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By Melvin L. Maisel

Can you imagine the wonderful feeling you would have if your deceased grandparents made special arrangements for you to receive a meaningful cash gift each year, at such times as Christmas or Chanukah, at your graduation or your wedding, or on other occasions special to you! Grandparents can make this dream come true and their grandchildren will continue to remember their special thoughtfulness.

How can this occur? Many grandparents participate in one or more qualified retirement plans. These plans may be 401(k), 403(b), profit sharing, money purchase, target benefit, defined benefit, or Keogh plans. In addition, many grandparents have accounts in one or more individual retirement accounts (IRAs). The investment earnings and the appreciation on these benefits are tax-sheltered until withdrawn. Generally, withdrawals begin at age 701Ž2.

There is a lot of confusion regarding planning for these assets. Do your clients recognize that the beneficiary designation for these funds should coordinate with the provisions of their estate plan? The provisions in their wills do not control these assets. When distribution must begin, an incorrect distribution election can result in an unexpected, dramatic loss for themselves and their heirs.

No income tax is imposed on benefits held in a qualified plan or IRA account until the funds are withdrawn. Death benefits paid from a qualified plan or IRA can be paid to a beneficiary over the beneficiary's lifetime. If these funds are held in a qualified plan and the beneficiary is not a spouse, the benefits must all be distributed when the qualified plan terminates. Because the qualified plan is sponsored by an employer, if the plan sponsor ceases to exist, the plan must terminate. For this reason, it is generally best to roll over plan benefits to an IRA as soon as the participant is eligible to do so.

In many plans, the participant may receive a distribution after reaching the normal retirement age. If the participant is the business owner and the plan is a defined contribution plan [including a profit sharing plan, a 401(k) plan, or a money purchase plan], he or she may amend the plan to reduce the retirement age if necessary to allow for the rollover of benefits into one or more IRAs. A 401(k) plan cannot be amended for an inservice distribution before age 591Ž2. Notwithstanding the "in service" distribution, the retirement plan will continue to receive tax deductible

Taking Care of the Grandchildren

In order to establish a future IRA for the grandchildren, the grandparents should designate the grandchildren as beneficiaries of a grandchildren's trust that will act as the primary beneficiary for the designated IRA. Since benefits can be paid over the life expectancy of the beneficiary, the period over which benefits are withdrawn can be significant, provided the designation is made prior to the initial minimum required distribution date following age 701Ž2. For example, if a grandchild is one year old when the grandparent dies, and the grandparent leaves $100,000 for the grandchild, based upon a 10% investment return, if withdrawals are made over the grandchild's life expectancy (80 years) the total withdrawals would exceed $32.7 million. If the grandchild was age 10 at the time the grandparent died, the $100,000 would produce total withdrawals that exceed $16.4 million and if the grandchild is age 20, the withdrawals would approach $7.4 million.

When there is more than one beneficiary in the same IRA, the life expectancy of the oldest beneficiary is used, unless there is a separate IRA for different beneficiaries. If some amount of IRA benefits are to be paid to grandchildren, a separate IRA for grandchildren (or if the ages are significantly different, a separate IRA for each age group of grandchildren or each grandchild) should be considered.

Which takes us to the Christmas or Chanukah gift. Since a grandparent can designate as beneficiary of his or her IRA a trust for the benefit of grandchildren, distributions are then made to the trustees, usually their children, not their grandchildren directly, and the trustee is instructed to make distributions during the special occasions in the grandchildren's lives. The gift at Christmas or Chanukah, the graduation or wedding gift, are all paid to the trustees from funds originally in the IRA. In a sense, this does become the "gift that keeps on giving."

There are, of course, tax considerations which must be reviewed before the grandparents' planning can be established. But the opportunity is there and may prove to be the best means of assuring that grandchildren remember the love their grandparents had for them. *

Melvin L. Maisel is chairman, Cornerstone Bank, Stamford, Connecticut, and president/CEO, Stabilization Plans for Business, Inc., White Plains, New York.

© 1997 Melvin L. Maisel


By Vincent J. Russo, JD, LLM, CELA, Russo and Atlas

Congress and the President have attempted to control the cost of the Medicaid program by enacting the Health Insurance Portability and Accountability Act of 1996, commonly known as the Kennedy/Kassebaum Health Reform Act, which became effective January 1, 1997.

