APRIL 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. Ending the Medicaid Emergency. The China virus health emergency which affected the various states’ Medicaid programs, and their ability to terminate benefits or impose penalties, will be phasing out. Indiana has already started imposing penalties in cases it previously did not, although there are many instances when penalties are not being imposed even now. The 2023 federal budget bill provides that effective April 1, 2023 states are no longer required to provide continuous coverage of Medicaid benefits. This means that it would require new legislation by Congress to postpone the April 1 date. The Indiana FSSA has stated that its goal is to implement any remaining periods of transfer penalties immediately beginning April 1, although it will need to work through some problems before being able to do so. A previous penalty that is still ongoing can only be imposed for the remaining time period, and prior periods cannot be added to an ongoing penalty. I have experienced a number of very inconsistent Medicaid determinations in recent months, and of course because of the changes which are now taking place, there have been many mistakes and erroneous notices issued which have resulted in the need to request a fair hearing. In all cases we have been able to resolve the issue without the formal hearing, but the process is a morass at this time. Common Asset Protection Planning Errors – Continued. We have previously addressed several common asset protection planning mistakes. One error is for the community spouse (i.e., the spouse who continues to live in the home or in another nonnursing facility environment) to fail to take advantage of the opportunity to increase artificially the community spouse’s resources prior to the Medicaid determination “snapshot” date. In the case of a husband and wife, when there is a “community spouse” and an “institutionalized spouse” (an institutionalized spouse would include a spouse who will be receiving care in the home under a Medicaid waiver), the “snapshot” date is the date as of which it is necessary to determine all of the “countable” assets that exist on that date. In the case of a nursing home spouse, the “snapshot” date will be the original hospitalization or nursing home admission date followed by a combined period of at least 30 days of institutionalization. In the case of a Medicaid waiver, the “snapshot” date is determined differently. The “countable” assets that are determined at that time will include most assets, such as bank accounts, investments, the cash value of life insurance (but not the death benefit), vehicles other than one exempt vehicle, etc. The home and any real estate that is placed in the name of the community spouse will be exempt (although all real estate should be transferred to the community spouse). Income-producing real estate is also exempt and should also be transferred to the community spouse. In general all assets should be transferred into the name of the community spouse. Also exempt will be the community spouse’s retirement accounts (although this exemption may change), but the institutionalized spouse’s retirement accounts will be “countable”. Once the “snapshot” date occurs, that date is etched in stone and it does not matter whether a Medicaid application is filed shortly after that or years after that. Once the “snapshot” date occurs, that is the date that will apply for all time. If the assets have not been determined at that time, it may be very difficult to go back several years to determine what the “countable” assets were a very long time ago.
If a “snapshot” date is contemplated, then there are things that one can do to increase the “countable” assets. For example, a home equity line of credit can be taken out, and funds withdrawn and placed in a bank account. Even though there has been no change in the net value of the couple’s assets because the real estate is exempt and the impact of the mortgage is irrelevant, the extra cash will be included as “countable” assets. Once the “snapshot” date occurs, the community spouse can keep one-half of the total of the “countable” assets up to a maximum amount. The excess resources must be made to disappear. So, if as of the “snapshot” date the assets were $100,000, the community spouse would keep $50,000 and would have to deal with the excess resources in order to position the institutionalized spouse for Medicaid. That is a relative easy process to undertake. However, suppose that before the “snapshot” date, a home equity line of credit is taken out for $100,000. In that event, on the “snapshot” date, the assets will consist of $200,000. The excess resources will be $100,000, represented by the home equity line of credit. In order to position the institutionalized spouse for Medicaid, the excess resources can be used to pay down the home equity line of credit, and now the community spouse can keep $100,000 rather than $50,000. Many couples miss out on this opportunity because they do not plan ahead. Don’t make that mistake!
Income and Principal in the Case of a Trust. Many trusts contain distribution clauses that reference differences between income and principal. For example, a trust may require mandatory distributions of all of the trust income, or it may make the distribution of both income and principal discretionary. Some trusts restrict principal distributions except in the case of very specific or even extraordinary circumstances. There are legitimate tax reasons for distributing income, since income left in a trust will be taxable to the trust at very compressed brackets resulting in high levels of tax at relatively low levels of income. Consequently, it is generally a good idea to allow for the distribution of income.
Distributions can be set up so that they can be made by “sprinkling” income among a number of beneficiaries based on certain criteria. In this way, income might be allocated to certain beneficiaries who are in lower brackets and not paid out to beneficiaries who are in higher brackets. If income is paid out of a trust, the income distributed will be taxed to the beneficiary, net of expenses, and not to the trust. Capital gains will generally be treated as principal. If a trust allows the trustee to distribute principal, or even specifically to distribute capital gains as a part of principal, then taxes attributable to the capital gain can be distributed out to the beneficiaries as well, thus reducing the level of taxation inside the trust. It is usually a good idea for the trust to specifically state that the trustee shall consider the tax effects to a beneficiary when the trustee is considering distributions. 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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