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 Common Asset Protection Planning Errors. Several previous issues of this newsletter have discussed some of the common mistakes made when undertaking asset protection planning for the purpose of Medicaid qualification. One error which can have devastating consequences is to apply for Medicaid before the “look-back” period has expired. As most people know, there is a five-year “look-back” period for Medicaid qualification purposes. That does not mean that a person cannot be qualified for Medicaid within a shorter period of time, but, if there has been a large transfer that would have resulted in a very long penalty, by applying for Medicaid before the five-year “look-back” period has expired, the penalty will not begin to run until Medicaid qualification. This can bring about a horrific result. As an example, let us assume that a person transfers property having a value of $300,000. The Medicaid penalty associated with that transfer would be 42 months. Let us suppose that four years have gone by, and the person who made the transfer is now in a long term care facility. If the parties wait until 60 months have expired from the date of the transfer, there will be no penalty for the previous transfer. However, if a Medicaid application is filed before the expiration of the “look-back” period, the penalty period will be imposed, which means that it would be necessary to pay for that person’s care for 42 months from the date of eligibility. Obviously there may not be funds available to pay for that care for such a lengthy period of time. By simply waiting out another year, the Medicaid problem could have been entirely avoided.
Additional Issues Regarding Bequests and Beneficiaries. The following will continue our discussion regarding some of the issues impacting bequests and beneficiaries arising in the case of wills and trusts. Many clients wish to arrange for care for their pets following their death. A common practice is to name a caretaker and leave a bequest or gift of money. Obviously, before making such arrangements regarding pets, the testator or trustor should confirm that the person to be named as the caregiver is willing to assume that responsibility. An alternate person should also be named. Money should never be left directly to a pet. The best arrangement to provide for pets is through a trust, sometimes referred to as a “pet trust.” The will or trust should specify to whom the remaining funds would be distributed upon the pet’s death. Unfortunately, arrangements for pets are often handled incorrectly. Indiana has specific rules regarding a pet trust.
Trusts Succession. Two new provisions of Indiana law, effective July 1, 2022, make it easier for two or more successor trustees to be appointed and to have a specific division of powers and responsibilities. One new provision would apply if a provision in the trust instrument addresses trustee succession, and the other will apply if someone is given the power to fill the vacancy and to appoint a successor trustee. Such a power to appoint will include the power to appoint two or more trustees and to establish a division of labor so that each trustee will have non-overlapping powers, duties, and potential liabilities.
Trust Decanting. Indiana adopted new trust decanting rules by enacting a version of the Uniform Trust Decanting Act (UTDA) which has now been enacted by twelve other states. The new Act applies to all trusts that have Indiana governing law provisions or an Indiana situs unless the trust explicitly prohibits decanting or the trust has only charitable beneficiaries. The provisions of the Act are somewhat complex. There are various reasons for decanting a trust. Some trusts have administrative provisions that do not work well, or it may be a good idea to add a trust protector (in Indiana this person would be called a “trust director”), or there may be a reason to make certain changes to a trust for tax purposes. Decanting a trust involves, essentially, executing a new trust and pouring all of the assets into the new trust. Actually, the new trust can be a rewritten version of the old trust so that the assets can remain in the existing trust which will be governed by the decanted trust provisions. The Act will not allow any change in trust distributions and beneficiaries unless the trust itself gives the trustee discretion regarding the distribution of principal. In general, if the trust restricts distribution to certain standards, such as health, education, maintenance, and support, then the trust could not normally be decanted to provide different distribution provisions. One exception would be a special needs trust. Under the Act, the trust can be decanted to establish a special needs trust, and the fiduciary may modify the dispositive provisions for the beneficiary with a disability even if the authorized fiduciary has no discretion in regard to distributions or has discretion only over income. The Act specifically allows decanting the trust into a special needs trust that could be either a pooled trust under 42 U.S.C. § 1396p(d)(4)(C), a first party trust authorized under 42 U.S.C. § 1396p(d)(4)(A), or a third party trust that does not require pay-back of Medicaid benefits provided. The new Act will allow more flexibility for the purpose of modifying trusts for the benefit of special needs individuals. More information regarding Indiana’s version of the UTDA will be addressed in the next newsletter.
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.
To download a copy of this . Click here.