The following information is our current understanding and analysis of this statute. Since this is a new law and there is not yet any court experience as to the interpretation of the law, practitioners must proceed with extreme caution when advising clients.

Section 217 of the Act, 42 U.S.C. Section 1320a-7b(a)(6), makes it a crime punishable by up to one year in prison and a fine of $10,000 to transfer assets in order to qualify for Medicaid benefits under certain circumstances.

The new law basically provides that whoever knowingly and willfully disposes of assets (including by any transfer in trust) in order for an individual to
become eligible for Medicaid, if disposing of the assets results in the imposition
of a period of ineligibility for such
assistance, shall be subject to a criminal sanction. There are several issues concerning the interpretation of the
statute because it is ambiguous and unclear. There is also legislation
pending in both the House and the
Senate which seek repeal of this
new criminal law.

What Activity Is Criminal?

The statute applies when there is a knowing and willful disposition of assets to obtain Medicaid benefits and the transfer results in the imposition of a period of ineligibility. There are two issues here.

What will determine a "knowing and willful disposition" of assets? Must this be the sole or principal intention of the individual? What if Medicaid eligibility is only one of several motivating factors of the individual?

What does "which resulted in the imposition of a period of ineligibility" mean? Are there different results depending upon the timing of the transfers?

Who Is the Criminal?

Clearly, the statute applies to an individual who makes the transfers and then applies for Medicaid. It is not clear if the statute applies to individuals who act on behalf of the individual, such as a practitioner-in-fact, co-owner of joint assets, a trustee, or a guardian.

Can the Act Be Cured?

What if the assets are returned and the penalty period is eliminated? The return of assets and elimination of the penalty period is allowable under the Medicaid eligibility rules. Would such action result in no "imposition of a penalty"? If so, the individual would not be subject to a criminal statute.

Can a Person Who Assists Be Subject
to Criminal Sanctions?

Title 18 U.S.C. Section 2 provides, in part, that whoever commits an offense against the U.S. or aids, abets, counsels, commands, induces, or procures its commission, is punishable as a principal.

Children of the individual and other third parties who assist the individual (such as an attorney-in-fact or a guardian) may be subject to criminal prosecution under the above provision. Practitioners who counsel individuals and their families may also come under this provision.

Guidelines for the Practitioner

Transfers Not Subject to Criminal Penalty. If the statute is enforceable, the consensus of opinion among elder law attorneys is that the new law will
not apply to the following transfers:

1. Transfers before January 1, 1997, its effective date.

2. Transfers made not for the purpose of obtaining Medicaid eligibility.

3. Transfers which are exempt under the Medicaid transfer rules.

Transfers That Should Not Be Subject to Criminal Penalty. If the statute is enforceable, the consensus of opinion among elder law attorneys is that the new law should not apply to the following transfers:

1. When a Medicaid application is filed after the look-back period (36 months for transfers and 60 months for trust-related transfers) under the Medicaid eligibility rules.

2. When a Medicaid application is filed within a look-back period when applying for Medicaid under the community based home-care program (nonwaivered services).

Advising Your Clients

It will be essential that you advise your clients as to this statute. The practitioner must discuss this statute and the possible implications if the practitioner is advising the client in the area of Medicaid or long-term care planning. The practitioner should also consider an informational mailing to clients who may be affected by the statute, even though there is no obligation to do so. *


By Martin Mushkin, Esq.

Finding a Securities Broker

It's your money. Do you have reason to trust your broker and the company he or she works for?

1. What you should learn about a securities broker:

* His or her education

* Professional licenses. Is he a licensed "registered representative" whose activities are regulated by the SEC, the
National Association of Securities Dealers, Inc. (NASD) and the state Blue Sky

* Experience in the business

* Method of payment. Is it sales commissions: If he doesn't make the sale he doesn't get paid?

* Financial consultant, financial adviser, and similar titles have no legal meaning.

2. Who does he work for? Is his company a licensed securities broker regulated by the SEC, the NASD, and the state Blue Sky Commission? Is the company a member of a securities exchange such as the New York Stock Exchange?

3. Establish your investment objectives. Bear in mind there is a risk in every investment.

* Do you want income, long term growth, liquidity?

* Are you willing to "speculate"?

4. Do you understand what you are

* Does the security fit your goals?

* What is the relationship between the broker and/or the company he works for and the company that issued the security you are investing in?

