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.
Goals Of SNTs In Asset Protection. The goals of asset protection planning, including utilization of special needs trusts (SNTs), typically involve the following: (i) leaving funds for the benefit of a child or other beneficiary without causing the beneficiary to lose important public benefits; (ii) making sure that the funds are well-managed; (iii) making sure that other children or beneficiaries are not over-burdened with caring for a disabled sibling and that the burdens fall relatively evenly among the siblings; (iv) being fair in terms of distributing the client’s estate between the disabled child and the client’s other children; and (v) making sure there is enough money available to meet the disabled beneficiary’s needs. People typically strive to provide not only for their own needs, and the needs of the person’s spouse, but also try to maintain as much control as possible without “tainting” the asset protection arrangement being utilized. Previous issues of this newsletter have addressed various issues of SNTs and asset protection planning. In most instances a trust of one or another type is used in order to achieve the goals of asset protection, and when SNTs are set up for the benefit of a child or other beneficiary, those trusts can be set up in various ways, either during the lifetime or at death, and have a multiplicity of tax and other implications. Readers are encouraged to review previous issues of this newsletter for previous treatment of asset protection and SNT planning issues.
Is Incurring A “Medicaid Penalty” A Bad Thing? Transferring assets and incurring a Medicaid penalty can have a very beneficial planning effect. A Medicaid penalty will arise when assets are transferred for less than fair market value. In Medicaid parlance, sometimes such transfers are called “improper transfers”. However, implementing a transfer arrangement and incurring a penalty is very often part of a specifically designed plan. A Medicaid penalty is determined by dividing the value of the assets or funds transferred by a state-determined rate, which represents the average cost of care in that state. The current Indiana so-called “divestment penalty divisor” is $6,078. This means that a transfer of $100,000 will incur a penalty of 16.45 months ($100,000 ÷ $6,078 = 16.45 months). The result would be that the person who made the transfer, or his or her spouse, would not be eligible to have the cost of nursing home care paid for by the Medicaid program, or the cost of Medicaid waiver service paid for, for a little more than 16 months if the transferor otherwise became qualified for Medicaid within a period of five years from the date of the transfer. The “penalty” does not represent a tax or fee, but simply a period of ineligibility once the person has otherwise qualified for Medicaid waiver services or for institutional care in a long term care facility. Penalties do not apply in the case of regular Medicaid, i.e., people who are living in the home and receiving traditional Medicaid health care benefits. As a planning option, typically people who are actually in the position of being ready to apply for Medicaid as a part of the planning process will transfer an amount or total value representing approximately 50 percent of their total countable resources, and then the remaining resources will be utilized in such a way as to effectively make them “disappear”, even though the funds would be available to pay for the person’s care during the Medicaid penalty period. The result is that the person has assets which are less than the $2,000 resource limitation, the Medicaid application is filed, and the person is then qualified for Medicaid beginning as of the first day of the month following the transfer. The funds made to “disappear” by means of a Medicaid-compliant annuity or by means of what is called a non-negotiable promissory note will be available to pay for the cost of care, combined with the person’s income, for the applicable Medicaid penalty period. This is sometimes called “half-a-loaf” planning, although the actual amount that can be transferred could be less than one-half of the total resources, or perhaps even substantially more than one half of the total resources, depending on the person’s other income, the cost of the nursing home, and other financial factors. It is possible in most instances to preserve very close to, or even more than, one-half of the person’s total countable resources, even if they are at the very brink of needing waivered services or entering a nursing home, or even if the person is already receiving waivered services or is in a nursing facility and decides to try to save a portion of his or her resources. All aspects of the transaction are fully disclosed in conjunction with the Medicaid application process, and the techniques used are in specific conformance with applicable state and federal laws.
Erroneous IRA Rollover Results In Significant Taxes. The March 2017 issue of this newsletter pointed out an advantage which can be available to a surviving spouse if the surviving spouse does not roll over an inherited IRA from the predeceasing spouse, but instead elects to treat the account as an inherited account. In such a case, if the surviving spouse is under age 59½, treating the IRA as an inherited account rather than making a rollover to the surviving spouse’s IRA will allow the surviving spouse to take IRA withdrawals without being subject to the ten percent early distribution penalty. If the surviving spouse rolls the IRA over into his or her own retirement account, while the surviving spouse may have more flexible distribution choices, the account will be the surviving spouse’s account, and the surviving spouse will not be able to withdraw from the account until the surviving spouse attains age 59½ unless the surviving spouse is willing to pay the ten percent penalty or qualifies for an exception, such as for a disability. A recent Tax Court Memorandum decision, Ozimkoski, T.C. Memo 2016-28, resulted in the surviving spouse incurring significant taxes as well as penalties because funds were taken from a rollover IRA following her husband’s death before she had attained age 59½. There was litigation involved over the subject IRA between the taxpayer, who was the surviving spouse, and one of the decedent’s sons who was the taxpayer’s stepson. After she had already completed the rollover, a settlement was effectuated, resulting in some of the IRA being paid to the stepson. The taxpayer did not report the IRA distributions involved in the settlement on her Form 1040 for 2008, which is the year when the withdrawal occurred, arguing that the distribution should not be considered her income because the stepson was entitled to a part of the IRA as a result of the probate litigation. The Tax Court ruled that an IRA beneficiary designation cannot be reformed after the IRA owner dies, and this case highlights one of the disadvantages of rolling an IRA over into the surviving spouse’s IRA as opposed to retaining the IRA as an inherited IRA. While in most instances, particularly when the surviving spouse is older, a rollover will make sense, it is not always the best choice. Once the rollover has been made, it may not be possible to undo it without incurring significant taxes and penalties.
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.