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Legal Assistance for Military Personnel
Summer 1998 - Volume 2, Number 3

Legal Assistance for Military Personnel Articles

From the Chair...
The Chair of the Standing Committee on Legal Assistance for Military Personnel discusses current issues and events

Offices in the Spotlight: Legal Assistance at Andrews Air Force Base, Maryland and Fort Belvoir, Virginia

The Taxpayer Relief Act of 1997 - How Will It Affect Military Personnel?

 From the Chair.
by Leonard L. Loeb
Chair, Standing Committee on Legal Assistance for Military Personnel

Only in times of crisis do you truly understand the meaning of support.

The ABA Standing Committee on Legal Assistance for Military Personnel was successful recently in forestalling a directive that it be sunsetted immediately. The information that the Committee was to be defunded came to us through the ABA's annual budget development process; not as a result of the qualitative assessment that every ABA entity undergoes every four years.

Thankfully, the respective Judge Advocates General of each of the armed forces immediately sent outstanding letters of support. These along with many other letters of support, including those from the North Carolina State Bar Committee on Legal Assistance to Military Personnel, the ABA General Practice, Solo and Small Firm Section and the ABA Standing Committee on Delivery of Legal Services, flowed in very quickly. All of the support that we received was most heartening. Particularly important to the Committee was the support of its ABA Board of Governors Liaison John F. McCarthy, Jr.

Based on all of this momentum, we decided to proceed with contesting the budget decision. We sought and were granted a hearing in front of the ABA Board of Governors' Program and Planning Committee. LAMP Committee member Kevin P. Flood, Director of NLSO S.E. at Jacksonville Naval Air Station, and I spoke with the Board at great length about the issues that LAMP addresses, the fundamental quality of life services provided through military legal assistance, and the necessity for the ABA to maintain its focus on these issues.

If good results can come from a bad beginning, that meeting was one of those instances. It was an excellent opportunity to inform key ABA leadership about the dedication and largely unsung work that legal assistance officers and the ABA provide daily to U.S. military personnel. We have received word that the ABA LAMP Committee can, in fact, continue to do its work.

I thank all of you who provided your tangible support in this process!

Offices in the Spotlight

Legal Assistance at Andrews Air Force Base, Maryland and Fort Belvoir, Virginia

by Bryan S. Spencer (Ret.)

The Standing Committee on Legal Assistance for Military Personnel spent April 23-24 in the Greater Washington, D.C. area providing an eight hour continuing legal education (CLE) program for east coast legal assistance officers and visiting the legal assistance offices at Andrews Air Force Base and Fort Belvoir. The CLE program included sessions on family law, legal ethics and legal assistance, lemon law/Magnuson-Moss warranty practice and estate planning.

The Committee uses the CLE programs to improve the skills of legal assistance officers who may not have had the opportunity to return to a two-week course at their service law school. In addition, the Committee looks for exceptional techniques from each individual base or fort legal assistance program for possible replication in other legal assistance offices.

Andrews Air Force Base
The Committee first visited the legal assistance office at Andrews Air Force Base, which is the "Home of the 89th Airlift Wing ." That sounds innocent enough until you realize that this is the command that provides military airlift support to the president, senior civilian government officials and senior officials from the Defense Department and the three services. In other words, this is the home of "Air Force One!"

According to Colonel Vic Donovan, 89th Airlift Wing Staff Judge Advocate, the Andrews legal assistance program concentrates on two themes:

  • customer service, and
  • blending legal assistance with preventive law efforts.
In the customer service area, the key components are the availability of services and perceived overall quality. The office provides notary services and walk-in, same day power of attorney preparation during each duty day from 0800-1500 hours. It limits legal assistance to general advice, letters for the client, descriptions of small claim court procedures, referrals to the civilian bar or other agencies and preparation of wills.

For appointments, according to former legal assistance officer Capt. Bryan Bonner, the legal assistance officers take a rather interesting three-prong approach. First, unit sergeants or commanders can arrange a same-day appointment for any unit member who has a legal problem that is significant enough to interfere with his or her duties. Second, the office has a morning- long, walk-in legal assistance clinic every Tuesday for active duty members and their dependents. Third, the office makes available, on an equal basis, an appointment system to active duty members, their dependents or retired military personnel residing in the Washington, D.C. area.

To measure the quality of services, the office distributes customer critiques that use a grading system in five areas of customer satisfaction. The base commanding general is briefed monthly on the survey results.

