LEGISLATIVE UPDATE

Appeals Court Rejects Bankruptcy Trustee's Argument that Disclaimer by Beneficiary-Debtor is Avoidable Transfer

Last month, the U.S. Court of Appeals for the Ninth Circuit affirmed a Bankruptcy Appellate Panel's refusal to avoid a disclaimer under 11 U.S.C.A. § 548 where the debtor, as a beneficiary of decedent's revocable trust, disclaimed her interest in the trust property. (Gaughan v. Edward Dittlof Revocable Trust (In re Costas), 9th Cir., 555 F.3d 790, 2/6/09). The federal Bankruptcy Code's fraudulent transfers and obligations provision allows a trustee to "avoid any transfer …of an interest of the debtor in property…that was made or incurred on or within 2 years before the date of the filing of the petition" if the debtor made the transfer with the intent to defraud, or received less than adequate consideration for the transfer and was insolvent on the date that the transfer was made or became insolvent as a result of the transfer. Earlier the Bankruptcy Appellate Panel had determined that the debtor's disclaimer was not an avoidable transfer because a disclaimer that is properly executed under state law does not qualify as a transfer of an interest of the debtor in property for purposes of § 548.

In October 2001, Edward P. Dittlof created the Edward Dittlof Revocable Trust under Arizona law. According to the trust's provisions, upon Dittlof's death, trust property would be distributed to several of Dittlof's children, including Rachelle Costas, with any deceased child's share going to his or her children. At the time of Dittlof's death in February 2002, Costas' share of the trust was worth approximately $34,800. However, in November 2002, Costas executed a disclaimer under Arizona law to refuse her interest and relinquish her claim to the property. Less than a month later, Costas filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. The bankruptcy trustee, Maureen Gaughan, sought to avoid Costas' disclaimer of the trust property under 11 U.S.C. § 548 even though a previous decision by the Bankruptcy Appellate Panel in Wood v. Bright (In re Bright), (241 B.R. 664 (9th Cir. BAP 1999)) had rejected application of § 548 to a similar state law disclaimer. Gaughan argued that a U.S. Supreme Court's decision involving a tax lien and disclaimer under state law in Drye v. United States (528 U.S. 49 (1999)) applied, undermining the Bright ruling. After the Bankruptcy court found Drye distinguishable, Gaughan appealed but the Bankruptcy Appellate Panel also distinguished Drye and adhered to its prior decision in Bright. Subsequently, Gaughan appealed.

In its opinion, the Appeals Court noted that "[l]ike other states, Arizona allows beneficiaries to renounce their interests in trusts through use of a disclaimer ([former] Az. Rev. Stat. § 14-2801 [repealed when state adopted the Uniform Disclaimer Of Property Interests Act])...A properly executed disclaimer carries a significant advantage for an insolvent debtor: it shields the disclaimed interest from the disclaimant's creditors. Arizona achieved this protection through [former] § 14-2801(G) [repealed when state adopted the Uniform Disclaimer Of Property Interests Act], which provides that '[a] disclaimer relates back for all purposes to the date of death of the decedent.' This relation-back rule, a common feature in many states, is a legal fiction that retroactively eliminates any property interest that a disclaimant previously held in the disclaimed property." Further, the court noted that § 548 only applies to interests in "property" as defined by state law, and according to Arizona law Costas had no interest in the disclaimed property. In response to Gaughan's argument to apply the Drye ruling, the court found the Drye case distinguishable in several matters. First, in Drye the tax lien was already in place prior to the execution of the disclaimer so there is a timing difference. Second, the legal context is different since Drye was "first and foremost" a tax lien case. Lastly, the court stated that the tax lien rules of Drye do not translate directly into bankruptcy rules. As a result, the court refused to extend its logic to the bankruptcy context., and affirmed the Bankruptcy Appellate Panel's refusal to avoid Costas' disclaimer under 11 U.S.C.A. § 548.

Source:
Westlaw: Gaughan v. Edward Dittlof Revocable Trust (In re Costas), 555 F.3d 790 (C.A.9) 2/6/09, 2009 WL 279090; United States Court of Appeals for the Ninth Circuit: Gaughan v. Edward Dittlof Revocable Trust (In re Costas), 9th Cir., No. 06-16520, 2/6/09

AARP Publishes Eighth Edition of Across the States 2009: Profiles of Long-Term Care and Independent Living Report

This month, the AARP Public Policy Institute issued the eighth edition of its reference report on long term care trends that impact estate planning decisions (Houser, Ari N., Wendy Fox-Grage, Mary Jo Gibson. Across the States 2009: Profiles of Long-Term Care and Independent Living, AARP Public Policy Institute. March 2009.) The report presents comprehensive data on the state and national level and includes maps and graphs, as well as individual profiles for each state and the nation.

According to the report, growth in the population age 85 and older is dramatically increasing, with this segment expected to rise by 74 percent between 2007 and 2030. Since those in this age group have a much higher rate of disability and are more likely to be widowed, this group is most likely to need long-term care services. During this same time span, the Institute says that the population age 65 plus is expected to increase by 89 percent, which is "more than four times as fast as the population as a whole (+21%)." Due to the aging of the baby boomers over the next 10-15 years, most of this growth will be those age 65 to 74. As a result, the population age 85 and older will grow even faster starting in 2031, when the first baby boomers turn 85, with growth of those age 85 and older projected to increase by another 118 percent between 2030 and 2050.

