AUGUST 2020
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.
SNTs Under The SECURE Act. The March 2020 newsletter reported that the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) mandates that most non-spouses who inherit IRAs must take distributions within a 10-year period. There are exceptions for the surviving spouse, a minor child, a chronically ill individual, any individual not more than ten years younger than the IRA participant, and a “qualified special needs trust” (“QSNT”). A QSNT is a special needs trust that benefits one or more disabled or chronically-ill persons if no other person may receive benefits during that time. A QSNT is allowed to use a lifetime distribution based on the life of the oldest QSNT beneficiary. If an IRA is payable in shares, with one share being payable to a non-QSNT or a non-disabled beneficiary, and another share being paid to a QSNT, then the pay-outs will be different for those shares. It should be noted that for planning purposes, even if a ten-year pay-out applies to a non-disabled beneficiary or a non-QSNT, the pay-outs do not have to be in equal installments. Distributions can be timed to correspond with larger deductions or reduced income during certain years. The SECURE Act did not change the rules for estates, or for a trust when there is not a qualified “designated beneficiary,” for which there is still a five year distribution period. In the case of a trust which is not a QSNT but which qualifies as a “designated beneficiary,” then the distribution period would be ten years. IRAs with trust beneficiaries require very careful planning.
Other SECURE Act Changes. As noted in the March 2020 newsletter, the SECURE Act repealed the maximum age for IRA contributions. Prior to 2020, taxpayers were not allowed to contribute to an IRA after age 70½. Beginning in 2020, individuals of any age may make IRA contributions if they otherwise qualify (please note that there are income limitations). Also, the age for taking required minimum distributions was raised to age 72 rather than age 70½. The SECURE Act also allows penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child. Distributions of $5,000 are allowed for this purpose, which applies to each taxpayer ($10,000 would be available for a married couple). This is now another exception to the penalty for distributions from an IRA before age 59½, but such penalty-free distributions are still taxable.
The SECURE Act also expanded Section 529 Savings Plans for expenses of registered apprenticeships and student loan repayments. Previously, “higher education expenses” did not include such payments. Up to $10,000 is now allowed from a Section 529 Savings Plan to pay principal and interest on qualified education loans of the beneficiary or a sibling of the beneficiary.
Indiana Court Of Appeals Allows Medicaid Annuities. In Hotmer v. Ind. Family & Soc. Servs. Admin., Ind. Ct. App. 19A-PL-2694 (June 30, 2020), the Indiana Court of Appeals allowed a married Medicaid applicant to purchase two irrevocable annuities requiring monthly payments to be made to his wife. The Indiana Family and Social Services Administration had ruled that because Hotmer was the owner of the annuities, the income must be attributed to him, which caused his income to exceed the limit for Medicaid eligibility. Consequently, his Medicaid application was denied. The Indiana Court of Appeals reversed and remanded for further proceedings.
In this case, the annuity documents made it very clear that the wife was the sole payee and beneficiary. The annuity contracts were irrevocable and non-transferrable. They could not be assigned, surrendered, or commuted (i.e., reduced to a liquidated value), and neither the annuitant nor the beneficiary could be changed. When the Medicaid application was initially denied, Hotmer appealed to an Administrative Law Judge (ALJ) who overturned the original denial. The FSSA then remanded the case to the ALJ with instructions to re-examine the evidence and applicable law and regulations. On remand, the ALJ again determined that the annuity income should not be countable as Hotmer’s income. The FSSA then again petitioned for review and the FSSA’s ultimate authority overruled its own ALJ and issued a decision that found that the denial was appropriate. Hotmer then petitioned for a judicial review and the trial court affirmed the FSSA’s decision. The Court of Appeals rendered a relatively short analysis of the case and overturned the denial.
This case involved the so-called “Name on the Check” rule, which generally holds that income belongs to the person to whom the check has been issued. However, this case did not address the applicable law and regulations which state that the purchase of an annuity which does not name the State as a remainder beneficiary in the first position (or in the second position after the community spouse or minor disabled child) will be considered as a transfer of assets for less than fair market value. This issue was not raised by the FSSA and was apparently not in controversy on appeal.
It should be noted that transferring IRAs or other funds from an institutionalized spouse to the community spouse in the form of an annuity can be very problematic. There may be tax considerations, but in addition, once the annuity is locked in, the community spouse cannot protect those payments. If the community spouse later requires long term care, those payments would continue to be made to the community spouse and would affect the community spouse’s Medicaid eligibility. In most cases it is better to liquidate the funds, transfer them to the community spouse, and then implement an appropriate asset protection arrangement which will still allow the institutionalized spouse to be qualified for Medicaid. By doing so, virtually all funds can be preserved not only to avoid affecting the institutionalized spouse’s Medicaid eligibility, but also to protect those funds for the benefit of the community spouse. However, consideration must be given to the tax consequences of such a transaction.
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.