Summary
July, 2000
CONGRESS OKs RETROACTIVE SOCIAL SECURITY RETIREMENT
President Clinton has signed into law the repeal of the Social Security earnings limitation for working seniors aged 65 through 69.
The Senior Citizens' Freedom to Work Act eliminates the Social Security retirement earnings test. Elimination of the retirement test is effective January 1, 2000, so there is retroactive application.
Caveat: No change is made to the earnings limit for workers who opt to collect benefits upon reaching early retirement age at 62. Under the earnings test that applies to Social Security beneficiaries aged 62-64, workers in that age category can earn up to $10,080 (for 2000) before losing approximately $1 in benefits for every $2 in wage income.
Individuals age 65 to 69 who postponed electing social security retirement because of the earnings test should file an application with SSA for social security retirement soon, if they want to receive benefits retroactive to January 2000.
GETTING YOUR KIDS EDUCATED CAN HELP YOUR ESTATE PLAN
Congress has authorized states to create tax exempt qualified state tuition programs ("QSTP"). The tax benefits to all parties involved are tremendous, especially the estate tax benefits. Illinois has finally initiated its QSTP Savings Plan, called Bright Start. One particularly novel approach allowed for contributions to QSTPs is that the contributor can effectively give up to five times the annual gift exclusion limitation in one year. The contributor can elect to treat a gift ratably over a five year period.
Before investing in a QSTP, however, you should review all disclosure materials from the State or the administrator of the program to ascertain annual and over all contribution levels, limits on times for withdrawal, penalties for early or non-qualifying withdrawals, and state income tax implications. More information about the particulars of the program can be found at its website: http://www.brightstartsavings.com.
REPORTING GAIN ON THE INSTALLMENT METHOD
Congress has enacted a provision which prevents accrual basis taxpayers from reporting gain on the installment method for dispositions.
The law is causing problems, especially for sales of small and closely held businesses. Several bills in Congress include a repeal of this provision. The Internal Revenue Service is trying to offer some relief.
Until the outcome is determined, we advise accrual basis taxpayers to look to the IRS notices for guidance, trying to structure the transaction to avoid application of the new law, if possible. Rev. Proc. 2000-26 is helpful.
NO MORE GHOUL TRUSTS
IRS has issued proposed regs under which only certain individuals (the donor, the donor's spouse, etc.) can be used as measuring lives for a guaranteed annuity interest or unitrust interest in a charitable lead trust (CLT). The proposed regs are aimed at a scheme (sometimes referred to as a "ghoul trust" or a "vulture trust") under which a charitable deduction is artificially inflated by using, as the measuring life of the term of a CLT, an unrelated individual who is seriously ill but not terminally ill. The proposed regs would generally be effective for transfers after April 3, 2000.
NO ECONOMIC BENEFIT FOR LOTTERY WINNERS
A right to property not yet reduced to cash is sometimes taxed currently under the "economic benefit" doctrine. One Ohio Super-Lottery winner wanted to be taxed in 1992 (with a lower top marginal tax rate) when he was declared the winner, rather than 1993 when he got his money. The court disagreed. The three elements of the economic benefit doctrine, said the court, are: (1) the existence of a fund in which money has been placed; (2) that is irrevocable and beyond the reach of creditors; (3) in which the beneficiary has vested rights to the money, with receipts conditioned only on the passage of time.
Mr. Thomas needed only to submit his claim form and the lottery ticket, which he did in 1992. However, he failed to identify a fund in which he had obtained irrevocable rights. Nor was a constructive trust created, because his award was subject to the state's creditors, including the lottery's other winners. Thomas v. U.S., (CA 6th, 05/26/00).
YOU MAY BE A RACKETEER WITHOUT KNOWING IT. . .
The Racketeer Influenced and Corrupt Organizations Act ("RICO") was originally designed to "eradicate organized crime in the United States." Unfortunately, RICO's alluring remedies (treble damages and attorneys fees) plus hard to define "pattern" parameters have created an environment in which a businessman can unknowingly violate RICO in many ways.
A vital factor is the duration of the alleged racketeering activity; the shorter the time period in which the racketeering acts were allegedly committed, the less likely a "pattern of racketeering activity" will be found. Duration is important because the focus of the "pattern" inquiry is whether the racketeering acts will continue. The longer a defendant has engaged in the racketeering activity, the easier it is for a court to believe that the racketeering will continue. Courts also ask whether the alleged "racketeering scheme" had an identifiable, terminal goal. Finally, in the business context, courts look to whether the alleged racketeering activity is the defendant's regular way of conducting business. If it is, then courts are inclined to find that the defendant's racketeering activities will continue.
Fortunately, RICO claims can often be disposed of by defendants, with the help of competent counsel, as a matter of law before trial.