Preventive law is another important element of the Andrews legal assistance program. Staff Sergeant Gerald Anderson, an office paralegal, created the Andrews Legal Assistance Home Page, which has become a critical public relations tool for the office. Capt. Kathleen Reder, the legal assistance officer, and Capt. Bonner added to the page office materials on consumer affairs and other preventive law topics, newspaper articles on various legal assistance subjects and commonly-encountered problems. (See to visit the web page.) In addition, Capt. Reder's article "Used Car Warranties: Buyer Beware" appeared in the base newspaper during the week of our visit.

The legal assistance officers are excited about the Internet's potential. All attorneys who provide legal assistance, for example, routinely use the Internet for conducting legal research in a fraction of the time previously required. All are in accord that as far as disseminating legal information electronically, they have, in the words of the old Carpenters' song, "only just begun."

In addition, the office conducts preventive law briefings to unit and spouse groups. Commanders' spouses get a special preventive law briefing, because experience has shown that the briefings can have a very positive impact on the military spouses unit by helping to prevent legal and financial problems for unit members and their families before they occur.

Fort Belvoir
The second legal assistance office that the LAMP Committee visited was at Fort Belvoir. This Army post is the major legal services installation in the Washington, D.C. area. Because of its location, it is the center of medical, commissary, exchange and other services for the pentagon and many other major military organizations. In fact, there are over 100 tenant commands but no troop units at Fort Belvoir. Steven Chucala, Chief of Client Services, briefed the Committee on the unique problems of a legal assistance operation at a post that serves senior officer and NCO military personnel in addition to thousands of military family members and retirees in the area.

The Fort Belvoir Legal Assistance Office has three full time civilian attorneys, all of whom have several years of legal experience. Paralegal specialists and receptionists provide direct support to the attorneys and screen prospective clients to ensure that they have legal issues that require an attorney. The office assists clients with emergencies, powers of attorney and notarizations on a walk-in basis. It sees all other clients on an appointment basis. Chucala's office uses a 45-minute or one-hour appointment schedule.

Every effort is made to provide clients with solutions to their legal issues, including written requests for their signature on a report of survey, consumer affairs problems, disability reconsiderations or reclaims to the Board for Correction of Military Records. Experience has shown that the clients do not have the expertise or skills to prepare legal documents necessary to resolve their problems. These services prevent the pro se client from, after receiving legal advice, coming back several times for clarification or next-step assistance.

Legal services at Fort Belvoir also include the full range of assistance, such as preparing documents for the client's signature, pro se petitions for adoption, petitions for change of names, preparation of separation/property settlement agreements, wills with testamentary trusts, small estate affidavits and the normal general practitioner range of legal services. In addition, the legal assistance officers provide handouts to clients to insure that they have some guidance to which they can refer after leaving the office, whether or not the officer prepared written documents for their signatures.

Dewitt Army Community Hospital is the major in-patient facility in northern Virginia. Legal assistance officers from Fort Belvoir provide bedside legal services to patients there. The services include the preparation of advance directives and wills.

Mr. Chucala's office also conducts an ongoing preventive law program. It includes speaking to military organizations at retiree activity days, providing widow and widower functions, and furnishing articles on legal assistance topics for the post newspaper. These newspaper articles are made into legal assistance handouts, furnished to clients in the office and included in welcome packages sent to incoming personnel and their families.

Among the many legal actions that the Belvoir legal assistance office pioneered was the first military electronic tax filing service in the Washington, D.C. area. Established in 1987, this service results in millions of dollars every year in tax refunds for active duty and retired personnel in all services.

Because of its reputation, the Belvoir legal assistance office is able to make telephone appointments for clients with local probate court clerks to get guidance and forms in simple probate matters. This arrangement conserves scarce legal assistance resources. Mr. Chucala has worked closely with local county taxing authorities and has assisted in the preparation of the county-issued brochure, "Tax Obligations of Military Personnel Living in Fairfax County." Both the local taxing and military legal authorities agree that the brochure provides an accurate reflection of the law in this complex and sensitive area.

The trust and respect that the Fort Belvoir's legal assistance program has earned was recognized during Operation Desert Shield and Desert Storm. The local bar association offered Mr. Chucala the services of 21 local law firms that volunteered to handle overflow military legal assistance clients on a pro bono basis.

Clearly, the Fort Belvoir legal assistance office is a capital law office for military personnel in the nation's capitol area.

Bryan S. Spencer (Ret.) is a member of the ABA Standing Committee on Lawyer Referral and Information Service.

