Real Estate:
THE SELLER'S RESPONSIBILITIES IN THE NEW LEAD PAINT DISCLOSURE REGULATIONS

The Environmental Protection Agency ("EPA") and the Department of Housing and Urban Development ("HUD") have worked together to issue new regulations affecting sales and leasing of certain housing built before 1978. Simply stated, for housing built before 1978, the seller or landlord must disclose and certify the existence of any known lead paint or lead paint hazard. Note that these regulations also impose certain requirements on agents, such as realtors, and possibly attorneys, for this disclosure. The law is effective September 6, 1996 for dwellings of four or more units, and December 6, 1996 for properties with one to four dwelling units.

The new regulations require sellers and landlords (and their agents) to disclose any known lead-based paint defects in the residential dwelling. Purchasers or tenants do not have to rely upon the seller/landlord's disclosure and can seek their own inspection for lead paint. Although not statutory, real estate practitioners seem to agree that the cost of such inspections should be borne by the purchaser. If lead paint is discovered in the inspection, the seller would typically pay for curing the defect if the transaction is completed. The cost may otherwise be apportioned by the agreement. The statute specifically requires that the buyer be given at least ten days to inspect the premises for lead-paint hazards before being bound by the contract. However, the parties may shorten or waive the ten day inspection provision or use a provision that makes the contract contingent upon the results of the inspection.

Be aware that not all housing is subject to the Act. Exclusions include: (1) housing for the elderly; (2) housing for the disabled; (3) zero bedroom dwellings, such as dormitory rooms or efficiency apartments; (4) properties being acquired in a foreclosure; (5) leases where a certified inspector proves the property is lead free; (6) short term leases (for less than 100 days); and (7) lease renewals where the lessor has previously disclosed all known information.

Noncompliance with the new regulations may result in serious penalties. The EPA and HUD can impose fines of up to $10,000.00 for a violation and prison terms of up to one year. A civil cause of action can result in trebled damages along with costs, expert witness fees, and attorneys' fees. Therefore, the new regulations must not be taken lightly.

Taxation:
IRREVOCABLE LIFE INSURANCE TRUSTS

While people have different opinions on the value of whole life insurance products as an investment, the use of an irrevocable life insurance trust as an estate planning tool can be invaluable for the larger estate.

The IRS includes in the taxable estate under the "augmented estate" definition life insurance proceeds over which the decedent had certain incidents of ownership during his lifetime, including the right to change the beneficiary of the policy. The use of a properly drafted irrevocable life insurance trust can avoid estate tax on the life insurance proceeds.

The irrevocable life insurance trust is an instrument in which the grantor names a trustee to own a life insurance policy or policies typically on the grantor's life. The trust is also the beneficiary under the policy. The grantor gifts the premium payments to the trust and, through the Trust Agreement, instructs the trustee to pay out the death benefit to designated persons at designated times. The irrevocable life insurance trust can provide for payment to the surviving spouse of all income plus such principal as is necessary for support, health, education and maintenance, and up to 5% of the principal amount or $5,000 per year, whichever is greater. If the life insurance to be purchased is a second-to- die policy, the trust can benefit others directly or can be used by the beneficiaries of the grantor's estate to pay estate taxes due on the rest of the estate.

Since the grantor is giving the premiums to an irrevocable trust, there are some gift tax consequences to be considered. The life insurance trust must provide that beneficiaries have a window of time during which they may withdraw their share of the gift to the trust. This is commonly known as a "Crummey power" and allows the grantor to use the $10,000.00 per donee annual gift tax exclusion.

It is better to have the trust set up first and then have the trustee purchase the policy, as opposed to transferring an existing policy to the trust. There is a three-year rule which may include the death benefit of the policy in the grantor's taxable estate if he dies within three years of the transfer to the trust, as well as other tax concerns when an existing policy is transferred to the trust.

The irrevocable life insurance trust is useful for maximizing the value of the estate to the heirs or beneficiaries. First, premium payments are a form of gifting to deplete the estate on which estate tax may be due. Second, the death benefit can be used to pay any estate tax which may be due on the rest of the estate. And of course, the proceeds are excluded from the taxable estate.

