Divorced Spouse Liable for Income Tax on Forgiveness of Credit Card Debt of EX

In the case of Jensen v. The Commissioner the US Tax Court recently ruled that Mr. Jensen was liable under section 61 (a) (12) of the Internal Revenue Code for income tax on some $4,000 worth of Credit Card Indebtedness forgiven by Citibank to his ex wife. As part of the settlement agreement the wife had acknowledged the debt as hers and had assumed and agreed to pay it. Nevertheless, upon forgiveness, because the credit card had been in Mr. Jensen's name, the bank reported it in his name to IRS on a form 1099 C. The tax court also found that he had not satisfied the burden of proof on establishing that the debt was not his and that the meaning of the acknowledgement and assumption language in the settlement agreement was "unclear". It is not clear if more detailed language in the settlement agreement would have been conclusive or if Mr. Jensen still would have needed to show documentation for the underlying charges to the account. Moreover, in Massachusetts, if the obligations were for necessaries, he may have been liable for the tax regardless. Language in the settlement agreement requiring indemnification for income tax liability on assumed indebtedness later forgiven might help, although if the ex spouse is in a financial situation calling out for forgiveness of indebtedness, it is hard to imagine that the promise would be of any value. It is also curious that the bank chose to forgive the indebtedness without even attempting to collect it from Mr. Jensen. It is no wonder that interest rates on these cards are skyrocketing.

Homestead For Revocable Trust Validated by Bankruptcy Court Judge

In the case of In re Rodrigues (Bankr. D. Mass., Case No. 09-11960-JNF) (Feeney, J.), the Judge validated a declaration of homestead filed by the beneficiary/trustee of her own revocable trust after she deeded the property to her trust. The declaration contained language similar to that found in virtually every form in use, viz. "that I own and am possessed and occupy said hereinafter described premises as a residence and homestead under Massachusetts General Law….”

Section 1 of Chapter 188 of the Massachusetts General Laws provides in part that: "An estate of homestead to the extent of $500,000 in the land and buildings may be acquired pursuant to this chapter by an owner or owners of a home OR one or all who rightfully possess the premise by lease or otherwise and who occupy or intend to occupy said home as a principal residence." [emphasis added].

Homesteads for homes in revocable trusts have generally been held invalid because under trust law the interest of the beneficiary is personal property and not real estate. Judge Feeney, however, apparently focused on the language of the statute after the word OR and the fact that the legislature used the word “or” a disjunctive meaning “either or” and not both.

Previously the bankruptcy court had also validated a homestead claim in the case of In Re Szwyd, in ruling that the homestead exemption would apply to property in a trust that for all intents and purposes was invalidated by operation of law under the doctrine of merger (where the grantor, the trustee and the beneficiary are all one in the same person).

The legislature has for a long time been considering amendments to the homestead statute that would clarify that a revocable trust interest does qualify for the exemption, but has been unable to enact any changes. It remains to be seen if the Rodrigues case will be widely followed or the principles raised and upheld or overturned on an appeal in some other case. The lesson of the case is that careful wording of the declaration of homestead itself should be considered when a revocable trust is involved. We also offer other options for clients to consider for homesteads and revocable trusts.

What is up with the Federal Estate Tax?

Yankees baseball owner George Steinbrenner died recently. There were some reports that just a few weeks before his fatal heart attack he had remarked to someone that if he died this year it would save his estate 550 million dollars (because there is no federal estate tax this year). There is still no indication at this time as to whether Congress will take any action to restore the Federal Estate Tax for 2010, either retroactively to January 1st or otherwise. Some bills have been filed which for the most part would restore things to the status of 2009 with perhaps a lower rate. The exemption in 2009 was $3.5 million. The tax comes back in 2011 with a vengeance at a small exemption amount of $1.0Million and oppressive rates Congress thought had been dispensed with years ago. In the meantime, people are dying and having to contend with the mess of carryover basis rules affecting basis of capital assets for purposes of determining future capital gains on property acquired from a decedent. The old automatic step up in basis to the date of death value does not apply to estates of persons dying this year and even though no Federal Estate Tax Return needs to be filed, the IRS has yet to tell us how to elect and apportion the minimum basic step up in basis of $1.3Million in property available to each estate plus property passing to a surviving spouse (whatever "passing to means" in the context of some trusts is up for grabs). Presumably something must be filed somewhere to do this. Given the state of the federal deficit, perhaps the thinking in Washington is that it wouldn't be the worst thing to happen if the tax did return with a vengeance, especially if no one could specifically be blamed for something that is going to happen based on a ten year old piece of legislation and two party gridlock. Because of the marginal rates of the tax due to return next year, folks with over one million dollars in combined assets who haven't already sought estate planning advice because of the Massachusetts estate tax, or avoided tax savings strategy for that tax because they thought the burden of it was not that significant (compared the the federal tax) to warrant the planning expense, should seek help as soon as possible as we are already beyond the midpoint of 2010.


Court Holds Wife Liable for Long Term Care Expenses of Husband

In December 2009 a Superior Court Judge in Springfield MA held a wife is liable for the nursing home expenses of her husband. In that case the long term care facility had sued the wife after the death of the husband. He left a bill of some $45,000 but no assets. The surviving wife owned a home in Springfield. The judge granted summary judgment in favor of the long term care facility. This was the equivalent of saying the wife had no defense. At issue was the meaning of two obscure provisions of the Massachusetts General Laws, Chapter 209 sections 1 and 7. Both statutes hold husbands and wives responsible for the expenses of “necessaries” of their spouses, but one of them limits such liability for wives to $100.00. The judge ruled that the other statute passed at a later time superseded. The case is likely to go up on appeal and we will probably hear more on it in a few years. In any event, husbands do not have the $100 limitation issue to argue. The lesson to be learned is that in spousal situations care should be taken to make sure that necessary Medicaid applications are submitted timely and pursued. Also, in spousal situations any medicaid planning recommending a “just don’t pay” strategy should probably not be entertained. This case did not reach the issue of what effect a properly drawn and executed prenuptial agreement would have had because such an agreement was not before the court. This issue of liability for long term care expense is just one of the more important issues to be considered when elders are considering the proposition of marriage. The case was East Longmeadow Management Systems, Inc. v Wilson.