience representing banks and doing foreclosures, this was news to me.  It was hardly clear what was going on.

Yesterday, The Wall Street Journal published an article that explains it and highlights the development of a new form of law practice, “foreclosure defense.”  If your facing foreclosure, it matters who you hire to represent you.  See the article by clicking on the following link:

http://online.wsj.com/article/SB10001424052702304410504575560072576527604.html?KEYWORDS=niche+lawyers

Medicare Coverage of Skilled Nursing Care – The Right Standard

I have heard, all to frequently, about people losing Medicare coverage for skilled nursing care because it had been determined that they had reached a “healing plateau.”    That is, they were not improving from the skilled nursing care they were receiving (and would not improve from additional skilled care) and, therefore, were deemed to be only receiving “custodial care”, not the skilled nursing services required for Medicare benefits.

While that may have been the standard in the past, it is not the standard today, but it still comes up.  As it did recently, when a federal judge ruled against the Social Security Administration and rejected  “Improvement” as a criterion for continuing Medicare skilled nursing facility (SNF) coverage.  Here is a summary of the case.

A federal district ruled that an administrative law judge (ALJ) with the U. S. Centers for Medicare & Medicaid Services (CMS) improperly denied Medicare benefits to a patient in a skilled nursing facility. The ALJ had concluded that “[i]t became apparent that no matter how much more therapy the Beneficiary received, she was not going to achieve a higher level of function.”

After undergoing hip replacement surgery on April 28, 2008, Mary Beth Papciak, 81, developed a urinary tract infection and was readmitted to the hospital. On June 3, 2008, Ms. Papciak was discharged by Dr. Tuchinda to ManorCare to receive skilled nursing care, physical therapy and occupational therapy. Upon Ms. Papciak’s admission to ManorCare, Ms. Papciak was unable to ambulate and could not use her walker due to numbness of her hands due to what was later diagnosed as carpal tunnel syndrome. Ms. Papciak also had a history of cellulitis, anemia, cholecystectomy, chronic atrial fibrillation, hypertension, anxiety and depression.

Ms. Papciak received therapy five days a week; however, she made slow progress during her stay. Her therapy included physical and occupational therapy, treatment, self care, therapeutic exercises and therapeutic activities. Her initial treatment was primarily for ambulation. Medicare paid for the skilled care Ms. Papciak received from June 3 through July 9, 2008. It was determined, however, that effective July 10, 2008, Ms. Papciak no longer needed skilled care because Ms. Papciak had made only minimal progress in some areas, had regressed in other areas, and had been determined to have met her maximum potential for her physical and occupational therapy. As a result, Medicare denied payment from July 10 through July 19 because Ms. Papciak was only receiving “custodial care,” not the skilled nursing services required for Medicare coverage.

Ms. Papciak appealed the decision denying coverage, and her appeal worked its way up the chain to an administrative law judge, which upheld the denial, which was then upheld by CMS’s Medicare Appeal Counsel (MAC). After exhausting her administrative remedies, Ms. Papciak sought relief in federal district court.

The federal district court sided with Ms. Papciak. The proper legal standard to be applied to a patient entitled to Medicare benefits in a skilled nursing facility is whether the patient needs skilled services to enable her to maintain her level of functioning.

In the CMS Medicare Skilled Nursing Facility Manual which sets forth the standard to be applied, the reviewing authorities must give consideration to a patient’s need for skilled nursing care in order to maintain her level of functioning. The relevant portion reads: “The services must be provided with the expectation, based on the assessment made by the physician of the patient’s restoration potential, that the condition of the patient will improve materially in a reasonable and generally predictable period of time, or the services must be necessary for the establishment of a safe and effective maintenance program.”

Neither the ALJ nor the MAC addressed Ms. Papciak’s need for skilled nursing care in order to maintain her level of functioning. This was error, held federal Magistrate Judge Cathy Bissoon, requiring that the decision to deny her benefits be overturned.

The ALJ had concluded that “[i]t became apparent that no matter how much more therapy the Beneficiary received, she was not going to achieve a higher level of function.” Similarly, the MAC stated that “[d]espite the appellant’s arguments to the contrary, the enrollee made little or no progress in therapy from the time of her admission to ManorCare through her discharge from skilled care on or around July 10, 2008.”

