Cantor Floman Blog

The background. Section 46b-37 (b) of the Connecticut General Statutes makes each spouse liable for certain expenses incurred by the other. One sub-section of the statute expressly includes “hospital expenses”. Another sub-section of the statute expressly includes “an article purchased by either which has in fact gone to the support of the family or for the joint benefit of both.”  What does this mean if one spouse is in a nursing home? Is the other spouse responsible for the cost of care because of the Connecticut statute?

The case. Carmen Coratolo was admitted to Wilton Meadows Rehabilitation and Health Care on August 14, 2006 for long term care services. The cost of his care was covered by Medicaid beginning on March 8, 2007 but until then there was no insurance coverage or other source of payment for his care. The cost of his care between August 14,2006 and March 8, 2007 was $60,795.32.

Wilton Meadows sued Sally Coratolo, Mr. Coratolo’s wife, pursuant to Section 46b-37 (b) (4) of the Connecticut General Statutes. It claimed that Mrs. Coratolo was responsible for the cost of her husband’s care as ”an article purchased by either which has in fact gone to the support of the family or for the joint benefit of both.”

The Connecticut Supreme Court, in an opinion reported on February 1, 2011 and found at 299 Conn. 819 (see link) concluded that Section 46b-37 (b) (4) could not serve as a basis for imposing liability on Mrs. Coratolo. Noting that the statute is contrary to the common law, and, therefore, must be strictly construed, the Supreme Court first said the plain meaning of the word “article” refers to a “tangible item and excludes the plaintiff’s care and services” (p.827).

The Court went further, however, and examined whether the word “article” in the statute could be interpreted to include “food, medicine or many other items that are associated with nursing home care” (p.827). Here, too, the Court concluded that the statute does not permit such an interpretation. In reaching its conclusion the Court was influenced by the Connecticut Patients’ Bill of Rights found at Section 19a-550 Conn. Gen. Stats. (see link). In part, the Patients’ Bill of Rights expressly prohibits a nursing home from requiring a third person to guarantee the cost of a resident’s care in a nursing home. The Court also was influenced by the fact that the spousal liability statute had been amended on several occasions but without adding “nursing home expenses”.

It is important to note that the claim of Wilton Meadows was based on the part of the statute that holds a spouse liable for “an article purchased by either which has in fact gone to the support of the family or for the joint benefit of both.”  Although Wilton Meadows later asserted that spousal liability should attach because a nursing home provides the same type of care as a hospital, it did not make that assertion in a timely manner. For that reason, the Court said “We therefore do not address the specific issue of whether ‘hospital expenses’ include nursing home expenses.” (p.824)

The future. Nursing homes continue to look for all sources of potential payment for the cost of care. The Wilton Meadows case specifically declined to address whether “nursing home expenses” are included as part of “hospital expenses” because that issue was not raised in a timely manner. Therefore, that prong of the statute remains open as a potential source of authority for a nursing home to attempt to impose liability on the non-resident spouse. One also assumes that the Connecticut Association of Healthcare Facilities will lobby mightily to amend the statute to expressly include nursing home expenses.

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A. Overview.  The stand by credit shelter trust is an estate planning tool that allows for the maximum use of the exemption equivalent amount ($1,000,000.00 in 2011 and succeeding years) for each spouse, thereby potentially doubling the amount that can pass to children (or other non spousal beneficiaries), federal estate tax free.

B. Example without a credit shelter trust.  Assume husband and wife, together, have $2,000,000.00 in assets, with $1,000,000.00 owned separately by each. Assume husband dies first and his Will provides that his estate passes to his wife. Assume wife dies shortly after husband with a Will that distributes her estate (now $2,000,000.00) to the children. Wife’s net taxable estate above $1,000,000.00 is subject to the federal estate tax at rates that begin at approximately 37%.

C. Example with a credit shelter trust.  Assume the same $2,000,000.00 of total assets. This time, when husband dies, his separate $1,000,000.00 of assets do not pass outright to his wife; instead, she elects to have that amount pass to a credit shelter trust for her benefit. When she dies, her separate estate of $1,000,000.00 passes estate tax free to the children. In addition to that, the $1,000,000.00 in the credit shelter trust also passes estate tax free to the children. If the $1,000,000.00 in the credit shelter trust has grown over the years to $2,000,000.00, the entire $2,000,000.00 passes estate tax free to the children.

