FEBRUARY 2024
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. Mistakes are frequently made when positioning a person for Medicaid eligibility and life insurance is involved. The rules are complex. A term life insurance policy is not a problem for the purpose of Medicaid eligibility since it has no value. However, it is very important to coordinate the beneficiary designation so that the proceeds after death are not subject to Medicaid recovery. It is only the cash value of a non-term policy that counts for the purpose of Medicaid, not the death benefit. If a life insurance policy is irrevocably assigned to a third party, the policy will no longer be counted, but the transfer of the policy, to the extent of the cash value, could give rise to a Medicaid penalty unless assigned to a funeral home. Even if a life insurance policy exists, if the insured no longer owns it, or otherwise has lost the right to surrender the policy and receive the proceeds, then it will not be treated as a resource. If there is a policy of life insurance, or even more than one policy, and the total face value of all life insurance policies does not exceed $1,500, then the policy will be exempt regardless of who the beneficiary is. If a funeral home is the owner of the policy, or if the policy is irrevocably assigned to the funeral home, the value of the policy does not count. However, this will apply only if the State of Indiana or the applicant’s/recipient’s estate is designated to receive any amounts remaining after the payment of all services and merchandise under the funeral contract (this only applies to Medicaid benefits provided after the age of 55). However, if the estate is designated to receive any excess proceeds, then the State of Indiana could pursue estate recovery. It is quite possible to protect the death benefit of one or more life insurance policies by dealing appropriately with the cash value. The ways of accomplishing this have been addressed in previous issues of this newsletter. It is not always necessary to surrender a policy in order to obtain access to the cash value with the result that the death benefit is lost.
Ways To Leave Retirement Benefits To Charity – Continued. Continuing our discussion of using retirement benefits to benefit charities begun in our last newsletter, there are various ways of passing such benefits upon a participant’s death. The simplest way, as previously noted, is to designate the charity as the sole plan beneficiary at death. However, the benefits could be left to charity as well as to others in fractional or percentage portions. Under the SECURE Act, which is effective for deaths after 2019, there is no longer a life expectancy payout for most beneficiaries. Most individual “designated beneficiaries” are now subject to a ten-year payout period, with some exceptions. A charity can be named as one of several beneficiaries receiving shares when there are various beneficiaries named. There can be certain problems if the beneficiary shares are not separated. If all of the beneficiaries meet the December 31 deadline of the year after the participant’s death for receiving their share, each of the beneficiaries can be considered separately. In addition, September 30 of the year after death is the so-called “beneficiary finalization date” which would operate so that, if the charity’s share can be paid out before that time, the charitable beneficiary will be eliminated and the remaining individual beneficiaries will be treated as designated beneficiaries entitled to a ten-year payout. If the charity and the individual beneficiaries remain as beneficiaries and if their shares are not separated before the beneficiary finalization date, or the December 31 year-after-death deadline for separating the accounts, then the non-charitable beneficiaries will not be eligible for the ten-year payout and would have to receive all of the benefits within a five year period. Care must be taken to be sure that the arrangements actually put in place do not run afoul of the “designated beneficiary”requirements. These comments represent only a cursory summary of the applicable rules when there are multiple beneficiaries. The rules are actually exceedingly complex. People must be very careful and receive proper advice from legal, tax, and investment professionals when making beneficiary designations. They are quite frequently done incorrectly.
Old, Empty, Or Dissolved Trusts. It is not unusual for an individual who passes away to have had a trust that was never funded, meaning that it was “empty” at the time of death. The trust might even have been dissolved. What happens if there was a beneficiary designation made in respect of an annuity or life insurance policy that the trust creator forgot about and which did not get changed, leaving the trust as the beneficiary? It is possible that the trust could be “revived” for the purpose of receiving the annuity or life insurance proceeds, and then the trust could be administered and the assets distributed in accordance with the terms of the trust. Of course, that may not be the trust creator’s intention. Many trusts include provisions setting forth that such a trust would be “revived” if such an eventuality occurred, but other trusts do not. It might still be possible to convince the insurance or investment company to make the distribution to the trust if adequate information regarding the trust can be made available. A significant problem would arise if a complete trust document cannot be found. If the decedent died on or after July 1 of 2023, then a 2023 amendment to the Indiana Trust Code makes it clear that if the trust instrument does not say what is supposed to happen in the case of a revoked trust, the assets will be treated as a part of the trust creator’s estate. This means that payment would have to be made to the decedent’s estate and would be subject to probate and estate administration. However, Indiana has a small estate affidavit procedure that applies if the total value of the decent’s probate estate does not exceed $100,000 (plus certain costs). In that event, an affidavit can be used to secure the payment to an estate beneficiary who is then responsible for receiving and properly utilizing the proceeds. People make a big mistake when they do not plan, or when they let their plans become stale. My recommendation is that people should sit down with their attorney at least every five years to review all existing arrangements and to see if any “tinkering” is appropriate. Meetings should occur more frequently if there are significant changes, such as an adverse health event, a significant change in wealth, death of family members, and similar matters.
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.