NOVEMBER 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. A common Medicaid planning error occurs when positioning a person for Medicaid requires a Qualified Income Trust, or “QIT” (also sometimes referred to as a “Miller Trust”). A QIT is required when a person’s income exceeds an amount known as the Special Income Limit (“SIL”). This amount is adjusted every year, and it is currently $2,742 per month. This amount represents gross income. When a person receives Social Security, the gross amount before the Part B deduction, and before any other deductions, is what is used to determine whether a QIT is required. In the case of a pension, it is the gross amount of the pension before any deductions for dues, insurance, taxes, etc. If gross income exceeds $2,742 per month currently, then the excess, or preferably an amount larger than the excess, will have to be deposited into a QIT. The money that is run through the QIT is then used to pay for nursing home or other charges. However, unless at least the amount of the excess income is run through the QIT, the person is not eligible for Medicaid for any month when too little income is deposited. In the context of qualifying a person for Medicaid, often the amount that is run through the QIT is set too low. Then, if income increases in the future, such as when the Social Security amount increases each year based on the cost-of-living factor that applies, it is possible that not enough income is being run through the QIT. As a result, when I determine the amount to be deposited into a QIT, I generally set that amount several hundred dollars higher than the amount of the excess income. There is no problem moving more income to the QIT, but if too little is deposited, the person will not be eligible for Medicaid during that month. If a loss of Medicaid occurs, it may be necessary to reapply, file an appeal, or take other action to deal with the temporary loss of eligibility. Making the QIT deposit high enough can help to avoid those complicated and expensive problems. It should be noted that when the Medicaid recipient dies, any funds remaining in the QIT must be paid back to the State of Indiana to the extent of Medicaid benefits provided. Consequently, the goal is not to accumulate money in the QIT. Occasionally money will accumulate, in which event the QIT amount does not count toward the $2,000 resource limitation for Medicaid eligibility purposes. While the Medicaid recipient can continue to be eligible for Medicaid, the funds in the QIT can be used for virtually any purpose that benefits the Medicaid recipient.
Grantor Trusts – Continued. The last issue of this newsletter discussed the concept of a “grantor” trust. As previously explained, a grantor trust is a trust for tax purposes that is treated as if all of the assets are still owned by the grantor. It does not pay taxes and usually does not file income tax returns. The typical revocable trust established by people for probate avoidance purposes is a grantor trust because of its revocability. Other powers contained in the trust will make the trust a grantor trust. For example, if the grantor has a reversionary interest in either the principal or income and the value of the reversion is worth at least 5% of the value of the property subject to the reversion at the time that the reversionary interest is created, the trust would be a grantor trust. In other words, if the grantor can take some of the property back, and the value of that interest is at least 5% of the value of the property, the trust will be a grantor trust. If a grantor has an absolute power to control the beneficial enjoyment of either the principal or income of the trust, the trust will be treated as a grantor trust. For example, if the grantor has the power to distribute either principal or income to an individual other than the income beneficiary and the remainder beneficiary, then the trust will be a grantor trust. If the grantor has the power to borrow principal or income without the payment of adequate interest or without giving adequate security, the trust will be a grantor trust unless the grantor/trustee can make loans to any such person under a general lending power. If the grantor retains the power to reacquire principal by substituting property with equivalent value, or the power to revoke the trust, or if the grantor retains an income interest in the trust, the trust will be a grantor trust for tax purposes. Many trusts are set up intentionally to be grantor trusts so that the trust will not pay income taxes. Trusts are taxed at very high rates within very compressed brackets. If the trust is a grantor trust, then the income from the trust will be taxed to the grantor or another person. That is frequently desirable to avoid taxation at the trust level. Whether or not a trust should be structured as a grantor trust depends on the client’s objectives in creating the trust. This will be discussed later in a future issue of this newsletter. Leaving Retirement Benefits To Charity. There are several reasons why a person might consider leaving retirement benefits to charity as a part of his or her estate plan. Obviously, the principal reason is to benefit the charity and to help the charity achieve its goals. There is no other reason why a person would leave retirement benefits to a charity except to help that charity. If a person does want to benefit a charity as well as non-charitable beneficiaries, the most tax-efficient way of doing so is to fund the charitable gifts with retirement benefits and leave other non-taxable assets to non-charitable beneficiaries. Retirement assets are worth more to the charity than to individual beneficiaries because the charity will not pay income tax on the benefits received. The wise use of charitable giving with retirement benefits can allow people to accomplish their other estate planning goals while at the same time accomplishing their charitable goals. However, there are many drawbacks and implications to utilizing retirement benefits as the vehicle to accomplish charitable gifts. Some of these issues will be discussed in future issues of this newsletter.
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.