CURRENT ISSUES IN THE AREAS OF ESTATE, TAX
AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
A Reminder About Beneficiary Designations. Several previous issues of this newsletter have addressed problems and planning considerations applicable to beneficiary designations for IRAs, life insurance, and annuities. I have repeatedly reminded readers of the importance of coordinating beneficiary designations to be consistent with the dispositive provisions in his or her last will and testament or trust. For example, if a will or trust sets up a trust for a younger beneficiary, and yet a beneficiary designation does not specify that the benefit should be paid to the trust for that beneficiary, then there is an inconsistency between the beneficiary designation and the estate plan. Readers should be mindful, also, of what happens if money is taken from an account, such as an IRA or an annuity, that has a specific beneficiary designation in place – after making the withdrawal, there will be less money available to be paid to that beneficiary. As an example, let us suppose that a client has an IRA that is payable to certain beneficiaries, which might include one or more charities, and a non-qualified annuity that may be partially or totally non-taxable, which is payable to other beneficiaries or charities. If an IRA distribution is taken, and then given to a charity, but the charity is not one of the beneficiaries of that IRA, but instead, perhaps a beneficiary of the non-qualified annuity, then the charity receiving the gift of the IRA distribution will receive, ultimately, not only the benefit payable from the annuity, but also the gift from the IRA. It is quite possible, then, that the unintended effect is that certain beneficiaries will receive less than intended while other beneficiaries will receive more than intended. It is exceedingly important that readers match their beneficiary designations to the dispositive provisions of wills and trusts, and also that they verify that funds withdrawn and perhaps given away to charities or others is being done so in a manner consistent with the client’s current dispositive goals. I cannot emphasize enough that in virtually every case in which I am involved, client beneficiary designations are not set up correctly.
An LLC Or A Corporation? There are multiple entity choices for a business enterprise, including not only corporations and limited liability companies (LLCs), but also general partnerships, limited partnerships, limited liability partnerships, and others as well. There can be differing tax implications which must be considered, but there are also distinctions between business formalities, litigation issues, and creditor rights in the case of dissolution or insolvency of the entity. LLCs in Indiana are governed by the Indiana Business Flexibility Act (“IBFA”), which was passed in Indiana in 1993. The Indiana Court of Appeals recently noted that although the IBFA has been around for more than 20 years, there is “[still] little case law interpreting [it].” Corporations, on the other hand, have been around for literally hundreds of years, and as a result, there is a great deal of legal precedent governing corporate enterprises. In general, an LLC will be easier to form and to administer, and that fact creates problems, since many times people will start them but not properly document many, if any, of the organizational aspects of the enterprise that should be documented. The operating aspects of an LLC will typically be covered in an operating agreement, which might be compared to the by-laws of a corporation. The tax laws governing a corporation tend to be more complex, since corporations can be subject not only to the general corporate taxation rules, but if the so-called “S” election is made, then the corporation will be governed by the rules applicable to an “S” corporation. An LLC will generally be treated as a partnership for income tax purposes, unless there is only one member, in which event it may be treated as a sole proprietorship. In the case of a one member LLC, the existence of the entity can be completely disregarded and treated as a sole proprietorship using the member’s social security number. People considering the formation of an entity should always get accounting and tax advice regarding those aspects of the enterprise, but even more importantly, legal advice should be sought to assure that not only is the best entity being selected, but also that the entity is set up properly to provide the greatest protection against liability. The limitation of liability aspect of corporations and LLCs tends to be overstated, but both an LLC and a corporation will provide some protection against liability, but only if the entity is formed and operated legally and effectively. The next issue of this newsletter will address other matters relating to LLCs and corporations.
Changes In The VA Pension Eligibility Rules. The Department of Veterans Affairs (VA) amended the rules regarding eligibility for the VA non-service connected pension. The new rules were published October 18, 2018, and went into effect on October 30, 2018. Readers interested in learning more about the new VA pension rules should review previous issues of this newsletter, or consult my website, www.rkcraiglaw.com, under the “News” button under the “Previous Newsletters” section. You may also refer to the October 2018 issue of this newsletter for specific headings to refer to under the “Articles and Links” section of my website. There is now a look-back period of 36 months when applying for the needs-based VA pension, so that any “covered asset” that was transferred for less than fair market value will result in a penalty period not to exceed five years. The penalty period is calculated by dividing the amount of the transfer by the Maximum Annual Pension Rate (“MAPR”) in effect as of the pension application date, which for 2018 is $2,169. The penalty will be recalculated if part of the gifted value is returned (referred to as a partial or total cure). There is now a bright-line net worth limit regarding the allowable net worth of a veteran which is currently set at $123,600, and which applies whether the veteran is married or single. The figure will increase annually. In the past, particularly in the case of an older beneficiary, an applicant might be considered over-resourced if the resources were as low as $40,000, and possibly even less than that. The new VA pension rules are similar in some respects to the Medicaid rules, but there are many differences and distinctions. While some planning opportunities are no longer available, other opportunities will now exist, and it is quite likely that many more potential beneficiaries will be eligible for the pension because of the expanded “bright-line” net worth limitation.
Insurance Mistakes – Continued. Another common mistake that occurs in the case of life insurance is for the insured to set up an irrevocable life insurance trust (“ILIT”) and then designate himself as the trustee. While this may be permissible in certain limited circumstances, it is an extremely dangerous thing to do. The IRS position is spelled out in Rev. Rul. 84-179, and will cause the insured trustee of the ILIT to be deemed to possess “incidents of ownership” if the trustee has certain powers over the policy. In general, if the creator of the trust is the insured or a beneficiary, there will most likely be a life insurance problem. It will almost always be best to designate an independent third-party trustee.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.