Founders Series: Irrevocable Trusts: Not Just for the Rich

Transcription

1 Founders Series: Irrevocable Trusts: Not Just for the Rich Presented by: Howard S. Krooks, J.D., CELA, CAP ElderCounsel Principal September 19, 2017 Should you have any questions, please don t hesitate to reach out to our team at ElderCounsel. info@eldercounsel.com

2 Irrevocable Trusts: Not Just for the Rich ElderCounsel Principal: Howard S. Krooks, J.D., CELA, CAP Welcome to our webinar! To ensure you see our webcams, click webcam in the upper left, select a position. If there isn t a position, click show webcam Please note your lines are muted To ask a question, click on the questions button on your GoToWebinar control panel and type your question Materials can be downloaded from the handouts section If you have audio problems, education@eldercounsel.com After the webinar ends and GoToWebinar is closed, please complete the short survey 2 Our Presenter Howard S. Krooks, J.D., CELA, CAP Certified Elder Law Attorney and member of the NAELA Council of Advanced Practitioners (CAP) Past President of NAELA and served on the NAELA Board of Directors from Co-Chair of the Special Needs Committee of the Florida Bar Elder Law Section Executive Council of the Elder Law Section of the Florida Bar as the NAELA Liaison and is a Past Chair of the Elder Law Section of the New York State Bar Member of the Joint Public Policy Task Force of The Florida Bar Elder Law Section and the Academy of Florida Elder Law Attorneys Founding Principal of ElderCounsel, LLC 3

3 Agenda Benefits of Irrevocable Trust Planning Talking to clients about Irrevocable Trusts IRAs What to do with IRAs Homes Avoiding estate recovery on the home Crisis Planning Utility How to get a crisis plan done with no proper donees 4 Benefits of Irrevocable Trust Planning 5 Benefits of Doing an Irrevocable Trust Even If You Are Not Rich 1. Parents who cannot manage money 2. Parents who are in danger of being sued 3. Parents who are spendthrifts 4. Parents who are vulnerable to scam artists 6

4 A Typical Client Harold, age 75, comes in to revise his estate plan as he wants to include specific gifts to his grandchildren. He was referred by his financial advisor, a good referral source of yours Harold appears to be in good health he reports playing golf a few times a month, he has several social groups he participates in, and he lives alone without assistance in the home he and his late wife owned His home is worth $300,000 and he has liquid assets and retirement funds total $425,000 As an elder law/estate planning attorney, what would you do for Harold? What would you charge? 7 What You Could Do Explain to Harold why his home and assets are at risk Determine which assets he wants to protect Design an asset protection plan using an irrevocable trust designed solely for this purpose ( Medicaid Asset Protection Trust ) 8 The Secret to Success Helping Harold understand the need to protect his assets now Helpful symbols 1. A ceramic piggy bank 2. Draw box: with solid lines with intermittent lines 9

5 What Harold s Resulting Plan May Look Like An irrevocable Medicaid Asset Protection Trust (MAPT) Trust summary and funding letter Asset Protection Letter explaining the plan A revocable living trust (for all assets that that don t go into the MAPT ) A letter to tax professionals and trustee instruction letter An enhanced durable power of attorney Must include enhanced gifting and planning powers Ability to create and fund irrevocable trusts What would you charge for this plan? 10 One Additional Way to Give Harold Total Protection A MAPT combined with a long term care policy can provide Harold complete protection Must decide the length of the policy Five years will provide complete protection Can client afford? 11 Single Individuals One important question is how much to fund into the MAPT Consider preparing a revocable trust to hold non-mapt assets 12

6 Married Couples The only question becomes how much to fund into the MAPT When one spouse applies for Medicaid the other spouse is entitled to a Community Spouse Resource Allowance (CSRA) This amount may be kept out of the MAPT 13 MAPT General Characteristics No principal to the grantor or spouse. Ever. Under no circumstances. Income may be paid but if you can avoid paying it to the grantor, that is always better Lifetime beneficiaries can receive income and/or principal. They would have the ability to take a distribution if mom or dad needed something 14 What Are We Trying to Accomplish? Removing the assets from the reach of health care creditors for possible Medicaid applicant and spouse Providing more protection for family assets than an outright gift Taking advantage of tax breaks available with certain types of irrevocable trusts 15

7 Primary Tax-Related Goals Achieve a step-up in basis of trust assets at the death of the grantor Income and Capital Gains taxed at grantor s individual tax rates Preserve real property tax exemptions Preserve IRC 121 capital gains exclusion in case the home is sold 16 Another Irrevocable Trust Planning Option Medicaid Family Protection Trust Same features as the Medicaid Asset Protection Trust, plus: Creditor protection for the beneficiaries Allows clients to focus on something other than Medicaid eligibility 17 Your Next Step 1. Get the word out to your existing clients that you d like them to come in for an estate plan review Letter offering a free consult, open house, etc. 2. Once in, if appropriate, explain the need to upgrade their plan to protect their home and other assets from long term care costs 3. Get hired, and design the asset protection plan 18

