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.
Differences Between VA Pension And Medicaid Trust Rules. I will be speaking at the 27th Annual Evansville Bar Association Estate and Financial Planning Institute on Friday, November 18, 2016. My topic will not only include the proposed changes to the VA pension rules, which changes have been previously addressed in this newsletter (refer to the September 2016 issue), but also differences between the VA pension and Medicaid trust rules. The proposed changes in the VA pension rules will not affect the impact of trusts on VA pension eligibility except to the extent that a penalty might be imposed for having established and transferred assets to the trust. The VA pension rules relating to trusts are very difficult to ascertain as very little guidance is available from the VA regarding the effect of certain trusts on pension benefits. Office of General Counsel Opinions from the Veterans Administration are generally the only available source to determine the position of the Veterans Administration on trusts. The general rules can be summarized as follows:
● A trust established by a third party which provides for the veteran’s support, whether established by the veteran’s spouse or another third party, will probably be treated as a resource affecting the VA pension eligibility.
● A special needs trust established by a third party, except perhaps the veteran’s spouse, should not affect VA pension qualification except to the extent that the trust assets are distributed or remain available to the veteran.
● A revocable trust would disqualify the veteran because the assets would be deemed to be available.
● An irrevocable trust established by the veteran or the veteran’s spouse, if either of them is a beneficiary, would cause the trust assets to be deemed to be available to the veteran because there would not have been an “actual relinquishment of rights in the property and income from the property.”
● A third-party inter vivos trust, unless established by the veteran’s spouse, should not be treated as a resource except to the extent that the assets are available for the veteran’s support, unless assets are actually distributed to or made available to the veteran.
The major difference between the VA trust rules and the Medicaid trust rules is that an irrevocable income-only trust established by the veteran or the veteran’s spouse, except to the extent of the income which would be deemed to be available, will not impact Medicaid eligibility, although a penalty may be imposed if an application for Medicaid is filed within five years of the date of the establishment of the trust. In general, there are more planning opportunities available, and greater planning specificity in regard to the applicable rules, in the case of Medicaid as compared to VA pension eligibility. Further information regarding these issues is available on my website in the “Articles and Links” section for 2016 Elder Law Developments which includes a copy of the materials that I presented at the 38th Annual Judge Robert H. Staton Indiana Law Update in Indianapolis on September 21, 2016. Similar but not identical information is also available under the heading “Veterans Administration Aid and Attendance Pension Developments.”
Treasury Department Looking At Family Business Transfers. There are new tax regulations proposed by the Treasury Department which are intended to limit the federal transfer tax benefits that may be available in certain cases when there is a transfer of an interest in a family business enterprise. Previous issues of this newsletter have reported certain tax cases involving a family limited liability company (an “LLC”) or a family limited partnership (an “FLP”). Readers should refer to the July 2016 issue of this newsletter which discussed the Estate of Purdue case and the September 2016 issue of this newsletter which discussed the Estate of Holiday case. The goal of such family entity planning is to reduce the value of a family member’s retained interest in the enterprise so that there will be less federal estate tax imposed at the time of the death of the family member who transferred the family business interest. These benefits stem to a significant degree from discounts which are applied both to determine the value of the interest which was transferred, so that there will be a reduced gift tax effect, and also to the value of the retained interest, so that there will be less federal estate tax imposed at the time of death. The Treasury Department has issued proposed regulations which would prevent certain valuation discounts in many instances. The proposed regulations can be reviewed at http://tinyurl.com/elr-valuationdiscount.
Business Succession (Continued). The preceding article above pertaining to family business transfers obviously entails business succession planning, since a transfer of a business interest is involved. One of the typical goals of business succession planning is to minimize the impact of federal taxes which might otherwise affect the family interest being transferred. There are many planning opportunities available in conjunction with the process of family business succession. First of all, the transfers of certain interests may qualify for the annual gift tax exclusion (which is currently $14,000 per donee per year) so that a business owner can transfer small interests to any number of family members or others and there will be no resulting gift tax effect to the extent of the $14,000 annual exclusion for each donee. There are also certain planning opportunities allowing particular kinds of gifts to be made in such a way as to reduce significantly the tax effect of the gift as well as to result in a reduction in the potential federal estate tax that would be imposed at the time of the death of the owner of the family enterprise who is transferring a part of the owner’s business interest. FLPs and LLCs might be used in conjunction with that process, as can other types of trusts and devices. However, because the terrain affecting this planning is a virtual minefield due to the many complex tax concepts involved, and due to the fact that the rules are constantly changing (as illustrated by the proposed Treasury Department regulations discussed in the previous article), much thought and planning must go into the process of business succession planning because of the potentially significant tax considerations involved. Please refer to previous issues of this newsletter regarding business succession planning.
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.