AUGUST 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.
Medicaid Update Regarding Retirement Accounts. The July special edition of this newsletter reported a significant change in the Medicaid rules relating to retirement accounts. The new rule was to be effective on or after August 8, 2024. Previously, if one spouse entered a nursing home (the “institutionalized spouse”), the spouse living at home (the “community spouse”) could retain his or her retirement accounts without affecting the institutionalized spouse’s Medicaid eligibility. Beginning August 8, 2024, the community spouse’s IRAs will begin to count. However, there have been some developments which now suggest that the new rule will apply to Medicaid applications filed on or after July 24, 2024. It is obviously too late to do anything about that now. The important point that people need to be aware of is that if they are planning for asset protection, it may be necessary over a period of years to reduce their retirement accounts by withdrawing the funds and paying taxes on them and then investing those funds in other investments. It is easier to protect non-retirement dollars than it is retirement dollars, and if a Medicaid application is filed and it is necessary to liquidate a retirement account in order to save all or a portion of the after-tax funds, a significant amount of taxes might be incurred at one time. By gradually reducing the amount in your retirement account, that tax burden can be spread over several years. This is very important when people are planning ahead.
Change In Rule Against Perpetuities. The Rule Against Perpetuities is an old rule established during the common law era that limited the period of time a trust could remain in existence before the trust would be deemed to have kept the assets away from the beneficiaries too long and would be forced to terminate. The old common law time period was “lives in being and 21 years.” In those days, trusts would be set up with certain beneficiaries, some of whom would be younger, and the trust might be continued for another generation or two, and for the purpose of the Rule Against Perpetuities, all of the current beneficiaries’ lives would be taken into account. Twenty-one years after the last of those beneficiaries died, the trust would have to terminate under the common law and the assets would have to “vest” in the beneficiaries then living. Indiana’s statutory Rule Against Perpetuities has been 90 years for quite some time. Effective July 1, 2024, the Indiana statutory Rule Against Perpetuities (“RAP”) replaces the 90-year maximum duration with a 360-year maximum duration. This rule actually applies to more than trusts, as it applies to any “future interest in property” but those property concepts are a little too complex for this newsletter. The RAP is most relevant in the area of trusts. People like to establish trusts that will last for multiple generations. The RAP in Indiana will allow trusts to continue for a very long period of time. There are certain provisions that must be included in the trust in order for the trust to take advantage of the 360 year rule.
Common Asset Protection Planning Errors – Continued. A common mistake that people make in the area of asset protection is failing to take into account all of the available assets before a Medicaid application is filed. It is important to verify that all assets have been accounted for and previous transfers, liquidations, etc., documented. Income tax returns should be checked for information that might not be apparent from the available financial information. The Indiana Family and Social Services Administration now uses an asset verification system (“AVS”) which often finds assets that may have been previously owned by the Medicaid applicant, and occasionally those assets still exist but were not disclosed. When filing Medicaid applications, it is best, if possible, to disclose and provide an explanation for accounts and other assets that have been closed or disposed of within the last five years, including vehicles that may have been sold, gifted, or junked.
Use Of LLCs For Liability Protection. A limited liability company (“LLC”) will often not provide as much liability protection as people believe they will. The kinds and degree of protection against claims of creditors that an LLC can provide will be very dependent on the structure of the LLC, the particular state law under which it was formed, how often and for what purposes the members of the LLC will need or actually receive distributions, as well as other factors. A sole member LLC will not provide much protection for the sole member since once distributions are made to the member, the creditor will be able to attach those funds. Further, if the liability claims are caused by actions of the sole member, the veil of the LLC will not provide any protection at all. If the sole member has employees, then the LLC might provide protection for a member for some acts of the employee, but the LLC’s assets will be subject to claims of creditors who may sue the LLC for actions of the employee if the LLC would normally be liable for the actions of the employee under the doctrine of “Respondeat Superior.” This is one of the rules of agency law that require the employer or the principal to be responsible for the acts of an employee or the agency within the scope of his or her agency or employment. There are various reasons for creating an LLC. If your major reason is asset protection, there may not be as much protection provided as you want to believe.
Definition Of “Health Care Representative”. Senate Enrolled Act 18 which was signed into law by the Governor of Indiana on March 13, 2024 makes a technical correction to the definition of a “Health Care Representative” in the Indiana Code, I.C. 16-36-7-13. The change is made so that the language will be consistent with the rest of Indiana’s 2021 advance directive statute. It clarifies that an entity (as well as an individual) can be appointed as a health care representative.
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.