D. How does the credit shelter trust work?  The surviving spouse is the sole beneficiary or the primary beneficiary. Income and principal can be distributed to the spouse during her/his lifetime. An independent trustee, however, must control the decision about discretionary distributions of income or principal to the surviving spouse. It is because the independent trustee is in charge of the discretionary distributions of income or principal that the assets in the trust are not considered “owned” by the surviving spouse at her/his death. The independent trustee can be a family member. The surviving spouse can have a limited power to remove and replace the trustee if dissatisfied with the trustee’s performance.

E. Why is it stand by? Since there may be no need for a credit shelter trust when one spouse dies, the trust is a stand by trust. That means the surviving spouse decides whether to activate the trust by funding it after a spouse’s death, but the surviving spouse need not make that decision until after a spouse has died. For that reason, the decision about whether to activate the trust will be based upon the financial circumstances and state of the law that exist at that time, not at the time the Wills are signed. This creates a significant degree of flexibility.

It is always important to create as much flexibility as possible in an estate plan. Probably, no one would opt for a credit shelter trust were it not for the tax reason that motivates the choice. The federal estate tax is a hot political issue. There are proposals to increase the exemption equivalent amount above $1,000,000.00, and there also are proposals to eliminate the federal estate tax entirely.

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Dear Friends:

As many of you may be aware, the federal estate tax is inapplicable to the estate of anyone who dies in 2010. Although this seems like good news for many families, there are two significant problems created by the same law. The first problem is that there is no step up in basis for property acquired from a decedent in 2010. The second problem is that the “exemption equivalent” for the estate of anyone who dies in 2011 or later is only $1,000.000. We will address each of these problems separately.

A. No step up in basis.

1. The Problem. The best way to understand the problem is to use an example. Mom died in 2010 owning her home. Her Will passes her home to you, her only child. Mom purchased the home many years ago for $50,000.00. The legal term that describes what she paid for the property is “basis”. The home was worth $300,000.00 when mom died. If you sell the home for $300,000.00 you will have a capital gain of $250,000.00 which must be reported on your income tax return ($300,000.00-$50,000.00). If mom had died in any year other than 2010, her “basis” in the home would have been stepped up to its date of death value, $300,000.00. For that reason, there would have been no gain because you would have sold an asset valued at $300,000.00 for that exact price, $300,000.00.

2. What to do about it.  A not widely known provision of the law allows someone who acquires property from a decedent in 2010 to file a special tax return which elects to take a step up in basis for property acquired from a decedent. By filing this return you can elect to raise mom’s basis in the home to $300,000.00. This will not happen automatically. The return is called a Large Transfer at Death Return. The maximum amount of basis that can be stepped up is $1,300,000.00; however, additional amounts can be stepped up for property passing to a spouse. So, if you acquired property from a decedent who died in 2010 we recommend that you contact your attorney and/or tax advisor immediately so as not to lose this potentially important benefit.

B. Exemption equivalent of $1,000,000.00 in 2011 and subsequent years.

1. The problem. Beginning in 2011 the federal estate tax returns, and it does so with an “exemption equivalent” of only $1,000,000.00 for property passing to anyone other than a spouse who is a United States citizen. By comparison, the “exemption equivalent” in 2009 had been $3,500,000. Although $1,000,000.00 may sound like a lot of money, the gross taxable estate for federal estate tax purposes includes life insurance proceeds, retirement accounts, your home, and anything else you may own that has value. If you inventory your assets, you may be surprised to find that they equal or exceed $1,000,000.00 in value.

2. What to do about it if you have a spouse. If you have a spouse, a credit shelter trust as part of your estate plan will allow you to double the amount that passes estate tax free to your children or other non-spouse beneficiaries. We recommend that you contact your attorney to find out more about the use of a credit shelter trust. If you look at the attachment to this letter, you will find additional information about the credit shelter trust.

3. What to do about it if you don’t have a spouse.  Gifts to beneficiaries of up to $13,000.00 per year per recipient have no gift or estate tax consequences. More sophisticated gifting techniques involving trusts may be appropriate in particular circumstances. If your assets exceed $1,000,000.00, we recommend that you speak with your attorney and/or financial advisor about appropriate strategies.

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Real estate transactions: Is your home part of a Planned Unit Development?  

A Planned Unit Development often includes a blend of residential, commercial and retail units, together with open space set aside for recreational purposes. Purchasing a home in such a community has advantages and disadvantages.

