Real Estate:
KEEP TRACK OF HOME IMPROVEMENTS

Clients vary with respect to their diligence for saving receipts for home improvements and repairs. For federal tax purposes, receipts for home improvements, repairs and remodeling should be kept for as long as you are a homeowner. For tax purposes, the critical issue is whether these projects are "improvements" or "repairs".

If they are improvements, the taxpayer can include the cost of such improvements in the cost basis of the home and thus reduce his or her capital gain tax liability if the taxpayer ever moves to a less expensive home or sells the home without purchasing a qualified residence later. If the receipts are merely for "repairs", such receipts have no tax impact whatsoever unless they are within 90 days of the sale of your old home.

As a refresher course, a taxpayer will generally be able to roll over the gain in his or her house so long as he purchases his next house for an equal amount, or greater than the value of the home sold. That way, any capital gain (i.e., the sale price less the purchase price and the cost of improvements) will be "rolled over" into the new house. The taxpayer is not limited to the amount of "roll overs" the taxpayer can have in a lifetime. Thus, if the taxpayers sell their home and buy a new house every year, so long as the cost of the new house is equal to, or of greater cost than the tax basis and unrecognized gains on the previous home, with few exceptions, the capital gain of each home will be rolled over into the next home. Remember, taxpayers over the age of 55 also have the one-time exclusion of $125,000 of capital gain.

Since the capital gain is reduced by an amount equal to the cost of true "improvements" on the property, it is important that the taxpayer retains all receipts and documents substantiating the cost of the improvement.

By definition, improvements "add to the value of your home, prolong its useful life or adapt it to new uses". For example, adding another bathroom, putting up a fence, replacing a roof or installing new wiring would be an "improvement". Repairs, however, are costs that maintain your home in good condition. Examples of repair are fixing your gutters, repairing leaks and replacing broken windows, etc.

Quite frankly, some "repair" or "improvement" issues are not quite settled. For example, wallpapering could be deemed as a home improvement (first time only) by one party and nothing more than a repair (subsequent times) by another.

It is important to note that through a lifetime of successive sales and purchases of real property, you could conceivably sell a home later in life and not qualify for the one-time exclusion, and be faced with paying capital gain on your home. In that case, you would need the improvement substantiation from conceivably your first home since the capital gain from your first home would, in fact, be a basis for the rollover and capital gain in your current home. As a consequence, this is a prime example of when tax records need to be kept for longer than the traditional three or six year period.

As a result, it is important to keep records so that in the year of the sale of a home, you can provide those records to your tax preparer when preparing the Form 2119, Sale of Home, that attaches to your Form 1040. This becomes a permanent record of your cost basis in your home.

Estate Planning:
MIDDLE INCOME ESTATE PLANNING - UNDERSTANDING MEDICAID LAWS

Many individuals and married couples want to know about the Medicaid laws and how individuals can qualify for Medicaid assistance if they need such assistance for long-term health care facility needs.

For a non-married or widowed individual, with the exception of modest exemptions ¹, the state would require such an individual to deplete his or her assets before Medicaid would begin paying for his or her health care facility. As a result, clients feel they can simply transfer their assets out of their name (by "gifting" their assets to their adult children) to impoverish themselves in order to qualify for Medicaid.

Self-imposed impoverishment does not work because Medicaid has the ability to investigate transfers, for Medicaid purposes, for 36 months prior to the application for Medicaid assistance. This 36-month "look back" period on all transfers of assets allows Medicaid to avoid any self-imposed impoverishment. When a person applies for Medicaid, the Illinois Department of Public Aid ("Department") will investigate all transfers of assets made during the 36 months prior to the application. Any asset transfer of $500 or more must be explained to the Department. If the Department finds that the assets (cash or property) have been depleted or transferred for less than the fair market value to create eligibility for Medicaid, the Department will impose a penalty.

The length of the penalty is calculated by taking the fair market value of the asset and calculating for how many months of long-term care services the asset or proceeds from that asset would have paid had it not been depleted or given away.