* Is the security a bond, debenture, preferred stock, common stock, option, mutual fund or limited partnership? Is it derivative or hybrid? ("Sophisticated" is a dangerous word.)

* Is it registered with the SEC? Is it legally tradeable? How long after you purchase it, can you sell it? As a practical matter, will there be a real market for it?

The Broker's Responsibility to You

When a securities broker "hangs out his shingle," he undertakes a fiduciary duty to his customers. He represents that he will deal fairly and in accordance with the standards of his profession.

A broker has an obligation "to know his customer." He must learn your financial circumstance so that he can properly recommend securities.

He must account for your money. He does this through periodic statements and confirmation slips of each transaction. Read them. Get an explanation if you don't understand them.

No half-truths. He must not make any untrue statement of a material fact, and must not omit to (state) a material fact necessary to make the statements (made) not misleading in the light of the circumstances under which they are made.

Your Responsibility in the Securities Transaction

You must act as a reasonably prudent investor. Don't check your brains at the door. Ask all the questions you want and feel comfortable that you understand what you are doing.

Don't misrepresent your financial circumstances and don't allow the broker to fill out anything stating your financial history that is false. Read, and at least think you understand, what you sign.

What to Do When Things Go Wrong

While most brokers are honest and diligent, there are remedies for the mistakes of the honest and the frauds of the dishonest. Many of the violations of law by brokers are violations of technical rules intended to protect the customer. Here are some of the actionable violations.

1. Unsuitable Recommendations. Investments must be "suitable" for the customer's portfolio. The "know your customer" rule requires that the broker only sell the customer investments suitable for his financial situation and investment objectives.

2. Trading to Earn Commissions. The broker must recommend a security on its own merit, not (principally) on the grounds that his employer is the sponsor of the security and he (the broker) will get a higher percentage of the commission by selling you a house-sponsored security.

3. Churning. Churning, a common offense, occurs when a broker who controls the volume and (frequency) of trading in a customer's account abuses the (account) by initiating an excessive number of transactions in light of the customer's objectives. The result is that (the) broker turns "capital into commissions."

4. Misleading Statements of Material Facts. This occurs when the broker fails to inform himself (and you) (about) the security and recklessly tells half-truths about (the) security he recommends to you.

5. Recommending on Tips. This is different from recommending based upon a research report. Recommending on tips may be insider trading. It is illegal.

6. Manipulation. This is when the broker uses your money (and the money of others) in transactions intended to influence the price of a security on the public market so that it is not a reflection of true purchases and sales.

7. Unauthorized Transactions. Trading in your account without at least a telephone authorization.

8. Failure to Supervise. A brokerage house has the obligation to supervise its brokers to make sure they are not violating the rules of professional conduct. Failure to closely supervise makes the brokerage house liable.

9. Excessive Markups. When the broker acts as a principal and sells a security to you, he cannot charge you a markup which is excessive given a fair market. When he purchases a security from you he cannot purchase at a discount which is excessive given a fair market.

Forums in Which to Sue and the Chances of Success

1. Statutes of limitations.

* Federal statute of limitations. The statute of limitations currently applicable to the most popular Federal claim is one year from discovery and a maximum of three years from the transaction.

* Connecticut statutes of limitations. Connecticut's statutes require action within two years from the transaction (negligence) and two years from the time the investor has noticed that he should inquire as to whether he has been defrauded. Contract actions may be brought within six years.

* New York statutes of limitations. Six years and two years from inquiry notice.

2. Forums.

* Federal court, state court, or arbitration.

* Arbitration. Most modern account opening agreements with brokerage houses require that customer disputes be arbitrated in arbitration proceedings administrated by the NASD, or a stock exchange. You still have a right to an attorney. The American Arbitration Association (AAA) also administers such proceedings. Arbitration awards are court enforceable.

3. The chances of success.

There are no statistics on success in court proceedings in these types of cases. In arbitration, recent statistics show that about 60% of the customer cases are settled before hearing with smaller cases settled more frequently and 60% of the cases going to decision give some type of recovery to the customer. Statistically, cases in which the customer retains expert witnesses and legal counsel produce better results. *

Milton Miller, CPA

William Bregman, CPA/PFS

Contributing Editors:

Alan Fogelman, CPA
Clarfield & Company P.C.

David R. Marcus, JD, CPA
Paneth Haber & Zimmerman LLP

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices

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