• Because the aesthetics of the community have been defined, in advance, you know what you are buying into, and that it will not change.
• On the other hand, the rules and regulations of the PUD may restrict your ability to engage in activities you otherwise would expect to be able to do at or from your home. For example, some Planned Unit Developments prohibit you from engaging in business from your home.    

If you are buying a home that is part of a Planned Unit Development, it is critically important that you review all of the restrictions on use, in advance. We can help you with this.

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Personal Injury Cases: What about my car?

If you have been involved in an automobile accident, here are some questions you will want answered almost immediately.  Who will pay to repair my car? What if it can’t be repaired? How will I get around for the next few weeks?

• If you have been involved in an automobile accident that is not your fault, the other driver’s insurance company is obligated to pay to tow your car to a garage, have it repaired, and provide you with a rental for a reasonable period of time.
• If the cost of repairing your car exceeds its market value, you are entitled to receive the market value.
• If the at-fault driver had no insurance, and if you have collision coverage and rental coverage, your own insurance company is the source of payment.  

If you have been involved in an automobile accident, contact us immediately. We are experienced at helping clients with the myriad of issues that arise when you are trying to have your car repaired and arrange for rental coverage while it is being repaired.

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Here’s the story of what happened that led to the legal dispute.

Mr. Blackwell (Buyer) and Mr. Mahmood (Seller) entered into a contract for the purchase and sale of real estate in Windsor. The sales price was $1,800,000.00. Mr. Blackwell gave a deposit of $40,000.00. Mr. Blackwell’s obligations under the contract were contingent on his ability to obtain a mortgage in the amount of $1,440,000.00. If Mr. Blackwell was unable to obtain a mortgage commitment in that amount within 30 days, he had an option to cancel the contract and get back his deposit. A provision such as this is typical in Connecticut real estate contracts.

To everyone’s surprise, the appraisal ordered by the Bank to which Mr. Blackwell applied for a mortgage set a value for the real estate of $1,220,000.00, considerably less than the contract price. In those circumstances, of course, the Bank would not approve a mortgage for $1,440,000.00.

Mr. Blackwell and Mr. Mahmood wanted to keep the deal together, if possible. Several written extensions and one oral extension of the mortgage commitment date were granted. Although the original contract was dated as of September 20, at the end of December the Buyer and Seller still were discussing ways of making the deal work. Mr. Mahmood was leaving for a trip out of the country and he and Mr. Blackwell agreed they would continue discussions at the end of January when Mr. Mahmood returned from his trip.

It was not until after Mr. Mahmood returned from his trip that the Buyer and Seller finally concluded the deal could not work. In early February, Mr. Blackwell formally notified Mr. Mahmood of this, in writing, and requested the return of his deposit. Mr. Mahmood refused to return the deposit. The reason he gave was that the written notice was sent later than 30 days after Mr. Blackwell had learned of his inability to obtain a mortgage. Mr. Mahmood maintained, therefore, that the deposit was forfeited as liquidated damages, all as specified in the contract.

Here’s what Mr. Blackwell did next.

Since Mr. Mahmood refused to return his deposit, Mr. Blackwell brought suit to recover his deposit. His Complaint alleged that the course of conduct between them estopped (legally prevented) Mr. Mahmood form insisting on strict compliance with the contract. After all, Mr. Blackwell said, we were continuing to talk about how to keep the deal together and I was waiting for Mr. Mahmood to return from his overseas trip, and he had encouraged me to wait. But, Mr. Blackwell did even more than that. In addition to that, however, Mr. Blackwell alleged that Mr. Mahmood’s failure to return the deposit constituted statutory theft pursuant to Section 52-564 of the Connecticut General Statutes. This significantly upped the ante because proof of statutory theft allows the trial court to award triple damages. Finally, Mr. Blackwell alleged that Mr. Mahmood’s failure to return the deposit violated the Connecticut Unfair Trade Practices Act, commonly referred to by the acronym CUTPA. This also significantly upped the ante because a violation of CUTPA allows the trial court to award the plaintiff attorney’s fees and punitive damages as well as monetary damages.

Here’s what happened at the trial.

The trial was to a single Judge, not to a jury. The Judge found in favor of Mr. Blackwell on all counts of his Complaint and awarded him a total amount of $136,930.41. That’s quite an award. Imagine this all could have been avoided if Mr. Mahmood simply had returned the deposit when requested.

Here’s what the Appellate Court said.

