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.
Tax Cuts And Job Act Affects ABLE Accounts. Previous articles in this newsletter have addressed ABLE accounts under the Achieving a Better Life Experience Act of 2015 (the “ABLE Act”). An ABLE account is a new type of tax advantaged savings plan for the benefit of disabled individuals under § 529A of the Internal Revenue Code (“IRC”). Similar to qualified educational savings accounts under IRC § 529, the proceeds, earnings on, and distributions from an ABLE account receive favorable treatment under federal law. Funds in an ABLE account are disregarded not only for income tax purposes, but also for public benefits purposes, such as Medicaid, for a qualified disabled beneficiary. An ABLE account may be a simple way to put funds aside for a beneficiary in order to improve the life of the beneficiary without affecting the beneficiary’s eligibility for public benefits, such as Medicaid. The Tax Cuts and Job Act allows rollovers from a § 529 college savings account into a § 529A ABLE account. Funds from a § 529 account can be distributed without penalty when transferred to an ABLE account for the same beneficiary or for a “family member” of the beneficiary as defined by the new law. This planning opportunity can be beneficial for a family which has saved for college and then encounters a situation later involving a child who develops a disability and an ABLE account becomes more appropriate. Further, an ABLE account beneficiary who is able to work and earn an income is permitted to make contributions to the ABLE account in excess of the $15,000 annual contribution limit that would otherwise apply. The maximum additional earnings contribution above the $15,000 annual limit is $12,060 in 2018. It should be noted, however, that earned income by a disabled individual may affect federal means-tested benefits. In addition, the federal Tax Saver’s Credit has been extended to include contributions to ABLE accounts subject to certain limits. The so-called Tax Saver’s Credit, formally called the Retirement Savings Contributions Credit, is available to low-to-moderate income workers. It helps to offset the first $1,000 (or $2,000 for married couples) for taxpayers who voluntarily save for retirement, including contributions to IRAs, 401(k) plans, and similar workplace plans.
Indiana Court Of Appeals Upholds Post-Marital Agreement. In Buskirk v. Buskirk, 88 NE 3d 217 (Ind. App. 2017), the Court of Appeals upheld a post-marital agreement entered into approximately three years after the marriage, but which was later contested in a dissolution proceeding approximately 40 years later. After the parties had discussed divorce approximately three years after their marriage, they entered into an agreement to keep their property and income separate and to allow the marriage to continue. Approximately 40 years later, when the wife filed for dissolution of the marriage, the husband sought to enforce the agreement. The Court stated as follows: “It has long been held that antenuptial agreements are valid and binding so long as they are entered into freely and without fraud, duress, or misrepresentation, and are not, under the particular circumstances of the case, unconscionable.” The Court applied the same analysis to the post-marital agreement in this case that it applies to pre-marital agreements and stated that since it was clear that the parties had entered into the agreement in good faith, with adequate consideration (i.e., their mutual agreements and releases), and with the intention at the time to enter into a binding agreement, the agreement should be enforced. Post-marital agreements can be extremely helpful in certain circumstances. In the case of a second marriage, particularly when the couple to be married may be concerned about long term care and exposing their marital assets to the long term care needs of the other spouse, a post-marital agreement can be a way of addressing those concerns. While qualification for Medicaid will not be affected by the terms of a post-marital agreement, entering into an appropriate agreement and planning in the context of long term care can address problems in advance that otherwise would be extremely difficult to address at a later time, perhaps many years later, when long term care becomes a likely event.
Insurance Mistakes (Continued). Suppose a loan is taken out against a life insurance policy, and later the life insurance is pledged as collateral for a third-party loan. If it turns out that the life insurance policy is a modified endowment contract (“MEC”), doing so may trigger a tax liability that was never anticipated. A MEC is an insurance policy issued after June 21, 1988 in regard to which the cumulative premium payments in any of the first seven years exceeds the sum of the net level premiums which would have been paid to provide a paid-up policy after the payment of the seven level annual premiums (this is the so-called “seven pay test”). Distributions from MECs are subject to the same tax rules as deferred annuity contracts, i.e., income rather than principal comes out first as a result of any withdrawal or distribution. Loans against the cash value are treated as distributions for this purpose. Also, there is a ten percent penalty on any withdrawal if the taxpayer is under 59½. Consequently, an analysis should always be undertaken if there is any possibility that a life insurance policy could be treated as a MEC.
Effectiveness Of Advance Directives. People often wonder whether health care advance directives executed in one state will be valid in another. It has been estimated that state laws in approximately two-thirds of the states expressly provide for the recognition of living wills and health care powers of attorney prepared in accordance with the law of another state. In practice, most states will recognize them, but because of state law differences, and because different terms are used (for example, in Kentucky, the health care representative is referred to as a health care “surrogate”), if a person relocates to another state, all legal documents should be reviewed and possibly revised or rewritten. Further, people tend to sign legal documents and then leave them unchanged for many years. Due to changes in the law, as well as their own circumstances, reviewing and revising them from time-to-time is a good idea. Consequently, if a person relocates to another state, that person should definitely have all legal documents reviewed for compliance with the intricacies of the law of the new domicile.
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.