Estate Planning:
MAKING CRIMINALS OUT OF MEDICAID APPLICANTS

The Health Insurance Portability and Accountability Act of 1996, signed into law last summer, primarily affected the availability, accessibility, and portability of health insurance coverage by employers. However, another brief section of the Act will have a serious impact on estate planning lawyers and Medicaid applicants.

Section 217 of the Act adds possible criminal sanctions on any person who:

"...knowingly and willfully disposes of assets (including by any transfer in trust) in order for an individual to become eligible for Medical assistance under an estate plan under Title XIX, if disposing of such assets results in the imposition of a period of ineligibility for such assistance under [the law]..."

Surprisingly, the legislation, by placing the provision in existing law, apparently imposes a penalty of up to five years in prison and a $25,000.00 fine or both. Note that this provision was passed without hearings or debate. It was not noted in the press coverage of the new bill and it escaped public discussion. The only issue that lawyers have agreed upon with this change in the law is ambiguity in defining the violation.

The phrase, "the imposition of a period of ineligibility" has caused considerable confusion. Many transfers do not result in a period of ineligibility. Certainly, transfers made exclusively for a purpose other than to qualify for Medicaid are not a violation of the Act.

For example, it seems unlikely that the legislative intent is to criminalize all transfers of assets for the purpose of becoming eligible for Medicaid. Under this reasoning, the criminal act would occur when the transfer occurs if the transfer is accompanied by any intent to divest assets for eligibility purposes.

In the alternative, if the transfer was made within three years prior to applying (within five years for transferring assets into a trust), the assumption would be that a criminal act had occurred. The least practical interpretation of the law is that a transfer made during the period of eligibility would give rise to a criminal act. The period of eligibility would be, for example, the time it would have taken to deplete the applicant's assets if they were paid to a nursing home or a long-term health care facility. For example, if the assets that were transferred would have paid for 18 months of care, the ineligibility period would have been 18 months, and any transfers made within 18 months prior to applying would give rise to a criminal act.

Be advised that there is little or nothing written on this very vague, new law. There are no cases, administrative rules, or official policy clarifications at this time. A review of the legislative history of this provision does not clarify the matter. We anticipate that Congress will correct the flaws in the legislation with a technical amendment in the near future.

Rights Of Married Persons:
EXPENSES OF FAMILY

Your spouse's purchase or incurring of a liability in his/her name can, under statute, also become your liability. Under the Illinois Rights of Married Persons Act, expenses of the family and of the education of children shall be chargeable upon the property of both husband and wife, or of either of them, in favor of creditors if the expenditure is for a family expense.

The family expense is defined as including what is necessary for the family under the conditions in which they live. Therefore, the expense must be one which contributes to the welfare of the family and benefits or maintains its integrity. Hospital, medical and funeral expenses have been held to be family expenses. The rental value of an apartment occupied by a husband and wife and members of their family constitutes family expense even if only one spouse is a party to the lease.

However, a spouse's liability would only accrue while the family was utilizing that property. Therefore, should the family leave the leased premises prior to the expiration of the lease, the spouse who signed the lease would be liable for any breach of the lease and the non-signatory spouse would only be liable for use and occupancy during the family's stay.

Other family expense items have been found to include wages of a domestic servant, vehicles purchased by one spouse, wearing apparel of one spouse, as well as home furnishings such as carpeting.

However, not all expenses of one spouse are deemed to be family expenses and thus attributable to the other spouse. Examples of this could be musical instruments, which would have to be viewed as to the purpose of the purchase, jewelry and other luxury items would have to be viewed on a case-by-case basis.

Similarly, attorneys' fees, whether incurred for just one spouse or for the family, may not be deemed family expenses.

The Illinois statute, in assessing liability upon a non-contractual spouse of a vendor, has created greater liability for that spouse based upon public policy of balancing vendors' rights with spouses' rights in the area of expenses of the family. Such expenses of the family has been held by courts to be broader than just mere necessities of life. Therefore a spouse should recognize that although he/she did not enter into a contract with a particular vendor, he/she still may be liable for their spouse's contractual obligations.

This newsletter is a publication of Lavelle Legal Services, LTD. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.