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.
What is a Dynasty Trust? A dynasty trust is an alternative choice for long term trust planning. There is usually a federal estate tax objective for such trusts, but in many instances a dynasty trust is used simply to protect the family wealth for more than one generation, and perhaps several generations. A dynasty trust is an irrevocable trust (although it might not arise until death, at which time it would become irrevocable), and will usually be established by the creator for the benefit of current and future descendants. Due to the changes which occurred in the federal estate tax system over the course of the last several years, and in particular due to the most recent changes, federal estate taxes are not a concern for most people. The current federal estate tax, gift tax, and GST “exempt amount” is now $11,210,000, which means that for a married couple, federal estate taxes will not be a concern unless a couple’s combined estate approximates or exceeds $22,420,000. Of course, when the estate passes down to future generations, that value will be added to the estate tax value of subsequent generations. Establishing a dynasty trust will prevent the ancestor’s estate from being added to the value of the next or another subsequent generation’s potential federal estate tax exposure. A dynasty trust might be established for non-federal estate tax reasons, in which event there may be more flexibility available in regard to the arrangement because the trust may not need to be designed to achieve particular federal estate tax objectives.
Types Of Buy/Sell Agreements. Buy/sell agreements are frequently used by businesses and their owners in order to limit the transfer of ownership interests among certain desirable or permissible persons. A buy/sell agreement will typically provide that an ownership interest in a particular entity can only be purchased or transferred under certain circumstances, such as at the owner’s death or disability, or could only be sold at a price determined under the agreement. The goal of a buy/sell agreement is to prevent disputes among owners of that entity and may help determine the value of that entity for tax purposes as well as to specify what the owner will receive and what the purchaser will pay. If the buy/sell agreement will determine the value of a decedent’s ownership interest, then there are certain IRS requirements that must be met [see Treasury Regulation §20.2031-2(h) and IRC §2703]. There are various common types of buy/sell agreements. A cross purchase agreement is generally an agreement among the owners of the entity providing that one of the owners will purchase the interest of another under certain prescribed terms. One benefit of such an agreement is that the purchaser will obtain a presumably higher “cost basis” for the purchased business interest, thus reducing the future for potential long term capital gain upon the sale of that interest at a later time. Another type of common agreement is a so-called “redemption agreement” pursuant to which the entity purchases the owner’s interest. This type of arrangement is often funded by life insurance, and the structure of the arrangement may be simpler than a cross purchase agreement since there would be only one buyer (i.e., the entity), rather than perhaps multiple owners which might require multiple insurance policies. There are also “hybrid agreements” which are actually quite common and what I typically use in the corporate context. Under this approach, the entity has the right to purchase first, followed by the other owners, and any interest not purchased by the entity and the other owners must then be purchased by the entity. This kind of arrangement provides choices and makes it possible to achieve the advantages of both the cross purchase type of arrangement and the redemption arrangement.
Medicaid Figures And Rates. This newsletter typically reports changes in certain applicable Medicaid figures that may be of interest to readers. The following are the probable spousal impoverishment and home equity figures for 2018:
● Minimum community spouse resource allowance – $24,720. In the case of a husband and wife, if one spouse is admitted to a nursing facility, the community spouse can retain resources having a minimum value of $24,720 (including the institutionalized spouse’s $2,000 limitation, the total would be $26,720).
● Maximum community spouse resource allowance – $123,600. In general, in the case of a husband and wife, if one spouse is admitted to a nursing facility, the community spouse can retain one-half of the countable assets. However, that total value cannot exceed $123,600 currently (including the institutionalized spouse’s $2,000 limitation, the total would be $125,600).
● Minimum monthly maintenance needs allowance – $2,030. The community spouse is entitled to a minimum income standard of $2,030. If the community spouse’s income is less than that, then the community spouse can receive an allocation of the institutionalized spouse’s income up to that amount. This figure will change in July of 2018.
● Maximum maintenance needs allowance – $3,090. The community spouse may receive additional income from the institutionalized spouse if the community spouse has excess housing costs. This will most often arise when there is a mortgage or when there are rent payments.
● Home equity limit – $572,000 (applicable to Indiana and most states, but the limit is higher in a few states).
The current divestment penalty divisor is $6,439 and will remain so until July of 2018. The new rate has not yet been published. The effect of the divestment penalty divisor (which is the penalty calculation rate) for a $100,000 transfer is 15.53 months ($100,000 ÷ $6,439 = 15.53 months).
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.