Not surprisingly, Mr. Mahmood was unhappy with the result at trial. He asked Connecticut’s Appellate Court to review the decision of the trial Judge. The Appellate Court did so and the Court’s decision was released on April 27, 2010. It can be found at 120 Conn. App. 690. The Court unanimously affirmed the trial Judge’s decision. In doing so, the Appellate Court followed a well established legal doctrine which says the decision of a trial court is to be set aside on appeal only if the decision “is clearly erroneous” either because it is legally incorrect or not supported by the evidence. The job of an Appellate Court is not to retry the case; rather, the job of the Appellate Court is to determine if the trial Judge’s decision is based on evidence presented at trial and is legally correct. Applying that standard, the decision of the trial judge was affirmed.

Analysis.

The result for Mr. Mahmood appears particularly harsh. As often is the case in legal disputes, the party who tells the more credible story usually wins. A corollary of that statement is that a party who appears not credible often pays a price. In this case the trial Judge said “Mahmood was not credible during this trial and in various documents that are either part of the file or are exhibits in this case.” It appears that this type of finding played a significant role in the trial Judge’s conclusion that Mr. Mahmood was liable for triple damages, attorney’s fees, and punitive damages, all in addition to the basic monetary damages of $40,000.00 (the amount of the deposit). Once he lost at trial, Mr. Mahmood faced an uphill battle at the Appellate Court. Since the trial Judge’s decision was based on the evidence and legally correct, the Appellate Court, following well established precedent, had no choice but to affirm the decision.

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Seller/Owner financing.

When a business is sold, it increasingly is common for the Seller to take back what is referred to as “Seller/Owner financing”. This means that part of the purchase price for the business will not be paid in cash at the closing; rather, it will be paid by the Buyer to the Seller over time. In today’s economic climate it often is difficult for a potential Buyer to obtain the amount of Bank financing needed to permit the purchase of the business for the contract price. In those circumstances, there is a strong incentive for the Seller to finance the short fall. If this occurs, it is critically important that the Purchase and Sale Agreement spell out the terms of the financing, the security for the financing, and the remedies in the event of a default.  

Whether you are selling a business or buying a business, we have the experience needed to assure that your interests are protected by the terms of the Purchase and Sale Agreement and at the closing.

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What is the current status of the Connecticut and federal estate tax?

The 2009 session of the Connecticut Legislature increased the Connecticut estate tax exemption for property passing to non-spouse beneficiaries from $2,000,000.00 to $3,500,000.00, effective as of January 1, 2010. On the federal level, there is no federal estate tax applicable to the estate of anyone dying in 2010, but in 2011 the federal exemption for property passing to non-spouse beneficiaries returns to $1,000,000.00. Everyone expects the federal law to be changed by Congress, but when and how is anyone’s guess. Both the Connecticut and federal estate tax have unlimited exemptions for property passing to a surviving citizen spouse.     

If you have questions regarding how the Connecticut or federal estate tax may apply to you, please contact us. 

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Can you complete the Medicaid application without professional help?

If a family member needs Medicaid (Title XIX) to pay for care in a nursing home or at home, a Medicaid application will be required to initiate the process. The Medicaid application is filed with the Department of Social Services (“DSS”) where it is reviewed by an intake worker. The Medicaid application process can be quite daunting. As an example, in most cases, the application requires the production of all of the applicant’s bank statements for the prior four years. A review of the bank statements by the intake worker often results in follow-up questions concerning specific transactions. The job of the intake worker is to scrutinize the applicant’s past transactions (potentially as far back as five years) and verify that nothing has occurred that affects eligibility. A family member may have difficulty assembling the required documents or knowing how to respond to inquiries about past transactions.

Please contact our office if you need help with a Medicaid application. We can help you get through the potential mine field of issues that may be raised by an intake worker.

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Change in federal law will affect residential real estate closing process.

For many years, federal law has required the Buyer and Seller of residential real estate to sign what is referred to as a “HUD-1” closing statement. The purpose of the HUD-1 is to disclose all costs associated with the transaction and all adjustments between the Buyer and Seller. It has not been uncommon for the figures on the HUD-1 to change, often at the last minute. The change in federal law requires a mortgage lender to give the Buyer/Borrower a Good Faith Estimate of all closing costs at least 10 days prior to the closing. In most cases, the closing costs disclosed on the Good Faith Estimate cannot be changed at the closing. This change in federal law puts a premium on accurately determining all closing costs much earlier in the process.

Whether you are a Buyer or a Seller, we will explain the HUD-1 and Good Faith Estimate and assure that your interests are protected by the terms of the Purchase and Sale Agreement and at the closing.  

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