Drafting Income-Only Trusts for Medicaid Eligibility and Tax Planning

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Drafting Income-Only Trusts for Medicaid Eligibility and Tax Planning Navigating Look-Back, Grantor Trust, Basis and Gift Tax Rules WEDNESDAY, OCTOBER 28, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Judith D. Grimaldi, Partner, Grimaldi & Yeung, New York Kyla G. Kelim, Esq., Aging in Alabama, Fairhope, Ala. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial and enter your PIN when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you that you will receive immediately following the program. For additional information about continuing education, call us at ext. 35.

4 Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: Click on the ^ symbol next to Conference Materials in the middle of the lefthand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

5 Income Only Trusts in Medicaid Planning Kyla G. Kelim, Esq. AGING IN ALABAMA Fairhope, AL 5

6 Irrevocable Income-Only Trusts (IIOT) Self Settled: This type of trust is settled by the Medicaid applicant or the applicant s spouse Trust Assets - Income-producing (Example: stocks, rental property, CDs) - Non income producing Residence 6

7 Objectives of Income-Only Trusts Control Flexibility Protection Tax Savings 7

8 Advantages of the IIOT Preserve assets/exempt for Medicaid purposes after lookback period Protect assets against catastrophic long term care costs Pass on the estate to heirs Minimize tax liability Retain control over assets Avoid risk of loss Right to income source of continued income Right to use, live in, sell real estate/purchase new property 8

9 Risks associated with IIOT Estate Recovery Right to elect against spouse s estate (depends on state s definitions: probate vs. nonprobate) Irrevocable No access to principal 9

10 Common Types of IIOT Assets Income producing assets - stocks, rental property, cds Non-income producing assets - residence 10

11 When to use IIOT? Depends on client and individual situation Generally advantageous when: --Long term care planning for married couples with different degrees of health and income --Long term care planning for married couples in good health --Long term care planning for married couples who will not need long term care for 5 years Trusts established for the non-institutionalized spouse of Medicaid applicant/recipient 11

12 When NOT to use IIOT Crisis planning when client will need long term care now or in the near future Long term care planning for married couple with limited resources Long term care planning for married couples with high income who live in or plan to move to state with income cap (ex: Colorado, Georgia) 12

13 Alternatives to IIOT Direct gifts --increased tax liability --exposes assets to risks from loss --lack of control Other type of trust (no income reserved, special needs) Spousal refusal Spend down 13

14 Five Year Lookback Period Deficit Reduction Act of 2005 imposed a 5 year lookback period (effective for most states 2/8/2006) Restrictions on transfers of assets Established penalty period for transfers for less than fair market value Penalty Period is UNLIMITED Changed beginning point of penalty period 14

15 Penalty Period Will be imposed for transfers for less than fair market value after 2/8/2006 Will not start running until applicant otherwise qualifies for Medicaid benefits --in a covered long term care facility --spent down financially --income qualified UNLIMITED 15

16 How the penalty is calculated Penalty may be imposed for even minimal transfers The amount of the penalty is calculated by adding up the transferred amounts and dividing by the average cost of nursing home care in the area or state as determined by the jurisdiction Can vary wildly by state 16

17 Cost of long term care relating to Penalty Can vary by state: may affect placement: -- Mom transfers her home worth $100,000 to daughter in July She falls, hits her head, and enters a nursing home for long term care in July She spends her savings and is under $2000 and eligible in October, In Alabama, divisor is $5800, so penalty period in March 2017 and in Florida, divisor is $8346 so penalty period is 12 months, she would be eligible in October, 2016 No long term care costs as little as $ in Alabama 17

18 Cost of long term care relating to Penalty Can also vary within a state For example in New York, the costs vary by region: --Central: $8,768 --Long Island (Nassau and Suffolk counties): $12,390 --New York City (5 boroughs): $11,843 --Northeastern: $9,414 --Northern Metropolitan: $11,455 --Rochester: $10,660 --Western: $9,442 18