The Taxpayer Relief Act of 1997 -
How Will It Affect Military Personnel?

by LCDR George F. Reilly

Part I of this series, which appeared in the Fall 1997 issue of Dialogue, considered the provisions of the Taxpayer Relief Act of 1997 [TRA '97] relating to the child tax credit and educational incentives. Part II discussed the significant changes relating to expanded IRAs and capital gains in the Winter 1998 issue of Dialogue. Part III, which appeared in the Spring 1998 issue of Dialogue, considered changes relating to the sale of a principal residence. This final installment focuses on the sale of a rental property and provisions on estate taxes.

Sale of a Rental Property
The new section 121 of the Taxpayer Relief Act of 1997 has dramatically changed the calculus of home ownership vs. renting and the retention of a house upon a PCS move. If you have a capital gain potential and can sell your house, there are tax advantages for doing so. If you elect to retain your house as a rental property after you move, whether the decision is fiscally based (e.g., soft market) or personal (e.g., "we're coming back!"), you have to consider both the short term and long term tax consequences.

A rental property is one of the few true tax shelters left for the average taxpayer. The price that you might pay for near term tax advantages (from losses, depreciation, business expenses, mortgage interest, etc.) might be a completely taxable sale in the out years if you fail to sell within the five year period when you had owned and used the home for two years (or lesser qualifying pro rata amount).

What then do you tell the unhappy client who has been renting out his former principal residence for too long to qualify for the two of five exclusion? If a client faces a capital loss, then he or she is okay with this house as an investment property as discussed above. In the more likely event that he or she is looking at a large taxable gain, the decision matrix is a bit more complicated. There are three basic options:

  • move back into the house for a period of time to qualify for the minimum tax-exclusion ratio, using the X/24 * $500,000 or $250,000 formula, and then sell the house;
  • sell the house and pay the tax at the new lower rates (but factoring in the new depreciation separately at 25 percent); or
  • be tax-creative and engage in a section 1031 like-kind exchange of investment property. The section 1031 exchange is also called a "Starker" exchange, which is named after the case that defined the practice. Essentially what you are doing is exchanging one form of investment real estate for another. The law permits dissimilar transactions to be considered "like-kind." So a person can exchange an investment farm for an apartment building or an apartment building for a beach house. There are a lot of rules and specifics contained in section 1031 exchanges, and they require sophisticated tax and/or real estate professionals. They can, however, save clients a lot of money in the long run.

An example: A rental property that does not qualify for the two of five rule has greatly appreciated. Your client is facing a $100,000 fully taxable gain. He does not wish to return to the house for a day, let alone a year. He is retiring in his present location. What he can do is work a Starker exchange for an investment property near his present home, or even a house in a vacation resort. He then can sell his present residence when he can qualify for the exclusion, move into the investment property, stay there for two years, and take a full $500,000 exclusion. Lots of gain, no tax. What a deal!

These are sophisticated transactions that must comply strictly with the statute and regulations. But as you can see, they have the potential to pay great dividends for a client. If your client has a situation like this, encourage him or her to speak to a real estate lawyer or commercial real estate agent. Although there are up front costs and professional fees, the tax savings down the line are dramatic.

The bottom line on rental property: the client must consider tax and personal considerations in deciding whether to retain or sell a house at a PCS move. If the client is unlikely to return within a few years, a sale or a plan to rent, then sell within the qualifying period, offers the greatest tax benefit. As noted at the outset, this is a big ticket area for legal assistance providers. Anticipate a lot of questions!

Estate and Gift Tax Issues
"We have long had death and taxes as the two standards of inevitability. But there are those who believe that death is the preferable of the two. 'At least,' as one man said, 'there's one advantage about death; it doesn't get worse every time Congress meets.'"

--Erwin N. Griswold

Death and Taxes
An age-old axiom to be sure, but one that has taken on a new light in the wake of TRA '97. Congress has taken on the subject that many have dubbed "death taxes," otherwise known as estate taxes. This seems to be the epitome [or nadir?] of taxation: taxing even those who have left this existence. Estate taxation is enough to make a taxpayer's blood pressure rise (perhaps hastening the coming of the taxman?) and an estate planner's mortgage to vanish. Despite a great sound and fury about the need to end estate taxation (always called "death taxes" by opponents) in the Tax Act then brewing in Congress, what emerged was merely a phased-in increase of the unified credit amount over 10 years.

The what credit? Well, actually the unified credit no longer is a good name. Now it is considered to be the "applicable exemption amount." Uh-oh. Not only is this tax jargon, but estate planning jargon layered on top! I'll back up and give you a quick and greatly simplified primer on estate and gift taxation.

