Law Offices of Randall K. Craig
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Serving Indiana Since 1975

January 2023 Newsletter

| Jan 18, 2023 | Firm News

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.

To download a copy of this newsletter, click here. 

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