This is a common misunderstanding about Medicare’s skilled nursing facility benefit, that the patient must be showing “progress” in order for Medicare to pay for her care. Indeed, federal regulations state that “[t]he restoration potential of a patient is not the deciding factor in determining whether skilled services are needed. Even if full recovery or medical improvement is not possible, a patient may need skilled services to prevent further deterioration or preserve current capabilities.”

What happened to Ms. Papciak? She was hospitalized again, discharged to a different skilled nursing facility, where she received physical and occupational therapy under the Medicare benefit, and was discharged home on August 21, 2008.

What’s in a name?

It goes without saying that employers should strive to be proactive in eliminating harassment and discrimination in the workplace. This may require that steps be taken to ensure that employees are trained to recognize, appreciate and respect ethnic characteristics beyond those associated with one’s skin tone or physical attributes.

The Wisconsin Law Journal recently published an article stating that ethnic characteristics can include ethnic names and conceivably encompass speech patterns unique to a particular ethnic group and customs and traditions of various ethnic groups.

The article includes the following hypothetical situation:  Over the last several months one of your managers, Teddy, has gone around on several occasions referring to Alonzo Ramirez, a sales representative of Hispanic descent, as “Al” to other employees and to potential customers during sales calls. For Teddy, whose full name is Theodore Adams, this is a way to help make Alonzo (like he has successfully done for himself) more personable to staff and customers alike. Alonzo, however, does not agree and begins to insist that Teddy refer to him by his birth name. Teddy, honestly seeing no harm in what he’s doing, continues to call Alonzo “Al” on occasion, particularly during sales calls.

Alonzo is convinced that Teddy’s deliberate and routine “Americanizing” of his Hispanic name over his objections has created a racially harassing and hostile work environment. He contacts you and threatens suit unless something is done quickly.

Can Teddy’s repeated references to Alonzo as Al, which on its face are racially neutral, serve as the basis of a successful harassment/hostile work environment claim? The short answer is yes, even if there is no evidence of discriminatory intent other than the Westernizing or Americanizing of an ethnic name. The 9th Circuit Court of Appeals recently dealt with this very issue. Ethnic characteristics protected by the law include more than just a person’s skin color and physical traits. The court noted that names in and of themselves are often a proxy for race and ethnicity.

The court determined that the defendant’s refusal to refer to the plaintiff by his given ethnic name was based on his race/ethnicity. Further, even if there was no direct evidence that the defendant believed his actions had racial implications, his decision to discriminate against the plaintiff’s Arab name in favor of Western names provided sufficient evidence of prohibited discriminatory intent. It supported a finding of a racially hostile work environment.

So what does this all mean for you in dealing with Alonzo’s problems with Teddy? It means you should take his concerns seriously. If the story he relays to you can be substantiated, it could very well mean that he has in fact been harassed and subjected to a hostile work environment in violation of the law. To avoid liability, you should take prompt appropriate remedial action including, but not limited to, disciplining Teddy, reassigning him to another location or terminating his employment. The same holds true even if you conclude after your investigation that Teddy, in his mind, had noble intentions. Good intentions in this regard will likely not be enough to overcome racial or ethnic insensitivity and discriminatory preference.

Protecting Privacy on Facebook

The social networking phenomenon has millions of Americans sharing their photos, pastimes and details about their class reunions on Facebook, Twitter and dozens of similar sites. You can certainly enjoy networking and sharing photos, but you should know that sharing some information puts you at risk. Experts advise there are some personal details you should never reveal.