Many of you have a dim recollection that you can give away $10,000 a year without taxation. What this is all about is the ability to give a gift to any number of people each year in an amount not to exceed $10,000 per person. Theoretically, if you were so inclined, you could take a phone book and start with A and end with Z, giving $10,000 gifts to each person. The next year you could do the same. If you are married, your spouse could consent to an equivalent gift and you could give jointly up to $20,000 to each lucky person.

What if your benevolence gets the best of you and you exceed these limits? If you should give more than the $10,000 or $20,000 to one person, a gift tax is owed. Now comes the kicker. You do not have to pay the gift tax right away since each of us has a lifetime credit equivalency (now exemption amount) of $600,000 [in 1997]. You can continue to give excess amounts of gifts without taxation until you reach the credit equivalency amount. Then you start paying taxes. And as both gift and estate taxes are linked or "unified," the starting tax rate after $600,000 is an eye-opening 37 percent!

Why do I say "credit equivalency amount?" This number is worked backwards from the tax owed to the equivalent amount of the gift or estate value. For example, although we talk about the $600,000 credit, what we actually mean is that the tax owed on $600,000, or $192,800, is credited against the tax owed. If you are below that amount, you pay nothing. If you are higher than $192,800, you pay the difference and, as stated earlier, the rates start at 37 percent.

If we do not use up any of our transfer tax credit, (gift and estate taxes are considered "transfer taxes" as they apply upon the transfer of property) then we die with our estates having the ability to take advantage of the full credit to avoid or minimize taxation. (There are certain deductions and credits which add to this simplistic equation but bear with me.) The Taxpayer Relief Act did not eliminate the estate tax, nor did it lower the rate of taxation. Instead it eases up the credit equivalency amount (now called the applicable exemption amount) to $1 million in 2006. The phase-in looks like this:

For Decendents Dying and Gifts Made In:Effective Exemption:
2006 and after1,000,000

What this means is that we in the legal assistance field are still in the estate planning business. Our clients are not immune from estate taxation issues at the exemption amounts listed above. And even though a $1 million dollar taxable net worth seems pie in the sky to most of us, it doesn't take much except some real estate, insurance, and solid investments to get us in that ballpark. A mighty fine park to be in if I do say so myself!

Of more pressing concern is the fact that, over the years, we have written huge numbers of wills using the $600,000 unified credit amount. Where this presents a problem is if we structured a trust or trusts (marital deduction trust; credit shelter or A/B trusts) using a fixed dollar amount rather than a formula. If the client's intent was to maximize use of the unified credit and we used a dollar amount, that amount is fixed until the will is revised. A properly drafted formula clause will permit maximum use of the applicable exemption amount. While obviously we cannot notify holders of all of the wills potentially affected, this is a good point to advertise for our legal assistance clients. In addition, although DL Wills has not yet been updated to reflect these changes, it is still workable since it gives trust options for estates "in excess of" $600,000.

One more thing on gifts. The gift tax annual exclusion amount of $10,000 has remained the same for 25 years. Congress now has provided for an inflation adjustment. This is of limited value right now since the upward adjustments can only be made in $1,000 increments, meaning that the first adjustment requires an increase in the Consumer Price Index of 10 percent. It may be many years before we see an upward adjustment.

As you have seen from this series is that the Taxpayer Relief Act of 1997 has dramatically changed the tax picture for many of our clients. The various credits that reduce taxation dollar for dollar, the deduction for student loan interest, the reduction on capital gains, and the tax-free sale of a home all benefit service members. Our job as legal assistance attorneys, particularly those running tax programs, is to ensure that our clients do not miss out on these significant tax benefits due to ignorance. Get the word out!

Does the far reaching nature of TRA '97 mean that Congress is through tinkering with the tax code for a while? It doesn't seem that way. A number of proponents of a flat tax system are making noise again, as are those who somehow want to streamline the tax code and the IRS, without going to a flat tax system. Then there are those who want a national sales tax rather than an income tax. Who knows what the future holds for taxpayers? But in the meantime, let's make sure that we take advantage of the law as currently written.

The views, analyses, interpretations and opinions expressed in this article are those of the author and should not be deemed views or opinions of the American Bar Association or the ABA Standing Committee on Legal Assistance for Military Personnel.

LCDR George F. Reilly is assigned to Headquarters Navy JAG, Legal Assistance Division as the Tax Specialist.

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The views expressed in Dialogue are those of the authors and do not necessarily represent the policies of the American Bar Association. The contents of this magazine have not been approved by the ABA House of Delegates and do not constitute ABA policy. © 2001 American Bar Association ISSN 1092-2164