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.
Life Insurance And Long Term Care. The cost of long term care (LTC) is so high that few people are able to “self-insure” (i.e., pay privately). Very few people, probably fewer than five percent of my clients, have purchased LTC insurance. This lack of interest and the low interest rate environment which affects an insurance company’s investment returns have resulted in many companies withdrawing from the LTC insurance business. People should be aware that life insurance can be useful as a means of funding LTC. Obviously, cash values can be withdrawn from life insurance policies which have cash value without affecting the death benefit (although doing so might reduce or eliminate any growth in the death benefit). There has been a trend over the last ten years or so toward “hybrid” products, and prior issues of this newsletter have addressed such insurance and annuity contracts which are designed to be used as a means of paying for LTC. These contracts have “riders” attached to them, which of course increase the cost of the premium as compared to pure life insurance. Some companies refer to this additional benefit as an “accelerated care benefit” rider which allows a person to access the investment value of a contract in order to pay for LTC needs. Obviously, the cash or investment value is reduced by the money withdrawn, but the unused death benefit will generally remain intact. It is very difficult to compare a hybrid contract with pure LTC insurance, because pure LTC insurance is designed solely to pay for LTC. This is one reason why many consumers prefer an investment or “hybrid” product, since if the investment is not needed to pay for LTC, there is still a benefit remaining in the investment. Later articles in this newsletter will cover other aspects of paying for LTC.
What Is The Uniform Principal And Income Act? The UPAIA is one of the so-called “uniform” laws, but in fact such statutory enactments are rarely adopted by every state and there are usually substantial differences between various state laws. You may have seen a reference to the UPAIA in a trust document (which might include the trust provisions of a last will and testament), which may have referred the trustee to the UPAIA in administering the trust. The most recent rendition of the UPAIA was revised in 2008 and has now been adopted by 27 states and the District of Columbia. Its goals are to address issues pertaining to how income earned during the probate of an estate or pendency of a trust is to be distributed to particular beneficiaries, how income and principal are to be determined when a particular interest in a trust begins, how income and principal should be distributed when an income interest in a trust ends, and how income and principal are to be distributed during the administration of a trust. It is often said that the UPAIA “governs” the accounting of estates and trusts, but actually it addresses primarily the issue of distributions between classes of beneficiaries. It helps to determine whether certain receipts should be treated as income or principal, and whether certain expenses should be charged to income or principal. This will obviously affect how much a particular beneficiary gets, since an income beneficiary would get less if expenses are charged to income rather than charged to principal, and the same would apply in the case of a distribution to a principal beneficiary. It should be noted that a trust can “opt out” of the UPAIA, but it must be very clearly stated in the trust that the “opt out” was intended. With certain types of trusts, such as the so-called irrevocable income-only trust (“IIOT”) that I use so frequently in asset protection planning matters, the trust specifically states that capital gains and capital gain distributions shall not be treated as income but shall instead be treated as principal, which is a provision that is added in order to protect the principal of the trust. Understanding the UPAIA is complex, and unfortunately we as practitioners perhaps do not spend as much time with our clients discussing such issues as we should. The way a document is drafted with reference to income and expense allocation issues can have significant impact on trust beneficiaries.
What Is Asset Protection Planning? Previous issues of this newsletter have addressed various aspects of what we typically call “asset protection planning”. In my practice, most of the issues that we confront pertain to Medicaid qualification and protecting assets in the process of planning for long term care. Certain states have statutes which allow the formation of an asset protection trust that can allow a person to protect assets against the claims of general creditors. In most states, including Indiana, a third party can establish a trust for the benefit of a different beneficiary, and if it is designed properly and includes “spendthrift” provisions, the assets in the trust can be protected against the claims of most third-party creditors. However, Indiana and most states do not allow a settlor or creator to establish a self-settled spendthrift trust to provide asset protection against the creditors of the settlor beneficiary. Readers may want to review previous issues of this newsletter in order to reconsider some of the asset protection issues that have been previously discussed. There are a couple of points that clients need to understand, however, which bear repeating. First, certain types of trusts can be created to achieve a degree of asset protection, particularly in the context of long term care. By planning ahead, people can protect virtually all of their assets, or certainly at least a significant portion of them, so that the existence of those assets will not adversely affect their Medicaid eligibility. In addition, a spouse can protect the assets for the benefit of a surviving spouse in the context of planning for long term care by means of what is referred to as a testamentary special needs trust, i.e., a trust that comes into existence under the predeceasing spouse’s last will and testament for the benefit of the surviving spouse which will protect assets against claims of Medicaid agencies and facilitate Medicaid qualification. Finally, it should also be noted that certain types of ownership, by the very nature of that ownership, will achieve a degree of asset protection. For example, if a husband and wife purchase property in Indiana as “tenants by the entirety”, that unique form of ownership will protect the property against claims on the part of creditors of one spouse. Consequently, if real estate is owned by a husband and wife as tenants by the entirety, and one spouse is involved in an accident, or has a financial liability, the tenancy by the entirety real estate will be protected and the creditors of one spouse cannot attach or obtain access to real estate owned as tenants by the entirety. Related to the issue of asset protection, however, is Indiana’s version of the Uniform Voidable Transactions Act (UVTA), which becomes effective in Indiana on July 1, 2017. It made a number of substantial changes in Indiana’s prior version of the Uniform Fraudulent Transfer Act (UFTA). As a general rule, if a person is thinking seriously about asset protection planning because a triggering event has occurred that may give rise to a legal claim, it is probably too late in most instances to engage in asset protection planning. It is never too late, however, to plan for Medicaid qualification and for asset protection in the context of long term care.
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.