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.
Irrevocable Income-Only Trust Developments. Previous issues of this newsletter have addressed the asset protection advantages of transferring assets to an irrevocable income-only trust (“IIOT”). I have written thousands of IIOTs and utilized hundreds in Medicaid cases which have been in every instance 100% successful as an asset protection strategy. There have been a number of cases in the Commonwealth of Massachusetts that over the course of the last several years have created certain concerns about transferring a residence to an IIOT. However, the most recent cases have substantiated the effectiveness of an IIOT which is holding a residence in regard to which the person who created the trust is allowed to continue to occupy the property. When an IIOT is used, and in particular when a residence is transferred to the IIOT, it is very important that the trust be structured in a manner that will provide the greatest degree of protection. The trust should state specifically that trust principal cannot be distributed to the creator of the trust at any time, under any circumstances, but that would not prevent “loans” from being made as long as the loans are documented and the transaction handled in a businesslike manner. It is also a good idea for the trust to state that the trustee will not have the power to reallocate principal to income, since under the Indiana Trust Code, the trustee would have that authority unless the trust prohibits such discretion. Readers may want to review my comments regarding IIOT developments which can be accessed on my website under the title 2017 Elder Law Developments and 2016 Elder Law Developments to obtain additional information regarding recent developments affecting IIOTs.
Transferring The Family Business Or Farm To Children. The following discussion represents a continuation of comments in previous newsletters concerning business continuation following the death or retirement of a business owner. There are several options for transferring or disposing of the family business or farm when there are both active children and inactive children in the family. One option is to transfer the business or farm equity to all children, but obviously that will create a number of problems as there may be disagreements between the active and the inactive children, particularly since inactive children will most likely be unfamiliar with business or farm affairs. It might be possible to restructure the business or farm entity prior to the transfer through a recapitalization so that there will be both voting interests and non-voting interests, with the active members receiving the voting interests and the inactive members getting the non-voting interests. However, unless the arrangement is structured properly, the inactive children would be holding something that gives them no input and possibly no way of being sure that they receive value for the interest that they own. Another very common approach is to transfer the business or farm interest to the children who are actively involved in the operation and other assets to those who are not involved, or to require the active children who receive the business or farm interest to in effect “purchase” from the inactive children the interest that they would have received had the inactive children received a share of ownership. Obviously this requires planning for liquidity so that adequate funds are available to compensate the inactive children. A similar approach can be taken by transferring the business or farm to all of the children but to include a redemption provision pursuant to which the business or farm entity must purchase the interest of the inactive children. This can usually be structured as a non-taxable transaction, but, again, the entity must have the liquidity to make the purchase, or it must generate enough positive income over the buy-out period to meet the other business needs, including funding working capital, while purchasing the interests of the inactive children. There are variations of these strategies, as well as other approaches, all of which must be closely scrutinized not only in respect of the tax and economic issues, but also in regard to the personal interests and emotions that can be impacted when children are not treated substantially the same.
Insurance Mistakes – Continued. Continuing our ongoing discussion of common mistakes made when planning with life insurance is the so-called “three corner” problem. This problem arises when there is a different owner, insured and beneficiary. A common scenario is when a life insurance policy exists on the husband, which is owned by the wife, but which is payable to the children. This may give rise to what has been referred to as the Goodman problem, so named after a tax case, which is that following the death of the husband, the wife may be deemed to have made a gift of the proceeds of the policy to the children. As a general rule, it is a good idea for the owner of the policy to also be the beneficiary. Consequently, if a life insurance policy is transferred to an irrevocable trust, it would generally be a good idea for the trust to be the beneficiary, and then the proceeds would be received by the trust and then distributed in accordance with the terms of the trust.
ABLE Account Developments. Previous issues of this newsletter have addressed ABLE accounts, and detailed information can be found by accessing the Articles and Links section of my website and reviewing the articles titled 2016 Elder Law Developments, 2017 Elder Law Developments, and 28th Annual EBA Estate and Business Planning Institute. CMS (the Centers for Medicare and Medicaid Services) released guidance to the State Medicaid Directors on September 7, 2017 regarding certain aspects of ABLE accounts. An ABLE account is a way to place money aside for a disabled beneficiary without incurring a transfer penalty and without affecting SSI or Medicaid eligibility. It might be used in the place of, or in tandem with, a special needs trust. There are certain advantages as well as disadvantages applicable to ABLE accounts, which are another tool in the planning arsenal for assisting a special needs beneficiary. Qualified expenses that may be paid from an ABLE account may have both tax and public benefits advantages and include any expenses relating to the disabled person’s blindness or disability, such as those for education, housing, transportation, employment training, financial management, legal fees, oversight and monitoring, funeral and burial expenses, etc.
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.