19 Cost of long term care relating to Penalty Is there another option in this example other than moving to New York? -- Mom transfers her home worth $100,000 to daughter in July She falls, hits her head, and enters a nursing home for long term care in July She spends her savings and is under $2000 and eligible in October, In Alabama, divisor is $5800, so penalty period in March 2017 and in Florida, divisor is $8346 so penalty period is 12 months, she would be eligible in October,

20 Cost of long term care relating to Penalty If you said apply in August, 2016, you win!! Remember the 5 year lookback, if you wait to apply until August 2016, then the 5 years has run NO PENALTY If you apply in July of 2016, call your insurance carrier THE PROBLEM: Most nursing homes have your client sign a Medicaid application on admission and routinely file them 20

21 Special types of cases Annuities IRAs or other types of retirement accounts Promissory notes Depends to a certain amount on state specifications Beware, in some cases, Medicaid will count unavailable assets as available, spurring litigation 21

22 Impact of ACA Affordable Care Act For expansion states, individuals or families of higher income may now qualify for Medicaid ACA uses modified adjusted gross income (MAGI) to determine eligibility, ex: family of 4 making less $95,400 annually qualifies for subsidy: does not work for long term Medicaid Medicaid resource limits and transfer of asset rules still apply to long term care ACA eliminated preexisting conditions, families no longer need to impoverish themselves to get care for a sick child 22

23 Impact of ACA Disabled can now get private plan Individuals enrolled in both Medicare and Medicaid (dual eligibles) are not eligible for a private plan No resource limits for ACA plan under the MAGI determination 23

24 Kyla G. Kelim, Esq. AGING IN ALABAMA P.O. Box 109 Fairhope, AL (855) ELD-RLAW 24

25 Income Only Trusts in Medicaid Planning Judith D.Grimaldi, Esq.

26 Use of Trusts in Medicaid Planning In transferring assets trusts are the recommended strategy to protect assets. Types of Trusts: Revocable- not used in Medicaid planning except by refusing spouse to avoid estate recovery and probate Irrevocable Used for asset protection Special Needs Discretionary Sole benefit This CLE will focus on the income only asset protection trust. (Income issues) 26

27 Trusts vs. Direct Transfers Trust advantages Death Disability Debts Divorce Dishonesty Tax benefits Real estate tax discounts Grantor income tax status Capital gains advantages Direct Transfers Simple, less cost Greater liability issues Less control Less creditor protections Inability to fix who will inherit Limited flexibility if there is a change in plans 27

28 Drafting Trusts - Types Medicaid Irrevocable Income Only Grantor Trust Third party must be appointed Trustee not Grantor Income may be payable to grantor or Grantor s spouse or issue No principal distributions to Grantor Can remain includible in Grantor s estate through retained interests, for example: LPOA, etc. Benefit- secures capital gains protections and stepped up basis 28

29 Grantor Trust Rules for Income Tax Benefits Grantor trust status allows income to be taxed at the Grantor s usually lower tax rate Income tax liability remains with the Grantor Trust tax rate - income of $12,150. (39.6%) How to achieve Grantor status Retain interests Medicaid cautions 29

30 Grantor Trust Options Power to: Substitute property of equivalent value (IRC 675(4). Medicaid caution Designate Charitable Beneficiaries Add beneficiaries (IRC 674(b)(5)) Use Trust Income to pay for Life Insurance (IRC 677(a)(3) Borrow w/o Security (IRC 675(2). Medicaid caution Receive income or any trust assets including a life use only. May not be discretionary or need approval of adverse party. IRC 677 (a) (1) Use individual rather than grantor to exercise these powers to avoid Medicaid implication 30

