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 Enlarges Long Term Care Partnership Program Protection. House Enrolled Act (HEA) 1341 was signed into law by the Governor on May 4, 2015, which extends immediately the protection provided by long term care partnership program policies to include the assets of a spouse and not just assets in the name of the insured. This corrects a problem under current State policy. Previously the asset disregard only applied to resources owned by the insured individual and not to the resources owned by the spouse. Indiana Code § 12-15-39.6-10 provides an asset disregard on a dollar-for-dollar basis equal to the benefits provided by a long term care insurance policy which does not pay benefits equal to the State-set dollar amount, or disregards the total value of all assets of an individual who is the beneficiary of a qualified long term care insurance policy that provides maximum benefits at the time of purchase equal to at least the amount of the State-set dollar amount then in effect. The asset disregard is available after the benefits of the long term care policy have been applied to the cost of long term care. HEA 1341 does not change the other requirements applicable to a qualified long term care insurance policy. For example, if a partnership program policy in Indiana was purchased in 2001 and provided a State-set dollar amount of benefit equal to at least $162,068, then once the total benefits were paid out under that policy (which would be paid out at the rate in effect after applying the annual dollar benefit cost-of-living increase), the individual would then be eligible for Medicaid and all of the individual’s and his or her spouse’s assets will be protected.
What Is A Qualified Longevity Annuity Contract? A QLAC is a longevity annuity owned inside a retirement account. An IRA account holder may purchase a QLAC with the lesser of 25 percent of the IRA balance or $125,000. The amount of the QLAC is not counted for Required Minimum Distribution (RMD) purposes until the account holder turns 85. If the account holder dies before age 85, there is an ancillary death benefit. In effect, the QLAC amount is not used in determining the RMD for any year which would otherwise be applicable to IRAs. Stated differently, if an IRA consists of $300,000, and $75,000 is used to purchase a QLAC, the RMD is determined using $225,000 as the value of the IRA. Industry statistics suggest that the demand for this product is still relatively weak. However, interest in longevity annuities does seem to be growing, and more companies are throwing their hats into the ring with new products. People should evaluate such products with great caution and should obtain independent and reliable financial advice. It appears that in the case of many products, the internal rate of return being generated on the longevity annuity is relatively low, or in many cases, even if not bad, it may not be significantly advantageous. Long term corporate bonds may pay out close to the same yields, and of course the purchase cost of an annuity is relatively high. In other words, simple conservative investments over the same time horizon may generate even more cash flow. It should also be noted that a QLAC is not Medicaid-compliant and can create complications in the Medicaid qualification area. However, from a purely retirement-planning point of view, a QLAC inside an IRA may be a good way to avoid earlier taxable distributions.
Asset Protection Involving Spouses. Previous newsletters have contained articles relating to various aspects of asset protection. One opportunity for a married person is for the potential debtor-spouse to transfer assets to the less risk-oriented spouse in an effort to protect those assets from the creditors of the transferor spouse. In general, even in the context of Medicaid qualification, spouses can transfer assets back and forth between themselves with no income or transfer tax consequences. However, in a state which is a marital property or a community property state (which Indiana is not), to overcome the presumption that the property retains its status as marital or community property, there must be clear and convincing evidence that the transfer is intended to be irrevocable and is intended to transmute the property into the separate property of the individual spouse. One way of transferring assets and avoiding the risk that the spouse may ultimately lose those assets is for the transferor spouse to transfer the assets to an inter vivos qualified terminable interest property trust (QTIP), which in effect results in only the income from the property being paid out to the transferee spouse. A QTIP is essentially an “income-only” type of trust, but it meets certain transfer tax requirements, which in the case of most individuals will not be a significant issue. Transferring assets to an “income-only” trust for the benefit of the transferee spouse can be a very effective mechanism for protecting assets, particularly in the context of Medicaid qualification. In many instances when assets will be transferred, whether it is contemplated before or after the marriage, either an antenuptial agreement or a postnuptial agreement might be appropriate in order to document and address the intentions and concerns of the spouses. It should be remembered that a person’s spouse is typically that spouse’s biggest potential creditor.
Beneficiary Designations. In many instances it will be best for your legal counsel to draft your beneficiary designation forms for life insurance and, in particular, for IRAs and other qualified plans. When people try to complete beneficiary designations themselves, even with assistance from their insurance and financial advisors, the results frequently fail to correspond with the estate plan and the desired economic goals. Individuals frequently fail to carry out the instructions at all, or if they do, the forms are executed improperly. Benefits that are intended to pass to a trust will instead pass directly to certain individuals, and in some cases to very young beneficiaries, thus necessitating the need for a legal guardianship. You should be sure that your beneficiary designations correspond with your estate plan.
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.3