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 On Bequests and Beneficiaries. Continuing our discussion regarding certain issues relating to bequests and beneficiaries as contained in wills and trusts, it should be noted that clients frequently are concerned about a contest to his or her will, which actually occurs very infrequently. Often they want to include a “no-contest” provision which would purport to disinherit whoever challenges the will. In Indiana, such clauses are now legal, although it will be ineffective if there is a legitimate reason for the challenge, i.e., such a provision cannot be used as a way of preventing a legitimate contest of a will that was improperly executed or fraudulently established. Another area where mistakes are made is the matter of charitable gifts. If a gift is made to a particular charity, with no restrictions or limitations, then the gift could be used for any legitimate charitable purpose as determined by the governing board of that charitable organization. If the gift is intended to be restricted to particular purposes or uses, then those purposes must be specifically defined. There may be particular sub-organizations or offices within the charity which should be referenced for the purpose of particular gifts. However, it is usually a good idea not to be too restrictive with a gift unless the person making the will or creating the trust is seriously concerned about any other uses. Should the organization not be able to use the gift for the express purpose, then it may not be able to accept the gift and the general charitable intention of the donor may be frustrated. It is also a good idea to explain what to do if the specific charitable organization no longer exists. In such cases, the personal representative of the estate or the trustee of the trust should be given authority to select a charitable organization to receive the gift that fills a charitable purpose that approximates the intended uses designated by the donor. If a specific property or asset is given, then it is possible that the organization cannot or will not accept that property or asset, and the personal representative or trustee should be given authority to sell the property or the asset and to distribute the net proceeds of sale to the charitable organization.
Additional Common Asset Protection Planning Errors. As discussed in the last few issues of this newsletter, when it comes to asset protection, there are many common mistakes that people tend to make, especially when they are being guided by advisors who do not have significant experience in the area of asset protection planning. Some transactions are not exactly “mistakes,” but the transaction may not represent good planning or an ideal use of the funds being transferred. As noted in previous issues of this newsletter, direct gifts to beneficiaries are generally not a good idea for a multitude of reasons. Some people desire to prepay the funeral expenses of certain family members, but I generally do not recommend that strategy. There was an Indiana Court of Appeals case approximately 20 years ago, Indiana FSSA v. Culley, 769 N.E.2d 680 (Ind. Ct. App. 2002), which held that there is no penalty for purchasing funeral trusts for children or their spouses. The court relied on the definition of “immediate family” in the Supplemental Security Income regulations at 20 C.F.R. § 416.1231(a)(4). In 2017, the FSSA narrowed the language in IHCPPM 2640.10.25.40 to allow only an exemption for the purchase of burial plots or spaces for immediate family members. After objections, the FSSA agreed to revert back to its prior policy until it was able to promulgate a new rule. New 405 IAC 2-4-2 promulgated by the FSSA on June 11, 2021, which is now effective, defines “burial expenses” to include the transfer of the deceased, use of a hearse during the ceremony, and the purchase of death certificates, and defines “burial spaces” to mean burial plots, grave sites, crypts, mausoleums, urns, niches, caskets, and other customary and traditional repositories for the deceased’s bodily remains. It also includes necessary and reasonable improvements or additions to or upon such burial spaces, such as vaults, headstones, markers, plaques, burial containers, and arrangements for opening and closing the grave site. There are various reasons why incurring such expenses may not be an ideal planning option. As stated in previous issues of this newsletter, the principal goal of asset protection should always be to preserve assets for the Medicaid applicant/recipient. The expenditure of funds for allowable burial costs would mean that those funds would not be available to meet the needs of the transferor. While there may be instances when incurring such expenses makes sense, such as in the case of a disabled child, every conceivable option should be considered in order to achieve the goal of protecting assets for the benefit of the Medicaid applicant/recipient.
Use Of The “HEMS” Criteria In Trusts. Many trusts provide that either the income or principal can be used for the benefit of a beneficiary to provide for his or her “health, education, maintenance, or support.” These “HEMS” criteria are used for certain tax reasons, as well as for other reasons. In general, if a person is a trustee of a trust, and can distribute either income or principal to himself or herself for any reason, then he or she will be treated as if he or she had created the trust and will be taxed on the trust income whether the beneficiary receives the income or not. If certain criteria are used, such as the “HEMS” criteria, then the trustee who is also the beneficiary can make such distributions and will only be taxed to the extent that the beneficiary actually receives the income. In a recent program I attended, a trust officer of a local corporate fiduciary explained that when it comes actually to administering the trust, a trustee often needs more guidance than the usual criteria. When a person creates a trust and makes reference to the “HEMS” criteria, the trustee may not feel that the trustee has enough guidance to determine what the creator of the trust actually intended. The trust officer pointed out that health and education are typically not problematic, but figuring out what is intended to be maintenance and support can be very difficult. The end result may be a trustee that is not sure about what the creator intended, and the beneficiary may be unhappy because the beneficiary believes that he or she should receive a distribution and the trustee does not agree. The goal in the case of all trusts should be to avoid disputes to the extent practicable. The content of the trust itself should guide the trustee in determining what the trust creator’s intentions actually were.
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.
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