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.
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
issues.
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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