SEPTEMBER 2022
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.
Bequests And Beneficiaries – Continued. The last few issues of this newsletter have
addressed a few of the issues impacting bequests and beneficiaries in the context of wills and
trusts. A major mistake will result if the wrong selection is made for the personal representative
of an estate or the trustee of a trust. Indiana and most states have adopted by statute a
specification of the duties of a personal representative and a trustee. In the case of a personal
representative of an estate, the personal representative generally must collect and protect assets,
taking the same into possession, pay debts and expenses, account for all transactions, and
distribute the assets to the appropriate people. It is very important to make the correct choice
when designating a personal representative or a trustee. A designated representative should
communicate well, follow instructions, not procrastinate, be absolutely trustworthy, not be
susceptible to bad or inappropriate influences, not be arrogant, not be disorganized, and must
have good common sense. Preferably someone will be selected who does not have a conflict of
interest with the beneficiaries of the estate or trust. Consequently, it might not be a good idea to
designate certain family members or business partners. A professional personal representative
or trustee might be best, but there may be additional costs involved, although in most instances
any designated personal representative or trustee is entitled to a fee. The personal representative
or trustee must be absolutely impartial. It is very important for the personal representative or
trustee not to engage in misconduct or take any kind of personal advantage. These comments
conclude our ongoing discussion of particular issues regarding bequests and beneficiaries in the
case of wills and trusts.
More Common Asset Protection Planning Errors. In addition to the previous issues of
this newsletter which have addressed certain common asset protection planning errors, another
common mistake is for a non-specialist attorney to prepare and then implement the wrong kind
of trust. I have seen even experienced practitioners make this error. For Medicaid purposes, a
trust is considered to be “revocable” if there are any circumstances under which it can be revoked,
even if it is labeled as being irrevocable. The principal of a revocable trust is always an available
resource. Payments from a revocable trust to a third party which are not for the benefit of the
individual who created the trust will be treated as a transfer and are penalizable. Payments from
a revocable trust to or for the benefit of the individual who set it up are counted as income to the
individual. Indiana looks through a revocable trust so that real estate is still treated as real estate,
and the rules on real estate are applied to that property. In the case of an “irrevocable” trust, if
there are any circumstances when payments from the trust could be made to or for the benefit
of the creator of the trust, the payment from the principal from which, or the income on the
principal from which, payment to the individual could be made shall be treated as resources
available to the individual. However, in the case of an “income-only” trust, when the individual
cannot benefit from the principal, but will receive the income, and no portion of the trust principal
can be distributed, the principal will not be treated as a resource to the individual. Therefore no
part of an “income-only” trust should be counted as a resource, but instead the trust principal will
be treated as having been transferred when the trust was established. If an individual wants to
transfer assets to protect those assets, and also be a beneficiary of the trust, the transfer should
be to an irrevocable “income-only” type of trust. The transfer will be subject to a penalty, however.
If an individual wants to provide assets for the benefit of a spouse without affecting the spouse’s
eligibility for Medicaid, then the trust must be a testamentary special needs trust unless the
transfer is to a special type of exempt pay-back trust providing that any remaining assets will be
paid back to the State of Indiana in reimbursement of Medicaid benefits. We will discuss trusts
in the context of Medicaid further in the next issue of this newsletter.
Uniform Trusts Decanting Act. House Enrolled Act (HEA) 1205 repealed Indiana’s
existing trust decanting statute and enacted Indiana’s version of the Uniform Trust Decanting Act
(UTDA), which has now been enacted by 12 other states. Indiana’s UTDA became effective
July 1, 2022. “Decanting” is the process by which a trust can be amended or rewritten to change
the structure and terms of a trust in particular circumstances. The new decanting statute limits
changes a trustee can make through decanting if the trustee does not have “expanded distributive
discretion” under the first (i.e., the existing) trust terms. Indiana’s new UTDA allows the trustee
to distribute trust property from an existing trust to one or more second trusts, and also allows the
trustee to modify the terms of the first (i.e, the existing) trust without distributing any assets to an
actual second trust. If an existing trust gives a discretionary power of distribution that is not limited
by an ascertainable standard or a reasonably definite standard (such as the typical “health,
education, maintenance and support” criteria), then the trustee can make changes in the second
trust that will alter the distributions between the beneficiaries. However, the power must be
exercised in a manner consistent with the first trust’s purposes. If the trustee’s discretionary power
of distribution is limited, then the trustee can decant, but the second trust must grant each
beneficiary of the first trust a beneficial interest in the new trust that is substantially similar to the
beneficial interest of the beneficiary in the first trust. Essentially, the trustee will be limited to
certain administrative changes in the trust. However, one change that can be made is to convert
the beneficiary’s interest, if the beneficiary is disabled, to a special needs trust that can be
protected for Medicaid qualification purposes. Indiana’s new UTDA includes a number of special
provisions regarding charitable interests. Decanting a trust can be very useful. Trusts often last
many years and circumstances change. It is not otherwise possible in many instances to amend
or reform a trust, and decanting may be the only modification method that does not require the
consent of the beneficiaries or court approval.
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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