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 IRA Developments. In a recent Medicaid case that I was handling, we received an initial determination by the caseworker within the Indiana Family and Social Services Administration (IFSSA) indicating that a community spouse’s retirement accounts would no longer be considered as exempt. Under the current rules in Indiana, and in many other states, which have been in place for several years, a community spouse’s retirement accounts have been exempt. For example, in the case of a husband and wife, with one spouse being admitted to a nursing facility, it is necessary to determine the value of all of the “countable” assets, and then there will be a division of the assets. There are ways of then utilizing those assets in order to preserve them and still be able to qualify the institutionalized spouse for Medicaid. The community spouse can retain certain assets. The community spouse has been able to retain his or her IRAs or other retirement accounts because of the exempt nature of those accounts. The word that we received was that the State of Indiana was changing that policy.
Ultimately, the State of Indiana decided to defer making a change to that policy until the State of Indiana invokes the rule-making process. In other words, it will need to promulgate and adopt regulations and changes in the applicable policy manual (the Indiana Health Care Program Policy Manual) to effectuate that change. For the time being, then, a community spouse’s retirement accounts will remain as exempt. This can be extremely important, since in order to qualify the institutionalized spouse for Medicaid, if it becomes necessary to liquidate the community spouse’s retirement accounts, and then plan effectively with those after-tax funds, significant taxes may be incurred in order to be able to preserve the after-tax funds. For the time being this problem has been avoided.
Retirement Planning. Attorneys in general, and elder law and estate planning attorneys in particular, must have a significant degree of familiarity with pension and retirement plan issues, as well as the rules governing IRAs. Dealing with those rules is very important when helping a client with estate planning, i.e., planning for how assets will be disposed of at death, and in the case of an estate administration, giving advice regarding the most effective use of retirement assets after taking into account the tax consequences involved. In the context of asset protection and Medicaid planning, obviously the impact of retirement accounts can be very significant. There may be instances when it will make sense to bring in more specialized advisors in the area of employee benefits, and an experienced and well-versed attorney practicing in the estate planning and elder law areas will know when it makes sense to do that. In order to give effective advice and counsel, it is very important to obtain good information and to be able to help the client determine what information is needed and in some instances help to gather that information. There are many types of retirement plans, including profit-sharing plans, money purchase pension plans, defined benefit pension plans, 401(k) plans, 403(b) plans, and others. Retirement accounts are extremely common and it is quite important to have a good working knowledge of the beneficiary options that are available in respect of IRAs and other retirement plans. As discussed in this newsletter previously, most clients, when implementing wills and trusts, do not properly utilize effective beneficiary designations for IRAs and other retirement plans (or for life insurance either). Since neither a last will and testament nor a trust will control the disposition of those assets, it is extremely important to coordinate proper beneficiary designations for assets that are controlled by beneficiary designation. As an example, if a client sets up a trust, whether under a will (a “testamentary” trust), or in a separate living or independent trust arrangement, it may be appropriate to designate that trust as a beneficiary of a retirement plan. There are instances when there are significant tax consequences from doing so, and it would be extremely important to be sure that the trust mechanism is drafted appropriately in order to achieve the desired tax objective of deferral of taxation of the benefits that are paid out of the retirement plan.
Non-Tax Aspects Of Estate Planning. Although the utilization of retirement accounts in conjunction with an estate plan will always have tax significance, there are many aspects of an estate plan that do not involve significant, or possibly any, tax considerations. There are various ways of transferring property at death, such as through a living trust (which could be either a revocable trust or an irrevocable trust), joint ownership, beneficiary designations, and other alternatives. Although one of the principal goals of estate planning is the minimization of estate, gift, and income taxes, in many instances, particularly with the current federal estate tax exemption amount being so large and the elimination of the Indiana inheritance tax, tax considerations in the case of non-retirement account assets become relatively insignificant. Probate avoidance may be a concern, but many times probate avoidance is oversold, and there are many ways of avoiding probate besides establishing a revocable or irrevocable trust. Deciding on the proper transfer mechanism is a key non-tax element of the estate planning process.
Attorneys frequently utilize a questionnaire format in order to elicit information from clients regarding their assets, their family relationships, and their desired goals and objectives. As clients age, asset protection and Medicaid qualification will frequently become a greater concern. In the case of younger beneficiaries, of greater concern is being sure that children are adequately provided for. “Avoiding probate” may be one of the considerations to be taken into account, but in some instances, “probate” can be a desirable or appropriate process. Helping a client navigate this process in order to make intelligent and well-informed decisions is a dynamic process presenting numerous challenges and requiring proper education of the client so that the client can make intelligent choices. Obviously a board certified and experienced attorney is better positioned to be able to facilitate that process.
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.