Serving Indiana Since 1975

November 2022 Newsletter

| Nov 18, 2022 | Firm News



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.

Common Asset Protection Planning Errors – Continued. This will continue our

previous discussion of some of the common mistakes people make in asset protection

planning, i.e., planning to protect assets in the context of long term care. Previous issues

of this newsletter have addressed a particular kind of irrevocable trust that can be set up

by an individual with his or her own assets, which may give rise to a Medicaid penalty.

However, after either the five-year look-back period, or the penalty period if less than five

years, the assets inside the trust can be protected and preserved. In cases when a person

wants to transfer his or her own assets and not incur a Medicaid penalty (the penalty being

a period of time during which the Medicaid program will not pay for care), there are two

principal types of self-created trusts that can be used as were discussed in the previous

newsletter which will not give rise to a penalty. However, if a parent or a grandparent

wishes to set aside funds for a Medicaid beneficiary, or for someone who might require

Medicaid in the future, such a trust would be a third party created trust.

A third party special needs trust can be set up when planning for a family member

or others. When designed properly, such a trust will be exempt and the assets are not

countable or penalizable. There is no pay-back requirement for a third party trust, nor is

there any kind of estate recovery against the trust assets. A third party special needs trust

can be implemented through a will, in which event it would be a “testamentary” special

needs trust (“TSNT”), or it can be set up through an existing trust that might come into

existence either immediately during the life of the creator or after the death of the creator

with the funding of a separate special needs trust. In order to protect the assets from any

possibility of a Medicaid claim, or a claim on the part of the Social Security Administration

for a person receiving Supplemental Security Income (SSI) benefits, appropriate special

needs criteria must be used.

A special needs trust is generally designed so that benefits may be made available

to a special needs beneficiary to improve their quality of life, but typically not for “support”

or “health” benefits. In general, one should not use a reference to the criteria of “health” or

“support” to determine whether or not assets should be distributed. Assets could be

distributed that would meet a need that would be health related, or which could provide for

something that would constitute support, but the decision must be specifically made to do

so and it must be based on the trustee’s discretion to meet that particular need, defined

in terms of a specific benefit, and not based on general criteria of “health” or “support.” In

general, the trust should be absolutely discretionary in regard to trust distributions. This

type of TSNT is very common in spousal planning. Whenever one spouse is eligible for

Medicaid, or may become eligible in the future, the other spouse will typically establish a

will containing TSNT provisions for the spouse should the well spouse predecease the

Medicaid eligible spouse. The next issue of this newsletter will address such a spousal

TSNT in greater detail.

Moving IRAs. When a person dies and a beneficiary inherits an IRA, the IRA must

be either distributed or moved into an inherited account. If distributed, the benefits will be

taxable. If moved into an inherited account, the taxes will not occur until the funds are

withdrawn over a period of time in accordance with the required distribution rules. Moving

the IRA is sometimes referred to as a rollover. Actually, non-spouse beneficiaries must

transfer an inherited IRA, not roll it over, while a spouse beneficiary can choose either the

transfer or rollover method when moving an inherited IRA. When a non-spouse beneficiary

transfers an inherited IRA, it is safer to have the receiving financial institution initiate the

transfer. Of course, the inherited IRA could be left with the same investment company by

transferring it into a new inherited account. If the beneficiary requests the transfer of an

inherited IRA, and if the holding company should process the transaction as a distribution,

the amounts received would be taxable and ineligible for rollover or transfer. There might

be a cure should this occur, but it is much safer to have the receiving institution request the

transfer so that the IRA can be moved directly from one institution to the other.

Spouse beneficiaries are permitted to choose either the transfer or the rollover

method. The transfer method may be better in some circumstances than a rollover. The

rollover method causes the spouse to lose the ability to keep the amount in the inherited

beneficiary IRA. The rollover method may be desired if the spouse wants to treat the IRA

as his or her own. However, this would mean that the spouse would not be able to take IRA

distributions without a penalty unless the spouse is over age 59ó. If the spouse is under

age 59ó, the spouse can take distributions from the inherited IRA and not be subject to

the penalty for early withdrawals. There is a “death exception” to the 10% early distribution

penalty in the case of an inherited IRA. A spouse who sets up an inherited IRA must start

life expectancy distributions by the later of December 31 of the year following the year of

the IRA owner’s death or the year the decedent reaches age 72. If the surviving spouse

is older than the deceased spouse, keeping the assets in a beneficiary IRA would allow the

spouse to defer starting RMDs until the year the decedent would have reached age 72.

It is very important for people who inherit IRAs to receive proper professional

guidance regarding their transfer options and the timing of distributions. The rules are

extremely complex and the foregoing summary only covers the surface of some of the


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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