31 Trust Tax Issue- LPOA Limited Power of Appointment drafting requirements and Tax issues What is a LPOA ( Testamentary and Life time) IRC 674(b)(iii) provides a Limited POA will provide: Step up in basis on Grantor s death under IRC 1014 Grantor Trust Status to apply to Income and Principal allowing use of individual s income tax rates The 121 capital gains exclusion on sale of residence Incomplete gift for tax purpose if both life and testamentary powers are included BUT Medicaid will not consider the trust assets since the assets are no longer available to the Grantor 31

32 Tax Issues Inclusion in Taxable Estate? When are trust assets includible in Grantor s estate: Grantor retains a life interest/ life estate, or 5% or plus reversionary interest. IRC 673 Or a power of appointment. IRC 674, or Any type of interest which would trigger federal estate tax inclusion (IRC Sections Retained Life Estate,2037, Revocable Transfers) 32

33 When Trust Holds Residence Supervise the deed signing and deed filing Include life use, residency or tenancy? Medicaid may consider certain retained interests to be equity in the real property Trustee should preserve and maintain the property as alternate to the life tenant Life tenant can retain any VA or Senior Citizen real estate tax discounts or exemptions. If transferred property is subject to a mortgage? Consult state law relating to due on sale clause. Is resident/borrower/beneficiary protected? 33

34 Real Estate Trust Issues What happens when Grantor can no longer live in the property? Designate that real estate must be sold Identify life estate costs and management Problematic areas: Multiple beneficiaries Covering costs Family members living in premises 34

35 Trust Drafting Cautions Caution Power of Appointments Risk an individual serving as Trustee and Beneficiary with the power to administer an irrevocable trust, will be found to have a General not limited Power of Appointment resulting in the trust assets included in the Trustee s estate. To avoid this Limit lifetime distributions to HEMS or have an only the independent Trustee make distributions to the Trustee. Interested Trustee cautions. 35

36 Income Tax Issues for Trusts Trust can be a separate tax payer Irrevocable Medicaid trusts need EIN s. SS number of Grantor should not be used. File separate fiduciary tax return (1041) reporting all income whether distributed or accumulated. Issue a K-1 to Grantor or all beneficiaries listing the share of income, deductions, and credits distributed Double Grantor Trust issues 36

37 Drafting Articles on Distribution of Principal Grantor may have no access to principal Third Party trusts and SNTs can give Trustees discretion to use trust assets for the benefit of the Medicaid Applicant or Recipient Sole Benefit and Spendthrift trusts are another form of discretionary trust but use caution in applying trust assets for support and medical care. 37

38 How to Provide Access to Principal If Needed Establish a class of beneficiary to whom the trustee may distribute principal Back door access Avoid distribution to minors if trust may need to be amended or decanted Provide for independent trustee to allow distribution to family member or individual who is serving as trustee 38

39 Special Trust Clauses Default SNT provisions IRA conduit language Addressing Digital Assets and Accounts Bequests of Tangible Personal Property Combining an Severing Trusts Tax appropriation/residuary estate 39

40 Drafting Distributions at Death No particular Medicaid requirement: Income Only Grantor trust may distribute the same as a Last Will. ( Option- use a pour over will) Can include credit shelter and tax provisions Exceptions: SNT first party must have pay back Sole benefit trust must be made payable to the estate. 40

41 Trustee Provisions/Recommendations If family member to serve as Trustee provide for appointment of independent Trustee or Co-Trustee. Provide for appointment of authorized trustee for decanting Provide for successor trustee and resignation options Consider whether the Trustee may act individually or serve alone Trust protector? 41

42 Special Trust Clause Consider putting SNT as a default provision for all beneficiaries who may be disabled Consider trusts for drafting around minor children and grandchildren. Consider inserting flexibility into draft to make amendments or emergency revocation possible if eligibility is needed before the 5 year look back period. 42

43 GRIMALDI & YEUNG LLP 9201 Fourth Avenue, 6 th Floor Brooklyn, New York Fifth Avenue, 6 th Floor New York, New York (718) jgrimaldi@gylawny.com 43