March 2014

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.

Medicaid Changes Due To Obamacare. There will be a number of significant changes in the Indiana Medicaid Program beginning June 1, 2014. The current spend-down system will be eliminated, except in the case of a person on a waiver or residing in a nursing home who has income above the so-called “special income limit,” which is currently $2,163. For those people, it will be necessary to implement a so-called “Miller Trust” (also called a “Qualified Income Trust”), which will insulate the excess income and prevent a loss of Medicaid eligibility. Currently, for community (non-waiver and non-institutional) Medicaid, the income limit for a single person is $721 (or $1,082 for a married couple). Currently, for people with income above that level, there is a “spend-down” to that level, which means that the excess income must be spent on health care, and the Medicaid program will then pick up the other covered medical costs. After elimination of the spend-down system beginning June 1, 2014, the new income standard will be 100% of the federal poverty level (FPL), or $973 for an individual and $1,311 for a married couple. People with income below that limit and otherwise eligible will qualify for Medicaid with no spend-down, while those with income above that level will not be eligible for Medicaid. If an uncovered person has no other insurance, that person can purchase insurance on the marketplace with a subsidy. There are other changes looming at the well. Readers should be alert to changes which might impact their or a family member’s Medicaid eligibility.

Charitable Annuity Versus Lead Trust. Previous issues of this newsletter have addressed certain aspects of a charitable gift annuity, which is a sum given to a charity with an obligation on the part of the charity to pay a fixed sum to an individual beneficiary for life. If an IRA is left to a charity with the obligation on the part of the charity to make payments to an individual beneficiary, the participant’s estate will receive a federal estate tax deduction, and the IRA or qualified plan benefits will be received by the charity free of tax. This approach may be advantageous compared to a charitable remainder trust (CRT), partly because of simplicity, even though the tax result may be very similar. However, leaving a retirement plan to a charitable lead trust (CLT) is probably a disadvantageous way to fund such a trust. If the goal is to allow funds to pass to non-charitable beneficiaries free of gift or estate taxes, there will be a cost incurred in the form of paying up-front income taxes because the CLT is not is not exempt from income taxes. This can bring about a significant financial reduction in the amount of money actually ultimately passing to the non-charitable beneficiary. CLTs have their place, but it is probably not an appropriate vehicle to fund with an IRA.

Protecting The Home. Protecting the home from claims of potential creditors is frequently the most emotional aspect of asset protection planning. Since the best way to protect an asset from potential creditors is not to own the asset at all, frequently people will transfer their home to other family members (a spouse or a child). There are many risks of such a maneuver, not the least of which is the possibility of a claim being made against the spouse or family member who owns the residence. There are also risks of high medical costs, divorce, lawsuits, tax liens, bankruptcy, incapacity of the owner, etc. Many states, including Indiana, recognize ownership on the part of the husband and wife as tenants by the entirety, which will insulate the home (or any real estate, for that matter), against the claims of creditors of one spouse. Consequently, acts by one spouse cannot adversely affect property owned by both spouses as tenants by the entirety. If both spouses are liable for the debt, then of course the property will be within the reach of a creditor’s claim. Many people inappropriately transfer their residence or other real estate to a trust, or perhaps between their two individual trusts, when in certain circumstances it might be better if they not do so. Such decisions should be made only after due consideration has been given to the multiplicity of issues surrounding potential claims and the ownership of property. Also, if parents transfer a residence to children, then when the children later sell that property, the children will incur capital gains taxes, while the parent(s) might have been exempt from capital gain taxes because of the special tax rules applicable to the sale of a principal residence. There are certain kinds of trusts that can be used which will preserve the tenancy by the entirety ownership, and other trusts that might protect an asset against other claims or perhaps allow the transferor to become eligible for Medicaid, if due consideration is given to the planning issues surrounding the transfer of a residence (or other real property, for that matter).

Naming Co-Trustees. People often wish to name co-trustees, possibly a family member and one or more non-family members, when establishing trusts. In general, if two co-trustees are named, the decisions must be unanimous. If three or more are named, then a majority will control. However, it is possible to allow co-trustees to delegate their authority to one another or others, and it is possible to assign certain specific trust responsibilities to a particular trustee or a group of co-trustees, with another co-trustee to have different responsibilities. Another possibility is to give someone, such as a trust protector, or another individual, “tie-breaker” authority. One way of doing this is to give one co-trustee control in a certain area, and another co-trustee control in another area, which might apply only if the two fail to agree in one or the other areas of potential dispute. Whenever more than one trustee is acting, it is very important to establish a clear order of succession, even if it is nothing more than to state that the surviving or remaining co-trustee will continue to act as the sole trustee. Since trusts may last a long time, it is essential to give due consideration to issues relating to trustee succession.

Spousal Impoverishment Error. The January 2014 issue of our newsletter included a typographical error for the maximum community spouse resource allowance. The amount shown was $170,240, but in fact the correct amount is $117,240 currently. We apologize for the typographical error which was not found and corrected before the newsletter was printed and mailed.