Also, an individual could plan to impoverish himself by transferring his property to an irrevocable trust. The look back period for irrevocable trusts is extended to 60 months. Also, transfers to revocable trusts ("living trusts") do not count as transfers at all, so that the property is considered to be still owned by the individual.

With respect to married couples where one individual needs long-term care, the state laws extend the exemption rules for the non-incapacitated spouse ("community spouse"). For example, the community spouse may have assets of up to $74,820 and a monthly income of $1,870. The Department will not count exempt assets in totaling the above figures. Exempt assets include the homestead (which is defined as the home where the community spouse actually lives), one automobile, all household furniture and furnishings, and personal property such as jewelry and clothing.

In conclusion, considering the 36-month and 60-month look back periods. individuals and married couples alike must plan well in advance to position themselves properly to take advantage of the Medicaid laws in Illinois.

A lot of attention has been directed to Warren Burger's last will that he prepared on his own. Warren Burger, as you may recall, was the Chief Justice of the United States Supreme Court for many years up until 1986. He died last June and left a one-page will essentially distributing one-third of his estate to his daughter and two-thirds to his son.

The document failed to provide authority for the executors to sell his real estate, and failed to waive bond or surety for his own son to act as a executor. Those acts alone added additional fees and court costs to the probating of the estate.

The will itself has been universally declared as "woefully inadequate" and draws attention to the necessity of adequate estate planning.

Further, because Justice Burger's last will does not have an attestation clause attached to it, it is not self-proving and, as a result, will add additional costs to the probating of the estate.

The most damaging evidence of the will's inadequacy was the total failure of estate planning between Justice Burger and his wife, who died in 1994. Because virtually no tax planning was done, Burger's $1.8 million estate will result in federal and state estate taxes of over $450,000. That tax bill could have been avoided in large part with fundamental tax planning when Justice Burger's wife was still alive. Possibly, through trusts and gifts, the tax liability could have been eliminated in its entirety.

The Burger estate is a grim reminder that basic estate planning can save a great deal of money in the long run and, more importantly, that leaving a poorly drafted will and a non-existent estate plan is a terrible legacy, as well as a costly mistake to make.

Debtor/Creditor:
THE FAIR DEBT COLLECTION PRACTICES ACT CAN PROTECT YOU!

If you owe money to a creditor and the creditor transfers the case to a bill collector, do not forget that the Fair Debt Collection Practices Act is the federal law that will protect you from the overreaching collection practices of unscrupulous debt collectors.

The Fair Debt Collection Practices Act prohibits any debt collector from discussing your case with anybody except you, the consumer, except to find out your location. If, at any time, the debt collector tells your neighbor or your employer that you owe money, the collector is in violation of the Fair Debt Collection Practices Act. A debt collector cannot communicate with any person more than once nor can they indicate on the envelopes of their collection letters that they are a collection agency looking to collect a debt.

If you are represented by an attorney, and the debt collector calls you either at home or at work, simply tell the debt collector that you are represented by an attorney, give your attorney's name and telephone number, and hang up the phone. Most important of all, keep a diary of the debt collector's activities. Make a note every time you receive a telephone call from the debt collector, when you receive a letter from the debt collector and every time a third party tells you that they have been contacted by the debt collector. In your diary you should include the name of the person who called you, for whom they work, what was said by that person, and what you or your neighbor disclosed to the debt collector. All of this information needs to be logged after every contact with a debt collector.

Finally, the debt collector needs to be put on notice that your place of employment is prohibited from accepting any collection calls. Put the debt collector on notice by sending him a letter certified mail, return receipt requested. Then, if any further communications come to your place of business, you will have found the debt collector in violation of the Fair Debt Collection Practices Act.

In the same fashion, you can cease all further communications by the debt collector by simply sending out a letter, certified mail, return receipt requested, stating that you are not going to make payment (if you so choose) and that you want the collection agency to cease all collection efforts. This letter, pursuant to the Fair Debt Collection Practices Act, will cease all further communications and the next step may or may not be a legal action on the debt.

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.