Other key findings show that there is growing ethnic and racial diversity in the older population, with 19.3 percent of the population age 65 and older non-White or Hispanic. This diversity is expected to continue to increase with "enormous implications for meeting diverse long-term care preferences" according to the report. When the last baby boomers turn 65 in 2030, projections estimate 29 percent of the population age 65 and older will be people of color with the percentage increasing to 42 percent by 2050.

The report also noted that the service options for those in need are growing, but these options are costly. With private pay still the primarily source of payment, life savings of the older household can easily be depleted. According to the report, the average private pay rate for a private room in a nursing facility was $209 per day. In 2007, reimbursement for a Medicaid nursing facility averaged $158 per day, and, in 2006, Medicare reimbursement averaged $305 per day. Assisted living has become an important option for many older Americans in need of less intensive care, with the average private pay rate approximately $3,000 per month or almost half that of a nursing facility. However, significantly fewer assisted living residents receive Medicaid assistance. Community-based and home service costs can vary dramatically, but in 2008 the average private pay rate for adult day services was $59 per day and, for home health services, $39 per hour for Medicare-certified home health aides and $19 per hour for non-Medicare aides.

For these and other key findings and trends, see the AARP's full report Across the States 2009: Profiles of Long-Term Care and Independent Living (d19105_2008_ats.pdf), or order a copy of the report by calling the AARP Public Policy Institute at (202) 434-3890 or emailing jgasaway@aarp.org.

Source:
AARP.org: Houser, Ari N., Wendy Fox-Grage, Mary Jo Gibson. Across the States 2009: Profiles of Long-Term Care and Independent Living. AARP Public Policy Institute, AARP Policy and Research. March 2009.

Supplement to Actuarial Tables Under I.R.C. § 7520 Issued by IRS

Last month, the Internal Revenue Services issued Notice 2009-18 extending the actuarial tables prescribed under I.R.C. § 7520 for valuing annuities, terms certain, reversions, and remainders to accommodate interest rates below 2.2 percent. Section 7520 requires that these values be determined using tables prescribed by the Treasury Secretary and an interest rate equal to 120 percent of the mid-term Applicable Federal Rate in effect under I.R.C. § 1274(d)(1) for the month of valuation. For income, estate, or gift tax charitable contribution calculations, the taxpayer may elect to use the interest rate for either of the two months preceding the month of valuation.

Treasury Decision 8886 provides tables of factors for calculating these values at interest rates starting at 4.2 percent, while IRS Publications 1457, 1458, and 1459 provide tables of factors at interest rates from 2.2 percent to 22 percent. However, in February 120 percent of the mid-term Applicable Federal Rate fell to 2 percent, Since none of the published tables provided the necessary factors, Notice 2009-18 extends the existing tables for interest rates below 2.2 percent.

Source:
Westlaw: Update for Actuarial Tables Under Section 7520, Notice 2009-18, 2009 WL 324113; Internal Revenue Service: Update for Actuarial Tables Under Section 7520, Notice 2009-18, published February 12, 2009.

IRS Requests Public Comments on Final Regulation Affecting Estate Planning Practitioners

In continuing efforts under the Paperwork Reduction Act of 1995, the IRS is soliciting comments from the general public on existing final regulations PS-92-90 (T.D. 8395) providing special valuation rules for family members' gifts of common stock or partnership interests (Sections 25.2701-2, 25.2701-4, and 301.6501(c)-1). I.R.C. § 2701 allows various elections by family members who make gifts of common stock or partnership interests and retain senior interests in the same entity. This regulation provides guidance on how taxpayers make these elections, what information is required, and how the transfer is to be disclosed on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

No changes are being made to the regulation. However, comments are requested on whether the collection of information is necessary and has practical utility, the accuracy of the agency's estimate of the reporting burden on taxpayers, ways to enhance the quality, utility, and clarity of the information collected, ways to minimize the burden of the collection of information on respondents, and estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

Comments should be received by R. Joseph Durbala, Internal Revenue Service, Room 6129, 1111 Constitution Avenue, NW., Washington, DC 20224 by April 21, 2009.

Source:
Westlaw: Proposed Collection; Comment Request for Regulation Project, 74 FR 7957-01, 2009 WL 412444; Department of the Treasury, Internal Revenue Service, Proposed Collection; Comment Request for Regulation Project, 74 Federal Register 7957, No. 33, Notices - February 20, 2009.

Applicable Federal Rates for March 2009 (Rev. Rul. 2009-8)
TABLE 1
Applicable Federal Rates (AFR) for March 2009

Period for Compounding

TABLE 2
Adjusted AFR for March 2009 for purposes of I.R.C. § 1288
Period for Compounding

TABLE 3
Rates under I.R.C. § 382 for March 2009

TABLE 4
Appropriate Percentages under I.R.C. § 42(b)(2) for March 2009

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%.

TABLE 5
Rate under I.R.C. § 7520 for March 2009

Source:
Westlaw: Federal Rates; Adjusted Federal Rates; Adjusted Federal Long-term Rate and the Long-term Exempt Rate, Rev. Rul. 2009-8, 2009 WL 400024; Internal Revenue Service: Rev. Rul. 2009- 8, Index of Applicable Federal Rates (AFR) Rulings, published February 20, 2009.

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