•  Your full birth date. It’s an ideal target for identity thieves, who could use it to obtain more information about you and potentially gain access to your bank or credit card account. If you’ve already entered a birth date, go to your profile page and click on the Info tab, then on Edit Information. Under the Basic Information section, choose to show only the month and day or no birthday at all. A study done by Carnegie Mellon showed that a date and place of birth could be used to predict most — and sometimes all — of the numbers in your Social Security number.
•  Vacation plans. That’s like putting a “no one’s home” sign on your door. Wait until you get back to tell everyone how awesome your vacation was and be vague about the date of any trip. Don’t invite criminals in by telling them specifically when you’ll be gone.
•  Home address. A study recently released by the Ponemon Institute (which does independent research on privacy, data protection and information security policy) found that users of social media sites were at greater risk of physical and identity theft because of the information they were sharing. Forty percent listed their home address on the sites, 65 percent didn’t even attempt to block out strangers with privacy settings, and 60 percent said they weren’t confident all their “friends” were really people they know.
• Confessions. You may hate your job, lie on your taxes, or be a recreational user of illicit drugs, but this is no place to confess. Employers commonly peruse social networking sites to determine who to hire and, sometimes, who to fire. One study done last year estimated that 8 percent of companies fired someone for “misuse” of social media.
•  Password clues. If you’ve got online accounts, you’ve probably answered a dozen different security questions, telling your bank or brokerage firm your mother’s maiden name; the church you were married in; or the name of your favorite song. Got that same stuff on the information page of your Facebook profile? You’re giving crooks an easy way to guess your passwords.
•  Risky behaviors. You like to soar above the hills in a hang glider, or smoke like a chimney? Insurers are increasingly turning to the web to figure out whether their applicants and customers are putting their lives or property at risk.
•  Your child’s name in a caption. Don’t use a child’s name in photo tags or captions. If someone else does, delete it by clicking on Remove Tag. If your child isn’t on Facebook and someone includes his or her name in a caption, ask that person to remove the name.

Common mistakes include:
•  Having a weak password. Avoid simple names or words you can find in a dictionary, even with numbers tacked on the end. Instead, mix upper- and lower-case letters, numbers, and symbols. A password should have at least eight characters. Better yet, 12 characters – not 11 or 13. Experts say 12 is the best. One good technique is to insert numbers or symbols in the middle of a word.
•  Overlooking useful privacy controls. For almost everything in your Facebook profile, you can limit access to only your friends, friends of friends, or yourself. Restrict access to photos, birth date, religious views, and family information, among other things. You can give only certain people or groups access to items such as photos, or block particular people from seeing them. Consider leaving out contact info, such as phone number and address, since you probably don’t want anyone to have access to that information anyway.
•  Letting search engines find you. To help prevent strangers from accessing your page, go to the Search section of Facebook’s privacy controls and select Only Friends for Facebook search results. Be sure the box for public search results isn’t checked.
•  Permitting youngsters to use Facebook unsupervised. Facebook limits its members to ages 13 and over, but children younger than that do use it. If you have a young child or teenager on Facebook, the best way to provide oversight is to become one of their online friends. Use your e-mail address as the contact for their account so that you receive their notifications and monitor their activities.

Nonprofits Must File by Oct. 15 to Maintain Status

Small tax-exempt, nonprofit groups are now required to file a tax form with IRS, or risk losing their tax-exempt status. Many should have filed in May, but the IRS has granted a one-time relief program that extended the filing deadline to Oct. 15.

Congress passed legislation in 2006 that requires all tax-exempt organizations, except churches and religious organizations, to file an informational 990-N return annually with the IRS starting in 2007. Before that legislation, organizations that collected $25,000 or less in a year were not required to file. For the first time those that didn’t file for three consecutive years are at risk of losing their tax-exempt status. That three-year window hit in 2010.

Even though the IRS sent out one million letters to inform these groups of the new regulation, many still didn’t file and are in jeopardy. Wisconsin has an estimated 6,000 small, tax-exempt organizations affected by this legislation. Close to 1,000 organizations In Milwaukee are on the list.

The form is short and takes just a few minutes to fill out. It contains eight questions, such as the employer identification number, name of organization, address, principal officer, etc. It can be found on the IRS website and can be filled out electronically.

Requiring this has given the IRS a means of creating an accurate, updated list of charitable organizations so people can determine whether an organization is tax-exempt and their contribution is deductible.

ID Thieves Target Kids

The latest form of identity theft doesn’t depend on stealing your Social Security number, according to an article published by the Milwaukee Journal Sentinel. Now thieves are targeting your children.

Nowadays children have Social Security numbers practically from birth, years before they even think about establishing a credit rating. Unscrupulous businesses are using computers to find these dormant Social Security numbers, and selling those numbers to help people establish phony credit and run up huge debts they will never pay off.

