DECEMBER 2009

Final DRA Comments. Since Indiana has now implemented the DRA, this portion of the newsletter which has continued for approximately three years will not be included in future editions. Developments in the areas of Indiana law and regulations impacted by the DRA will of course be reported as additional guidance becomes available. It should be noted that the Indiana Family and Social Services Administration issued a policy document on November 1, 2009, summarizing the new provisions of Indiana's Medicaid rules which are to be integrated into the Program Policy Manual in the near future. Even though the five-year "look-back" period is now in effect for trusts and other transfers, the actual period of Medicaid ineligibility to result from particular transfer planning strategies may be considerably shorter, even as short as a month or a few months, thus creating the opportunity through the implementation of proper planning techniques to preserve a portion of the person's assets and shorten the period of time for obtaining Medicaid qualification. This will allow the establishment of a supplemental care fund to address financial needs that are not covered by the Medicare and Medicaid programs.

Included in Best Lawyers Publication. I am pleased to announce that I have been included in the 2010 edition of The Best Lawyers in America in the specialty of Trusts and Estates. I was named an Indiana "Super Lawyer" in 2007 - 2009.

IRA Planning Discussion, Continued. The last issue of this newsletter summarized some of the post-death IRA planning options available to a surviving spouse and other beneficiaries. It was noted that there are special rules involving a trust as a beneficiary, although those special issues were not summarized in the last newsletter. If a trust is named as a beneficiary, the trust document or a summary of the trust must be sent to the IRA plan custodian or trustee by October 31st of the year after the year of the participant's death. Since the "stretchout" period applicable to a trust beneficiary will be based on the age of the oldest trust beneficiary, it is usually a good idea to have a separate trust to inherit the IRA, or portions of it, and it is often a good idea to keep the trust separate from a trust which receives other assets or to provide special rules applicable to the IRA distributions. If the trust is a "see-through" (sometimes called a "conduit") trust, all minimum required distributions will be paid to the trust based on the beneficiary's age and then distributed out to the beneficiary. If it is desirable for the trust to be a discretionary trust, then it is very important that the trust allow for appropriate distributions in order to minimize the income tax consequences of the IRA distributions. It is almost never a good idea to designate a special needs trust as a beneficiary of IRA distributions, since special needs trusts are designed for the supplemental care of a beneficiary whose public benefits, such as SSI and Medicaid, may depend on the assets held by the beneficiary, and mandatory distributions from the trust may cause the beneficiary to be disqualified for public benefits. However, there are instances when a special needs trust of necessity will be named as the IRA beneficiary, and with proper planning, the IRA payments can generally be preserved, at least to a significant degree, with proper trust planning and implementation. If a beneficiary of the trust is not a person, but is rather a charity or a non-individual, then the trust will be a disqualified beneficiary for the purpose of electing a life expectancy payout from the IRA. Such a defect might be cured, but if it is to be cured, it must be cured during the "shake-out" period (the period prior to September 30 of the year after death as discussed in the previous newsletter), so that there are no inappropriate beneficiaries of the trust which would adversely affect the IRA "stretch payout." IRAs are frequently a significant part of an individual's assets, and as a consequence, because of the unique tax characteristics of IRAs and other qualified plans, they create unique planning opportunities and pitfalls. I frequently find in my practice that qualified plan beneficiary designations have not been made properly and are inconsistent with the participant's general estate-planning goals and objectives.

New IRS Actuarial Tables Have Beneficial Effect. The IRS issued new tables for valuing life estates and annuities earlier this year which reflect recent mortality experience and lower interest rates. The increased life expectancy under the new Table 2000 CM results in a life estate having a slightly higher value and remainders and reversionary interests having a slightly lower value. As a consequence, charitable remainder trusts may be a little less desirable while charitable lead trusts may be a little more desirable, as also may be private annuities. It should be noted that for transfers on or after May 1, 2009, but prior to July 1, 2009, the donor may choose to value the tax effect of the transfer under either the old or the new tables, and likewise for estate tax purposes if the decedent dies on or after May 1, 2009, but prior to July 1, 2009. Please note that a private annuity is often considered for a person with a shortened life expectancy, but the applicable table cannot be used if the person is terminally ill when the gift is completed, i.e., if there is at least a 50 percent probability that the person will die within one year.

Long-Term Care Hybrid Incentives. Beginning in 2010, distributions from life insurance and annuities may be tax free when used to pay long-term care costs. This new tax rule may enhance the popularity of hybrid products which are not straight long-term care insurance policies. Utilization of long-term care insurance has not become that popular due to the expense, particularly when prospective purchasers feel that they may never need the insurance. Hybrid products may entail a cash value life insurance product, which can be used for nursing home costs, with any remaining balance to be paid as a death benefit, or an annuity which may have a long-term care feature attached. Many companies have issued hybrid products that combine the features of annuities or life insurance with long-term care benefits. The cardinal rule to remember in regard to the purchase of insurance for any risk is to first determine what it is that you are trying to insure. Once a person has focused on the risks that he or she is most concerned about, that person will be in a much better position to determine whether or not it makes sense to insure that risk, and if so, to evaluate the options that are available to meet the perceived need. If a person has minimal assets and little extra income, then it may not make sense to purchase long-term care insurance unless there are unique concerns that need to be addressed, such as a strong desire to stay in the home as long as is practicable. A comparison of the various options can then be undertaken to determine which of the available options appears to be the most affordable while at the same time most directly addressing the perceived risks. In virtually every case it is advisable to obtain several comparative quotes from competing insurers or product vendors and to be sure that you are undertaking an "apples to apples" comparison.

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.

Previous Newsletter - October 2009