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.
Advice To Caregivers. The Administration for Community Living (ACL) has produced a fact sheet with advice to caregivers, which is available at https://acl.gov/sites/default/files/programs/ 2019-01/Bereaved%20Caregivers%20Fact%20Sheet_10.02.18-v2.pdf. The ACL has also prepared a longer report on wisdom gained from caregivers, which is available at https://acl.gov/sites/default /files/programs/2019-01/ACL_OPE_Bereaved%20Caregiver%20Study_Final%20 Report_jan2019.pdf. The general consensus of caregivers is that most feel that they do not get the information that they need in a timely manner.
Insurance Mistakes – Continued. This will continue an ongoing discussion about common mistakes people make when planning with life insurance. An issue arises when an insured creates an irrevocable life insurance trust (ILIT) and transfers a policy on the insured’s life to the trust. The so-called “three-year rule” would cause the proceeds of the insurance policy to be included in the insured’s gross estate for federal estate tax purposes if the insured dies within three years of the date of the gift. One way to avoid that problem is to transfer the policy in a transaction which constitutes a bona fide sale for full value. One way of accomplishing this result would be for the insured to sell the policy to the insured’s spouse who might then contribute the policy to the spouse’s ILIT. However, for this to work, the spouse should not be the beneficiary of the spouse’s ILIT. For estate tax purposes, the spouse should not be a beneficiary of the spouse’s ILIT. A transfer by the spouse to the spouse’s ILIT would not fall under the three-year inclusionary rule of the IRC §2035 should the spouse die within three years of the transfer since it did not involve a transfer of incidents of ownership by the insured. Although there is a transfer for value rule that applies to the sale of an insurance policy, with the result that the death proceeds in excess of the basis in the policy would be ordinary income to the beneficiary, there are exceptions to the so-called “transfer for value” rule. One exception is a sale to the insured’s spouse. There are other ways of avoiding the three-year inclusionary rule as well as the transfer for value problem.
Medicaid Figures And Rates. This newsletter typically reports changes in certain applicable Medicaid figures that may be of interest to readers. The following are the spousal impoverishment and home equity figures for 2019:
● Minimum community spouse resource allowance – $25,284. In the case of a husband and wife, if one spouse is admitted to a nursing facility, the community spouse can retain resources having a minimum value of $25,284 (including the institutionalized spouse’s $2,000 limitation, the total would be $27,284).
● Maximum community spouse resource allowance – $126,420. In general, in the case of a husband and wife, if one spouse is admitted to a nursing facility, the community spouse can retain one-half of the countable assets. However, that total value cannot exceed $126,420 currently (including the institutionalized spouse’s $2,000 limitation, the total would be $128,420).
● Minimum monthly maintenance needs allowance – $2,058. The community spouse is entitled to a minimum income standard of $2,058. If the community spouse’s income is less than that, then the community spouse can receive an allocation of the institutionalized spouse’s income up to that amount. This figure will change in July of 2019.
● Maximum maintenance needs allowance – $3,161. The community spouse may receive additional income from the institutionalized spouse if the community spouse has excess housing costs. This will most often arise when there is a mortgage or when there are rent payments.
● Home equity limit – $585,000 (applicable to Indiana and most states, but the limit is higher in a few states). The current divestment penalty divisor is $6,527 and will remain so until July of 2019. The new rate has not yet been published. The effect of the divestment penalty divisor (which is the penalty calculation rate) for a $100,000 transfer is 15.32 months ($100,000 ÷ $6,527 = 15.32 months).
Types Of Trusts. There are many types of trusts utilized in the estate planning, financial planning, and asset protection planning process. There are revocable and irrevocable trusts, so-called “credit-shelter” (or exemption equivalent) trusts, “Crummey” trusts, irrevocable life insurance trusts (ILITs), charitable trusts of various kinds, and asset protection trusts, just to mention a few. Most trusts will be either revocable or irrevocable. Obviously a revocable trust is one that the creator can revoke or completely amend or rewrite. Such trusts are typically used for probate avoidance purposes only, and will never be beneficial in the realm of asset protection, although a revocable trust could be created by one person that would include benefits for another person in regard to which the assets in the revocable trust would be protected against issues involving the beneficiary. A revocable trust will become “irrevocable” at death, following which the assets will be transferred to certain beneficiaries, or possibly held or set-aside as a separate trust, or perhaps several separate trusts, for other and possibly many different beneficiaries. One type of irrevocable trust that I use very frequently, and in fact I have written thousands of them, is a so-called “irrevocable income-only trust (IIOT), which is a trust that an individual or spouses might create which will be designed to protect their assets for Medicaid qualification purposes after a period of time. Another trust that is frequently used is a “grantor” trust, which is really not a type of trust, but actually is a trust that is defined for tax purposes to be one that is disregarded for tax purposes so that all income and deductions will be attributable to the creator of the trust. Most IIOTs are grantor trusts, so that the trust itself is disregarded for tax purposes, even though the trust can protect assets for the benefit of the creator, subject to certain rules relating to the calculation of a Medicaid penalty and the applicability of the so-called five-year “look-back” rule. The foregoing comments merely skim the surface of the types of trusts that can be utilized, and it should be noted that there are innumerable issues applicable to each of the various kinds of trusts that can be used in various circumstances or to achieve particular goals and objectives.
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.