Online companies use computers and publicly available information to find random Social Security numbers. The numbers are run through public databases to determine whether anyone is using them to obtain credit. If not, they are offered for sale for a few hundred to several thousand dollars.

Because the numbers often come from young children who have no money of their own, they carry no spending history and offer a chance to open a new, unblemished line of credit. People who buy the numbers can then quickly build their credit rating in a process called “piggybacking,” which involves linking to someone else’s credit file. Many of the business selling the numbers promise to raise customers’ credit scores to 700 or 800 within six months.

If they default on their payments, and the credit is withdrawn, the same people can simply buy another number and start the process again, causing a steep spiral of debt that could conceivably go on for years before creditors discover the fraud.

The crime can come back to hurt children when they get older and seek credit for the first time, only to discover their Social Security number has been used by someone else.

Experts say the fraud is difficult to stop because it’s so easily hidden and targets such vulnerable people. Other than checking with the credit bureaus to see if there is a credit file associated with your child’s Social Security number, there are no specific tools for safeguarding the number.

The Fair Credit Reporting Act guarantees you access to your credit report for free from each of the three nationwide credit reporting companies (Equifax, Experian, and TransUnion) every 12 months.  (AnnualCreditReport.com is the only authorized source for the free annual credit report that’s yours by law.)

Monitoring your credit is one of the best ways to spot identity theft. The Federal Trade Commission recommends checking your credit report at least once a year to correct errors and detect unauthorized activity. Rather than getting three reports at once, we advise people to obtain one credit report every four months from one of the three credit reporting companies on a rotating basis. By requesting the reports separately, you can monitor your credit more frequently throughout the year.

We’ve always recommended doing it for yourself. Now do it for your kids too.

Non-Compete Decision Favors Employers

On July 13, the Wisconsin Court of Appeals gave employers another victory in the realm of non-compete agreements. Just one year ago, the Wisconsin Supreme Court interpreted Wisconsin’s restrictive covenant statute in a manner favorable to employers. The court of appeals has followed suit with a decision that Wisconsin’s non-compete statute does not apply to restrictive covenants contained in stock option agreements that are not inextricably tied to the employment relationship. That means the restrictive covenants contained in these agreements are subject to the common law’s rule of reason, rather than the stricter non-compete statute.

Keep in mind that this decision may not be the final word on this matter. It can be appealed to the Wisconsin Supreme Court. If the Supreme Court agrees to review the matter, the decision could be overturned or changed.

What does this mean to employers?
Employers who have legitimate protectable interests should continue to use restrictive covenant agreements that conform to the requirements of Wisconsin’s non-compete statute, preferably from the start of the employment relationship. Employers who offer stock option agreements with restrictive covenants post-employment should also review these agreements to maximize the potential benefits of this decision.

Employers should take note of five key issues raised by the Court of Appeals decision:
1.    The company did not offer the employee the opportunity to purchase stock in its parent company with the intention of forcing him to accept the agreement or face termination. The fact that he could have refused the offer without losing his job removed any bargaining advantage the company would otherwise have. For this reason, courts will likely continue to subject agreements that require acceptance of restrictive covenants as a condition of employment to the requirements of Wisconsin’s non-compete statute.

2.    The court may have been more willing to enforce the stock option agreement because of this individual’s status as a key employee. Although it is possible to offer stock option agreements containing restrictive covenants to all employees, employers should tailor the restrictive covenants so that they are not overly burdensome for lower-level employees.

3.    The court also focused on the fact that the stock option agreement did not restrict the employee’s ability to work with the company’s competitors, but it did not rule out the possibility of incorporating such a restriction into a similar agreement. Before including such a restriction into a post-employment stock option agreement, employers should carefully weigh the risks that a later court might apply, complying with requirements of Wisconsin’s non-compete statute.

4.    The court of appeals did not address the fact that the non-disclosure provision had no time limitation. Restrictive covenant agreements, at least those subject to Wisconsin’s non-compete statute, must contain reasonable time limitations. Despite the court’s willingness to uphold this particular provision, it is still appropriate to include a reasonable time limitation even if they are part of a stock option agreement. Employers should consult with an attorney to determine the appropriate time limitations for any particular situation.