. . .AND YOU BETTER KNOW WHAT A MULLIGAN IS
One enterprising politician sponsored a golf tournament to raise money for his campaign for re-election as mayor. He offered a $10,000 prize for hitting a hole-in-one on hole number one. In addition to entry fees, tournament organizers raised funds by selling "mulligans". Mr. Spinks paid to participate in the tournament. He also bought at least one mulligan. At the first hole, Spinks hit his first ball and did not make a hole-in-one. He then used his mulligan, and this time he hit a hole-in-one. The mayor refused to pay, asserting general ignorance concerning the word "mulligan," and that the word "is golfing jargon; defined in no dictionary, discussed in no cases, and unknown to the general population."
The court disagreed, taking judicial notice of the meaning of the word "mulligan," which can "be readily and easily determined by reference to sources that cannot be reasonably disputed." According to Webster's, a mulligan is a free shot sometimes awarded when a golfer's preceding shot was poorly played. Spinks was entitled to the $10,000 prize, ruled the court. Wright v. Spinks, 722 NE2d 1278 (Ct. App. Ind., 01/31/00).
ESTATE TAX REPEAL; WILL IT HAPPEN?
Our estate planning clients should be interested to know that the House of Representatives, on June 9, by a vote of 279 to 136 passed legislation that would, over a period of 10 years, repeal the federal estate tax, gift tax and generation skipping tax provisions of the Internal Revenue Code. The bill, now before the Senate, also provides for some tax rate reductions for larger estates during the period prior to repeal, and, in addition provides for a carryover basis system, rather than the current stepped up basis system for decedents dying after the year 2009, except that the step-up in basis would continue to be permitted with respect to $3,000,000 of property passing to a surviving spouse and $1,300,000 of property passing to other beneficiaries. The prospects of the bill ever becoming law in its present form, however, seem somewhat dim since the bill is being disputed in the Senate, and also because President Clinton, who vetoed similar legislation last year, has announced that he will veto the current bill as passed by the House.
MORTGAGEES AND GOOD FAITH TREATMENT OF INDIVIDUAL HOMEOWNERS
Have you ever wondered if your bank or mortgage company has an obligation to treat you fairly? Does the bank have a duty to act in good faith? An Illinois appellate court has said yes, that a lender has an obligation to act in good faith with an individual homeowner.
The homeowner, Ms. Voyles, had a single family house in Springfield with a mortgage from a local Springfield bank, Bank A. She moved to the Chicago area, rented out her Springfield home and bought a new house, with a mortgage from a local Chicago bank, Bank B.
Several years later Bank A failed and the homeowner's Springfield loan was assigned to a new lender, Bank C. Soon after the change, Bank C began refusing the monthly mortgage payments. Bank C claimed that the monthly escrow payments were not sufficient to cover property taxes and that it had increased the amount due each month to cover the escrow. Apparently, however, Bank C never told the homeowner of the new amount.
The homeowner became aware of the problem and tried to pay all the back payments, but all efforts were spurned by Bank C who reported its foreclosure proceedings to various credit reporting services. When the homeowner tried to refinance her mortgage in Chicago with Bank B, the adverse credit report kept her from obtaining her refinancing. By the time the matter was resolved, homeowner had lost her job and Bank B would not refinance the loan. Homeowner sued Bank C for several claims including breach of a duty of good faith and fair dealing, seeking compensatory and punitive damages.
The appellate court agreed. While the duty of good faith and fair dealing is usually only an aid in interpreting a contract, in some cases it can be an independent obligation. In mortgage lending to individuals there is no statutory remedy which precludes the obligation of good faith. Since Bank C's actions were arbitrary and capricious, including seeking to engineer a credit controversy to allow Bank C to foreclose, the obligation was breached.
The court reasoned that its ruling would not be the opening of a floodgate of future cases. Here the relationship between the homeowner and Bank A was of long standing and Bank C's actions were deliberate, intentional and outrageous. This was not a case involving a bank and a sophisticated developer.
As a result it appears that the breach of good faith claim may exist in Illinois law, at least for individual homeowners. While it is a valuable claim, it is unlikely to be available in any commercial situation. Voyles v. Sandia Mortgage Corp., 724 NE2d 1276 (IL App. Ct., 2nd Dist., 2000).
BEFORE WE GO. . .
We are pleased to announce that a new associate, Christine S. Lee, has joined us. She did her legal work at Loyola University School of Law. Glad to have you with us, Chris.
IN MEMORIAM. . .
We regret to inform you that John Teevan, for so many years a bulwark of our firm, has passed away. John will be missed by all of us.
SUMMARY
Summary is intended for your general information purposes only. Because the information may not be precisely suited to your needs, we urge you to consult with us before using this information in specific situations.
