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.

DRA Update. At last the State of Indiana has issued what appears to be the proposed final rules regarding implementation of the Deficit Reduction Act of 2005 ("DRA"). The proposed final rules are very similar to the proposed rules which were issued in August of last year (for additional information pertaining to the previous proposed rule, refer to my October 2008 newsletter). It does appear that the five-year look-back period will apply to all transfers which occur on or after February 8, 2006, and that the Medicaid penalty period will not commence to run until the person has been admitted to a long-term care facility, has applied for Medicaid, and has been denied eligibility due to the transfer of assets, but would otherwise have been eligible. Consequently, the proposed rules are extremely harsh, as were the previous proposed rules. However, ameliorating this harsh effect is the legislation that was adopted during the last Indiana legislative session and which was signed into law, as reported in my June 2009 newsletter. This legislation disallows regulations to be adopted concerning transfers of property to the extent that the transfer occurred before the effective date of the new regulations. Consequently, it appears that transfers, whether to trusts or otherwise, which occur before December 1, 2009, will be subject to the current rules rather than the new rules, even if the Medicaid application is filed after December 1, 2009. Transfers prior to December 1, 2009, should be subject to a three-year look-back period for direct transfers, with a maximum five-year look-back period for transfers to certain trusts, and with the Medicaid penalty period to commence even though a Medicaid application has not been filed and even though the person transferring assets has not been admitted to a long term care facility.

The new rules, as well as the implications for planning undertaken under the current rules, are extremely complex. If you are currently engaged in transfer planning, whether involving trusts or otherwise, you should strongly consider implementing those arrangements sooner, rather than later, in order to avoid the harsh effects of the new rules. Readers should also be aware that the divestment penalty divisor changed as of July 1, 2009 (it is adjusted as of July 1 of each year), from $4,456 to $4,611. This means that a transfer of a given amount, when divided by the divestment penalty divisor, will give rise to a shorter penalty period after July 1 than the penalty period which would have applied prior to July 1. As an example, if $100,000 of value is transferred, whether outright or to a trust, the Medicaid penalty period will be 21 months after July 1, 2009 ($100,000 ÷ $4,611 = 21.69), which is rounded down to 21 months under the current Medicaid rules. Please note that the new proposed rules would not allow a round-down, so that the actual penalty period would involve a number of days after the 21-month period commensurate with the fractional percentage quotient which results from the penalty calculation.

Other Indiana Developments. The last legislative session enacted House Enrolled Act No. 1287, which implements a number of changes in the Indiana Probate and Trust Codes. One change allows an individual to sign a funeral-planning declaration pursuant to which a "declarant" may select a "designee" to carry out the funeral plan of the declarant as set forth in the declaration or to make arrangements concerning the disposition of the declarant's remains, funeral services, merchandise and ceremonies. This change was effective July 1, 2009. The new provisions set out a priority regarding the right to control the disposition of a decedent's body. The individual granted the authority in a funeral-planning declaration has the first priority, followed by an individual granted the authority in a healthcare power of attorney. The following persons will then succeed to the next level of priority: the decedent's surviving spouse; a surviving adult child of the decedent; a surviving parent of the decedent; and an individual in the next degree of kinship under Indiana's rules relating to inheritance.

Another important change under HEA No. 1287 is the adoption of the Transfer on Death Property Act, which will apply not only to accounts at financial institutions previously established as pay-on-death ("POD") accounts, but also will allow the transfer on death ("TOD") designation or titling of real estate and virtually any other form of asset or investment. You will recall that last year Indiana authorized the establishment of a TOD title in the case of a motor vehicle or watercraft. Under the new law, it is possible, although many times not desirable, for an individual or a couple to sign a transfer-on-death deed to designate who will become the owner of real estate following the death of the owner(s). It should be noted that HEA No. 1287 also adopted a number of other changes in Indiana's rules relating to probate and estate and trust administration.

Charitable Giving Discussion Continued. The last two issues of this newsletter included discussion about various charitable giving techniques. The issues addressed previously included the use of charitable trusts and a charitable annuity, as well as a discussion of the different types of charitable trusts, outright gifts of cash and capital gain property, and the extension to the end of 2009 of the special benefit available to an owner of a traditional or Roth IRA for direct distributions made to public charities up to a $100,000 limitation. We will now conclude our discussion of charitable gifts by addressing a few miscellaneous and ancillary issues.

If tangible personal property such as a work of art is transferred to a charity and the property is unrelated to the charity's purpose, the fair market value of the item gifted must be reduced by 100% of the long-term capital gain element. Qualified appraisals are also required for such non-cash gifts valued at more than $5,000 and closely-held stock worth more than $10,000. An appraisal is not required for gifts of publicly-traded securities. An example of a property that is unrelated to a charity's purpose would be the gift of a work of art to a charity providing aid to the poor or assistance to children, while if the artwork is transferred to an art museum, the transfer is probably related to the charity's purpose. The deductible portion of the gift would be subject to either the 50% of adjusted gross income limitation, or a 20% of adjusted gross income limitation, depending on whether the gift is to a so-called 50% charity (i.e., churches, educational institutions, hospitals, etc.), or a 30% charity (i.e., private foundations, and please note that the deduction limit for tangible property to a 30% charity would be subject to a 20% rather than 30% AGI limitation).

A charitable gift will obviously give rise to a larger tax benefit to a donor who is in a higher tax bracket. For 2009, the maximum tax bracket is 35%, which is reached at a level of income of $372,950 for single individuals, joint taxpayers and surviving spouses and heads of households, or at $186,475 for married individuals filing separately. However, a single individual will reach a 33% income bracket at $171,550, while spouses filing jointly and a qualified surviving spouse will not reach the 33% bracket of income until $208,850, and a head of household will reach the 33% bracket at $190,200. As a consequence, different taxpayers will receive varying tax benefits from charitable gifts depending on their filing status.

Finally, since net long-term capital gains (gains on capital assets held for more than 12 months) are taxed generally at a maximum rate of 15%, obtaining a deduction for the full amount of an appreciated gift, as compared to selling the property and donating the cash, will save capital gain tax of 15%, plus any applicable state income tax. The charity can then sell the appreciated gift and the capital gain tax can be avoided entirely. Please refer to the previous discussion regarding certain limitations on such transfers, and please also be aware of the fact that there are certain special capital gain tax rules for lower-bracket taxpayers, children under age 19 or under age 24 if full-time students, and that a special 28% top rate applies to the long-term gain on collectibles.