5.    Finally, employers should also not assume they can simply offer an employee one share of company stock to avoid the strict requirements of the non-compete statute. Restrictive covenants are always analyzed under the totality of the circumstances standard and must be supported by adequate consideration. Consequently, employers should carefully consider the circumstances under which they offer restrictive covenants to each employee and the adequacy of the consideration for accepting the restrictions.

“Honest Services” Fraud Defined

Recent rulings by the Supreme Court have significantly narrowed the scope of criminal liability for corporate officers and employees under the “honest services” law of the federal wire and mail fraud statutes.  Federal law makes it a felony to “deprive another of the intangible right of honest services,” a crime known as honest services fraud.

The Supreme Court held that individuals can only be convicted of honest services fraud if they have committed bribery or received kickbacks. Prior to the ruling, prosecutors had used the honest services statute to convict corporate executives and other employees for a broad range of activity, including non-disclosure of conflicts of interest. This ruling effectively put the brakes on prosecutors’ more ambitious theories of criminal liability.

Limiting honest services fraud to bribes and kickbacks likely means that prosecutors can bring charges only when an officer or employee has taken money, or other types of gifts, from a third party. Absent evidence of bribery or kickbacks, failure to disclose conflicts of interest will no longer be grounds for prosecution.

This raises some questions. Will prosecutors be able to fit self-dealing and conflict-of-interest cases into the bribery/kickback framework? Also, to secure a conviction for honest services fraud, must prosecutors show that corporate workers held a fiduciary position? It is possible that prosecutors may be able to pursue self-dealing and other breach of fiduciary duty cases by framing them as bribery or kickback schemes.

It is possible that, sometime in the future, Congress may pass laws that expand the definition of corporate “crimes.” In its ruling, the Supreme Court expressly invited Congress to pass clearer laws if it intends to permit the prosecution of self-dealing by corporate officers and employees.


Identity Theft Easier Than Ever

With the explosion in social networking and business conducted online, it’s easier than ever to steal someone’s identity. To fight that, prosecutors are taking a more aggressive approach in how they use Wisconsin’s identity theft laws.

In a recent article in the Wisconsin Law Journal, Milwaukee County District Attorney John T. Chisholm was quoted as saying, “I think the reason behind that is because the implications of identity theft in the Internet age are so much greater… I’ve known some prosecutors who have been victimized themselves and it can take years to restore credit.”

Defense attorneys argue that in some instances, identity theft laws are too broadly applied in place of lesser theft charges. For example, the statute states that unauthorized use of an individual’s personal identifying information or documents is a Class H felony punishable by up to a $10,000 fine, six years in jail, or both.

Prior to the rise in identity theft awareness, a case where someone takes a credit card and charges $100 at a store would usually result in a misdemeanor theft charge where the offender would pay restitution and a fine. Now the same crime may result in a felony charge.

According to the article, the law gives prosecutors added leverage, and the expanded use of identity theft laws can include things like signing someone else’s name on a check, which many people don’t realize is form of identity theft.  Some less serious crimes are now charged as identity theft that probably would not have been before.

The statute is broad, agrees Dane County District Attorney Brian Blanchard, but isolated instances, such as giving a false name or birth date to police, probably wouldn’t be charged as a felony.

Prosecutors are likely to evaluate intent by an offender and damage to a victim, monetary or otherwise, when determining whether a crime warrants felony charges. However, there could be more opportunities to apply the identity theft statute given the rise in people sharing information online.

“If someone has done an Internet search and picked a victim out, to me that is felonious,” stated Blanchard. Unique situations are also popping up, such as a case recently referred to Blanchard’s office which involved a man from Michigan who stole the face and body of a Wisconsin man to use on a singles website.

Fraud investigators say people don’t always realize what types of information can put them at risk of identity theft, especially online. A common security question for online accounts is asking for the account holder’s mother’s maiden name. If that person has their mother as a friend on Facebook, and she’s using her maiden name in her username, it can be pretty easy to put two and two together.

The ease of stealing somebody’s identity means people must be more vigilant nowadays.