Planning for Life s 3 Phases

Transcription

1 Planning for Life s 3 Phases Copyright 2017 Anthony B. Ferraro BS, MSTax, CPA, JD Partner DiMonte & Lizak, LLC Anthony B. Ferraro BS, MSTax, CPA, JD An Elder Law, Estate & Trust and Asset Protection Lawyer DiMonte & Lizak, LLC 216 Higgins Rd. Park Ridge, IL abferraro@dimontelaw.com 1

2 Introduction Who comprises your clientele? Is your clientele stratified? Wealthy? Middle class?- (how defined?) Impoverished? Mixed? A. The Biggest Threat The biggest threat to our middle-class taxpayer/clients is the devastating cost of long-term care This threat comes with chronic illness, disability or just the natural aging process. So the challenge becomes risk minimization 2

3 Context The story of Aunt Irene 66% of all people will need some sort of longterm care 7% of long-term care is paid with long-term care insurance, 22% is paid privately, 66% is covered by the Medicaid program Traditional Estate Planning v. Senior Estate Planning The distinction between traditional estate planning and senior estate planning will permeate throughout this discussion. It is an inherent part of the planning for life s 3 phases It will directly impact your selection of tools, especially the types wills and trusts you select 3

4 B. Consider the 3 Phases of Life In order to plan properly in an estate planning context break things down for the client into: Maturing years Senior years Post death years C. Consider the 3 Phases of Planning Next assist the client in understanding the 3 different phases of planning: Maturing years Senior years a. preplanning b. wait-and-see planning c. crisis planning Post death years 4

5 I. 3 Phases of Life A. Maturing Years Estate planning is required in the maturing years Quite often it's descendant focused Oftentimes it's tax, asset protection and business focused B. Senior Years For wealthy clientele- focus is on tax, dispositive planning and asset protection planning For middle class clientele focus is on retirement planning and asset protection from the cost of long-term care 5

6 C. Post death Years claims debts estate tax returns estate and trust administration accountings distribution planning and probate post death spousal plans II. 3 Phases of Planning- A. Maturing Years Tools Tools: Tax tools Federal estate and gift tax State estate and gift tax Federal and state income tax Nontax tools Dispositive planning Distribution Standards 5 & 5 powers Required income payments HEMS Dynasty or not Situs Control Use and enjoyment Flexibility Asset protection planning- Creditor focused Asset protection planning- LTC focused 6

7 3 Phases of Planning- B. Senior Years Complex enough based on current federal and state statutory and regulatory framework to break down into 3 phases and 3 sets of tools: Preplanning - tools Wait-and-see planning - tools Crisis planning - tools Senior Years - Tools Bypass wills and trusts with spousal SNTs Medicaid & VA asset protection planning, analysis and trusts Enhanced powers of attorney with long-term care authority Guardianship VA benefits Special needs planning 7

8 3 Phases of Planning- C. Post Death Years For most clients the focus is on tax return filings, estate and trust administration, accountings, distributions, probate and post- death surviving spousal planning Post death issues Asset Valuation Continuity Claims Contests Retirement Plans Estate and income tax deductions Disclaimers Portability Decedent's final tax returns The estate s income tax return Income in respect of a decedent Taxation of distributions The 65-day election, etc. III. Special Focus On: The Senior Years 1. Preplanning 2. Wait-and-see planning 3. Crisis planning 8

9 What is Preplanning? Preplanning is a phase where the client usually expects to have many years in which to plan. This is usually a result of youth and good health Preplanning Tools Look into LTC insurance- (traditional or hybrid?) Revise powers of attorney for LTC Contact Doctor? Is guardianship necessary? Inventory Assets and Income ( income too as often not well understood by client) Revise estate planning docs from traditional to senior? Create a blueprint- calculate preplan strategies Design /Sign / Fund 9

10 Preplanning Strategies Preplanning for Medicaid some examples: a.5 year planning b.outright gifts c.gifts to Trusts d.purchases and transfers (allowable or not?) e.personal care contracts f. Purchase of home g.purchase of child s home, etc. h.long Term Care Insurance What is Wait and See Planning? This is where client knows there is a diagnosis, but the expectation is they may have many years to remain at home If the client(s) cannot remain in home, then they will migrate into crisis planning 10

11 Wait and See Planning Tools Same as Preplanning Tools and Strategies above But, greater urgency because of diagnosis What is Crisis Planning In crisis planning, the client(s) need immediate long-term care either at home or in a long-term care facility - 24/7 This is expensive, either at home or in a facility 11

12 Crisis Planning Tools Review and modify facility contract Set up raw data often not readily on hand, need cooperation of client or their surrogates Design and/or implement strategy(s) File applications for benefits, VA, Medicaid, Medicare Supp, Social Security elections Conduct post application Medicaid audit File appeals if needed (700,000/7,000 backlog) Handle REDEs Crisis Planning Strategies Crisis Medicaid Planning Examples: a. Gifts with annuity b. Gift with promissory note c. Purchase of annuity for assets that exceed the CSRA d. Curing prior transfers e. Pleading a hardship exceptions f. Divorce g. Spousal refusal to support (distinguishable from spousal refusal to disclose assets which is not permissible) 12

