JANUARY 2023
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. As several previous
issues of this newsletter have explained, there are a number of common mistakes that
people make when engaged in asset protection planning, i.e., planning to protect assets
in the context of long term care. Several previous issues of this newsletter have referred
to and described different types of so-called special needs trusts. As previously noted, a
special needs trust that is implemented through a last will and testament is called a
“testamentary special needs trust (“TSNT”). A TSNT is commonly used when planning for
spouses. In fact, one of the most common asset protection planning errors is failing to
utilize a TSNT when planning for spouses. When one spouse is qualified for Medicaid
while in a nursing home, or for a Medicaid waiver in the home, virtually all of the assets
owned by the spouses will be transferred into the name of the non-Medicaid spouse. What
happens if the non-Medicaid spouse predeceases the Medicaid-eligible spouse? If the
predeceasing well spouse has a will that leaves the assets to the Medicaid-eligible spouse,
the assets will then flow back and the Medicaid-eligible spouse will become ineligible for
Medicaid. If there is no will, the Medicaid-eligible spouse will inherit, likewise losing
Medicaid eligibility. If the well spouse attempts to disinherit the Medicaid-eligible spouse,
the failure to provide for the Medicaid-eligible spouse will be treated as an uncompensated
transfer, thus invoking a Medicaid penalty. This means that the Medicaid program will not
pay for the care of the Medicaid-eligible spouse for a period of time because of the
uncompensated transfer.
In virtually every spousal case a TSNT should be used. If the predeceasing spouse
has signed a will with TSNT provisions and then predeceases the Medicaid-eligible spouse,
the desired assets can pass into a TSNT for the Medicaid-eligible spouse. Most of those
assets will not be needed and will not be used, but if the Medicaid-eligible spouse does
have needs, then funds can be made available to meet those needs. However, the assets
in the TSNT will not affect the Medicaid eligibility of the surviving spouse. A TSNT will
should be used in every spousal case when a Medicaid application is being filed. Too
frequently such an arrangement is not put in place, and in my practice, at least two or three
times a year it actually occurs that the well spouse will predecease the Medicaid-eligible
spouse. If those arrangements have not been put in place because the non-Medicaid
spouse refused to do so or simply did not get around to signing the new last will and
testament containing TSNT provisions, the entire process becomes extremely complex and
significant assets will be lost.
Qualified Disability Trusts. A Qualified Disability Trust (“QDT”) is a trust for a
beneficiary who has a disability. It may be a testamentary trust or an inter vivos trust. If
drafted properly, it may not only shelter assets for public benefits purposes, but may also
provide an income tax benefit to the beneficiary. A QDT is purely a tax concept. No election
is necessary if the trust beneficiary meets the statutory requirements. It may also be, or
may not be, a special needs trust (SNT). The purpose of the rules relating to a QDT is to
reduce the income taxes otherwise payable by a special needs beneficiary.
A QDT has a special income tax exemption as well as a standard deduction.
Consequently, substantially more tax can be avoided with a QDT than with a trust that is
not a QDT. This makes the QDT a good beneficiary of an IRA. If the minimum distributions
are low enough, there can be tax-free accumulation of IRA distributions inside the QDT.
The QDT must be a non-grantor trust, and so it may be a good idea to designate
an independent trustee. A QDT cannot have multiple beneficiaries, although some
authorities dispute this. A self-settled SNT cannot be a QDT because it will in almost all
instances be a grantor trust, which is a tax concept that causes all of the income to be
taxed to the creator of the trust whether or not the income is distributed. The beneficiary
will need to meet the requirements of disability which are mandated for a QDT.
Determining The Trust Creator’s Intent. In many instances it is a good idea for
a trust instrument to spell out specifically what the creator’s goals are for establishing a
particular trust. In other words, the trust instrument should provide specific guidance to the
trustee about making distributions. Many trusts, however, do not include such insights. In
many instances it may be appropriate to include a statement as part of the trust to provide
a better understanding of what the creator’s beliefs, feelings, and attitudes are as well as
the creator’s expectations regarding the role the trust should play. Such statements can
be succinct and do not need to be complex or cumbersome. It might be appropriate to
include statements of the creator’s values and priorities, or it may be appropriate to spell
out whether the beneficiary’s other resources should be taken into account in determining
whether or not to make distributions. It might be a good idea to express what the lifestyle
expectations are for the beneficiary.
Retirement Planning. An attorney advising clients about retirement planning
matters will need to review at least certain retirement plan documents and verify the client’s
vested interest, the client’s desired beneficiaries, and consider and advise concerning the
general tax and planning issues involved. It may be appropriate to advise concerning ways
of rearranging the disposition of benefits in order to enable distributions to be made over
the longest period of time possible, or modifying the plan in consideration of the income
tax consequences of retirement account withdrawals. The attorney will most likely not be
involved in issues relating to investment planning or retirement plan interpretation unless
the attorney is a specialist in dealing with retirement plan matters. The attorney should
advise and guide the client about planning for the assets to be distributed at death and
what the effect of that disposition may be in considering asset protection/Medicaid planning
strategies when a client or the client’s spouse owns an interest in a retirement plan or is
a retirement plan beneficiary.
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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