June 2013

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.

Indiana Inheritance Tax Repealed. The Indiana inheritance tax was repealed retroactively to January 1, 2013, by the enactment of House Bill 1001, which was signed into law on May 8, 2013. This means that for any decedent who died in 2013, there will be no Indiana inheritance tax, nor will there be any Indiana estate tax or Indiana generation-skipping transfer tax. There are numerous positive effects of this change beyond the obvious one of eliminating the taxes that otherwise would be payable in the case of certain estates and trusts. One positive benefit is that it will no longer be necessary to obtain a consent to transfer (sometimes called a tax waiver) from the county assessor in order to transfer certain assets following the death of a decedent, nor will it be necessary to file an inheritance tax return and pursue the sometimes cumbersome process of determining the amount of Indiana inheritance tax due. On the negative side, however, is the likely result that many people who otherwise might have been encouraged to plan because of the possibility of taxes will now most likely fail to plan at all under the mistaken impression that there are no other significant reasons to plan. Previous issues of this newsletter have addressed the importance of planning and some of the myriad reasons why people should do so which have nothing to do with either federal estate taxes or Indiana inheritance taxes.

Another Retirement Plan Suggestion. For creditor protection, employees who participate in a qualified retirement plan should consider a rollover from the qualified plan to an IRA. Since Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (the “Act”), a debtor can obtain an unlimited bankruptcy exemption for IRAs that contain only funds rolled over from a qualified retirement plan, while the exemption for IRAs funded with annual contributions is limited to $1 million. Although a “pure” rollover from a qualified plan to an IRA will be completely exempt, it should be noted that the ACT does not specify how the exemption applies to a traditional or a Roth IRA which includes rollover funds from a qualified retirement plan as well as other contributed amounts.

POST Enacted. The Indiana Legislature enacted a POST law to be effective July 1, 2013 (House Enrolled Act No. 1182). “POST” refers to a Physician Order for Scope of Treatment. The September 2011 issue of this newsletter contained an article which was critical of the POST concept because it involves a medical-driven regime rather than one based on typical concepts of health care advance directives. Fortunately, the new POST legislation does not limit the use of health care advance directives in Indiana, but instead it will involve a supplementary process. In fact, a health care representative could invoke the use of the POST form, which may make it less likely that a “life-prolonging procedure” will be utilized. A future issue of this newsletter will address the POST concept in more detail. It is contemplated that the Indiana State Department of Health will promulgate the POST form. Whether or not patients and health care providers will know what to do with the form or how to utilize the form properly will remain to be seen. More information will follow.

Asset Protection Revisited. Several recent articles in this newsletter have addressed various aspects of asset protection planning. Such planning involves transfers of assets, and in many cases it will involve the utilization of a trust. As previously noted, in the context of planning for long-term care, a particular type of asset protection trust is used quite frequently. Time is a person’s best friend as well as his worst enemy in the realm of asset protection. Occasionally the expression “old is gold” is used. If transfers are made and there are existing creditors who may later object to that transfer, then the scheme may be deemed to involve the intent to defraud creditors. If transfers are made before a liability actually exists, even though the liability is contemplated because a person is involved in risky enterprise, it is much more likely that the transfer plan will be effective. Although in the context of long-term care it is possible to implement a transfer and qualify for Medicaid within a relatively short period of time, obviously, one can protect more assets by transferring assets sooner and avoiding the impact of the five-year “look-back” period which will apply at the time of Medicaid qualification. In any event, one should not transfer assets that he or she is likely to need, although there are certain kinds of transfers that can be implemented which will permit the transferor to continue to enjoy at least a modicum of ownership and control, such as, perhaps, the right to receive the income from the transferred property. Other aspects of asset protection planning will be addressed from time to time in future issues of this newsletter, and readers are encouraged to revisit some of the previous commentaries in prior issues for additional information.

Planning For Business Assets. In many families, one or more of the children will be active in a business enterprise, while another child or other children may not be. Some plans contemplate the gift or transfer of business assets to certain children, and non-business or non-voting business assets to other children who are not involved in the enterprise. In such cases, it is very important that all of the planning documents be coordinated to achieve the particular estate planning goals. If there is a buy-sell agreement applicable to the business, the agreement should be coordinated with the planning strategy. An “exit strategy” should be considered for children who have non-voting interests in the business. Valuation and appraisal issues must be addressed in such cases, and of course the liquidity to be able to make the purchase must be planned for, which may involve the purchase of life insurance. In some instances, a buy-sell agreement will be structured which will allow certain owners to compel the active owners to purchase their stock, i.e., the non-voting or non-active shareholders might be given a “put” option to invoke a buy-out of their interests. A formula would typically be included to determine the purchase price which would take into account the lesser value of a non-voting interest as compared to a voting interest, as well as taking into account other discounts due to the lack of marketability, minority interests, etc. A stream of payments might be contemplated so that the business itself can finance the purchase with its own earnings. In cases involving assets outside the business which have adequate value, such non-business assets can be set off to the inactive children, and “equalization” can be accomplished either with other non-business assets or by requiring the payment of an adjustment amount from the children who receive the business interests.