13 10 Things You Must Know In Crisis 1. The cost of care in your region 2. The critical calculation for LTC 3. The three ways to pay for long-term care 4. Complicated Medicaid eligibility requirements 5. The consequences of applying for public benefits without planning 10 Things You Must Know in Crisis 6. The consequences of applying for benefits with planning 7. Understanding the differences between senior estate planning and traditional estate planning 8. Who will the challengers be? 9. Keeping up with the latest public benefit changes brought about by legislative initiatives, executive branch changes, budgetary restrictions 10. Medicaid asset protection planning strategies and legal ethics 13

14 IV. Community Spouse Estate Planning- Too Often Overlooked Although many times the expectation is that the spouse needing nursing home care will die first, this does not always happen If the healthy spouse does not have an estate plan in place or has one that has not been updated, then upon the death of the healthy spouse, the Medicaid eligible (or ill spouse) could lose their eligibility Community Spouse Estate Planning When spouses have traditional estate plans that contain what are called sweetheart wills and trusts (ones that leave everything out right to the surviving spouse) problems can arise- For example, a typical fact pattern illustrates this point: 1. The ill spouse receives the entire estate on the death healthy spouse 2. This puts the Medicaid spouse over the asset threshold for Medicaid eligibility. 3. Recognize there is no provision in Illinois Medicaid laws for a disclaimer by the ill spouse without Medicaid penalty. 4. The result could be a complete spend down by the ill spouse of the inherited estate from the predeceasing healthy spouse. 5. Another problem : Unless a period of time has elapsed, since the institutionalized spouse has obtained Medicaid eligibility, the community spouse cannot disinherit his or her ill spouse entirely without causing Medicaid eligibility penalty for the ill spouse 14

15 Community Spouse Estate Planning Better Approach: do some senior estate planning and thus leave assets to the ill (or potentially ill) spouse : a) in the statutory minimum 1/3 or 1/2 b) not outright but in a trust c) with SNT (supplemental needs trust) standards and NOT support standards or HEMS standards. Community Spouse Estate Planning IMPORTANT: Trust left behind for ill spouse should always be lodged in a will, and NOT in an RLT or standalone trust For spouses, always in a will. See Illinois Admin. Code - Title 89- Section c 15

16 CAUTION: it is just as important for the community spouse to revise their estate plan properly for the surviving institutionalized spouse as it was in obtaining Medicaid eligibility for the ill spouse to begin with V. More on Community Spouse Estate Planning Estate Planning or Medicaid planning What comes first? Pre-Planning v. Crisis planning It s impact on community spouse s estate plan For Community Spouse Estate Planning What tools do we have? Disinheriting a surviving spouse in Illinois Can it be done? See Bezzini Case (Connecticut) 16

17 How to handle the surviving spouse s 1/3 or 1/2 right to an elective share? Trust or Outright? If you select a trust (preferable) what type of right of election trust can you use: Full support?- probably countable Completely discretionary?- some say difficult to value Income only trust?- with discretionary principal distributions for special needs? Special Needs Type? (Or supplemental needs?) For example, where trustee is required to distribute income for special needs in his discretion and has power to distribute principal for special needs (not to supplant government benefits) Is the elective share a spenddown asset in Illinois? Will the intentional bypassing of the institutional spouse by the community spouse cause a period of Medicaid disqualification for the ill spouse? What about the waivers of the elective share rights in a prenuptial or postnuptial agreement? Other design issues What happens after drafting of Community Spouse Estate Plan is completed? See discussion about Funding below 17

18 VI. Funding Instructions Generally, and subject to legal and ethical constraints: Do not hold property in joint tenancy Do not name ill spouse as beneficiary of life insurance and/or retirement plans Put all assets in the name of the healthy spouse Have ill spouse convey interest in primary residence to healthy spouse Put portfolio in healthy spouse's name, etc. VII. Case Study - Single A) Pre-plan : Make a series of calculations: Can the client pay for 60 months at the highest possible reasonable cost of care? B) Crisis Plan : Make a series of calculations: How much can the client transfer away, legally and ethically? Can the client obtain Medicaid eligibility by intentionally incurring a Medicaid penalty while retaining enough assets to pay through the penalty period with the newly converted, non-countable assets? 18

19 VIII. Case Study - Married A) Pre-plan Same calculation as above for single preplanning case, except that in a married case, conservatism dictates that client must be able pay for BOTH SPOUSES for 60 months at the highest reasonably expected cost of care, and Also do Community Spouse Estate Planning B) Crisis Planning See above slide regarding Crisis Planning, and Also do Community Spouse Estate Planning Thank you! 19