NOVEMBER 2021
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.
More Regarding Bequests. A specific bequest is generally used to refer to a specific gift in a last will and testament of money or property, although it is more correct to refer to a specific “devise” if the gift is of real estate or if it pertains to the residue of the estate. A specific “legacy” is sometimes referred to as a gift of money. In most instances, it really does not matter what the bequest or devise is called, but when it is “specific,” it refers to a specific item of property or a specific amount of money. As a previous issue of this newsletter noted, the words used are very important when gifts are included in a will or a trust. A “demonstrative” bequest is a gift of a certain amount of money from a particular property or fund. A demonstrative legacy includes characteristics of both general and specific gifts. They are general in nature and refer to a specific fund or piece of property. “General” bequests are gifts of assets from a general estate, such as a gift to “John Smith, my nephew, in the sum of $5,000.” A “residuary” bequest comes out of the balance of the estate after other gifts, and payment of bills, taxes, and administration costs. When it comes to tangible personal property, such as household goods, furnishings, personal effects, etc., most people will provide that such property can be divided between particular beneficiaries, such as children, as they agree, with any disputed items to be sold. As long as there is no disagreement, the children can then divide those assets any way they choose. The testator or the trustor may include an equalizing distribution of cash in case certain children receive less in value than others. It is also possible to refer to a list, which could include either a few or possibly many items of tangible personal property, specifying in the list how those assets will be distributed, and to whom. If the last will and testament or the trust refers to the list, the list can be changed without changing the last will and testament or trust. In Indiana, a list cannot be used in either a trust or a will for business property, real estate, or monetary gifts.
Common Asset Protection Planning Errors. The next few issues of this newsletter will address certain common asset protection planning errors that many people and their advisors make. “Asset protection” in this context refers to protecting assets for the purpose of qualifying for Medicaid. This is most frequently done in the case of a husband and wife when one spouse is admitted to a long term care facility, and the goal is to preserve the assets for the community spouse so that all of those assets do not have to be spent paying for the care of the institutionalized spouse. In the geographical area of Evansville and Vanderburgh County, it is not at all uncommon to expend as much as $10,000 or more per month when paying for long term care. The average couple, or the average single person if he or she is unmarried or widowed, would lose virtually all of their assets within a fairly short period of time if it becomes necessary to pay for that level of care for an extended period of time.
The biggest and most common mistake is failing to plan at all. Planning is important for many purposes, whether to reduce the impact of taxes (including estate taxes and income taxes), and planning for the disposition of IRAs. Planning is also important in order to assure that the goals of the testator or the trustor are realized. The Bible, specifically Proverbs 21:5, states that the plans of the diligent lead to profit as surely as haste leads to poverty. While failing to plan is the most common and most damaging mistake that people make, and even though there are fewer options available with crisis planning, even in crisis planning approximately one-half of the assets can be saved, and often more depending on the level of income and the cost of care. This is true irrespective of what was done, or not done, and irrespective of when certain actions have taken place. In the case of a husband and wife, most people do not realize that it is generally possible to preserve virtually all of the assets for the community spouse, although all or a portion of the institutionalized spouse’s income might have to be paid to the nursing facility. However, in order to preserve those assets, it might be necessary to liquidate certain assets, including IRAs or other qualified accounts, and taxes may be incurred. Planning ahead can help to reduce the tax burden of liquidating assets and retirement accounts.
Direct Gifts In Asset Protection Planning. It is my opinion as well as my practice that direct gifts to children or others are rarely appropriate as a means of preserving assets. The goal should always be to protect assets for the benefit of the “client,” which usually is the Medicaid applicant or the Medicaid applicant’s spouse. Obviously, as an attorney, when I am working with a family, it is very important to identify at the outset who I represent, i.e., who the client is. It is my practice in virtually all cases to treat the Medicaid applicant or recipient and his or her spouse as the client or the clients. Assuming that to be the case, then when a client’s funds or other assets are being planned for, it is almost always inappropriate to transfer those funds or assets directly to a child or other family member. The direct receipt of those assets would create a great deal of risk, since it is possible that those resources may not be available for the client when needed. It is almost always better to transfer the assets to an irrevocable asset protection trust, such as the irrevocable income-only trust that I typically use. Such an arrangement will assure the availability of the funds later, if needed, which funds can be made available as a “loan” from the trust to the Medicaid recipient. Documenting such loans will allow for the possibility of “payback” to the trust with no Medicaid penalty if the Medicaid recipient later accumulates excess funds.
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.
Download a copy of this newsletter here: News21-November