8 Talking to Clients About Irrevocable Trusts 19 Talking to Clients About Irrevocable Trusts Before You Are Hired You are not talking about irrevocable trusts You are only talking about asset protection Depending on the reason client came to see you, you may have to change the conversation to focus on what could happen if his/her health declines Use easy to understand terms to describe how you can protect their assets 20 Talking to Clients About Irrevocable Trusts After You Are Hired You begin discussing how to design the trust The client s fear of losing control is only an issue if you make it one Remind client that his/her lifestyle will not change We are leaving enough assets outside the trust for client to live on 21

9 Talking to Clients About Irrevocable Trusts When planning early (proactive planning) It is as much about asset protection as it is about making sure our clients have choices if a health care crisis strikes 22 IRAs 23 General Rules Regarding Countability of IRA Funds Periodic Payment Status In some states - IRA funds exempt RMDs = income for Medicaid budgeting purposes Possible Issue less than 70 1/2 Only Traditional IRAs w/rmds Some States Require Medicaid-compliant Annuity (tax-qualified) Roth IRAs No RMDs - may be countable resource some states exempt anyway 24

10 Strategies for Preserving IRA Funds Leave IRA As Is Avoids Income Tax Liability issue Principal Reduced Over Time RMDs budgeted as income for Medicaid purposes Taxes paid anyway as RMDs paid Requires Prediction of life expectancy of applicant May result in nearly complete loss of asset 25 Strategies for Preserving IRA Funds Surrender Followed by Transfer to Spouse/Disabled Child or MAPT Income tax liability issue Make sure proper withholding at time of surrender CS can engage in post-eligibility planning Disability Rule for pre-59 1/2 withdrawals avoids 10% penalty 26 Strategies for Preserving IRA Funds Partial Surrender Followed by Transfer to Spouse/Disabled Child or MAPT Addresses Income Tax Liability issue Transfer portion surrendered Leave remaining balance in IRA 27

11 Strategies for Preserving IRA Funds IRA of Community Spouse Consider separate from ill spouse s IRA Not countable asset of ill spouse Will Count as Asset Towards CSRA Payout Status May Convert to Income Beware Must Change Beneficiary Designation Away from IS 28 Strategies for Preserving IRA Funds Petition for Support Unrelated to Divorce Possible avoidance of income tax acceleration Results in non-taxable transfer of IRA to well spouse Depends on state law Need separate maintenance agreement and court order 29 Strategies to Avoid Estate Recovery on the Home 30

12 Estate Recovery Rules General Concepts States required to seek recovery against Medicaid recipient estates OBRA 1993 Limited to amounts paid on or after age 55 Includes all property constituting estate as defined under state law. 42 U.S.C. 1396p(b)(4)(A) Expanded definition of estate permissible. 42 U.S.C. 1396p(b)(4)(B) Special Issues Joint Tenancy Tenancy in Common Life Estate Trust, Other 31 Estate Recovery Rules General Concepts Recovery must be postponed until after death of recipient s surviving spouse AND Only if not survived by - Minor Child (under age 21) Blind Child Disabled Child 32 Strategies to Avoid Estate Recovery on the Home Place Home into MAPT 5 Year Lookback Period Step-up in basis on death (estate tax inclusion) Beware - Some states can still recover 121 Exclusion Preserved Grantor Trust Sale during lifetime net proceeds remain in MAPT Considered best overall option! 33

13 Strategies to Avoid Estate Recovery on the Home Create Life Estate 5 Year Lookback Period reduced penalty period Step-up in basis on death (estate tax inclusion) Some states can still recover 121 Exclusion Preserved Sale during lifetime partial capital gains exclusion partial allocation of net proceeds to recipient 34 Strategies to Avoid Estate Recovery on the Home Lady Bird Deed (some states) Enhanced Life Estate Deed = Fee Simple Interest Retained Functions as a Transfer on Death Deed Avoids Estate Recovery No Penalty Period 121 Exemption Preserved Step-up of Basis Preserved Sale During Lifetime - Allocation of Proceeds if Property is Sold During Life Tenant s Lifetime 35 Strategies to Avoid Estate Recovery on the Home Outright Transfer to Children/Relatives 5 Year Lookback Period No right to use and occupy for senior No Step-up in basis on death Loss of 121 Exclusion (unless donee entitled) Sale during lifetime No allocation of net proceeds to recipient 36

14 Getting a Crisis Plan Done When There Are No Proper Donees 37 Getting a Crisis Plan Done When There are No Proper Donees No proper donees could mean we are dealing with problem children We want to avoid outright gifts for fear the money will disappear Rather than an outright transfer Transfer assets to a MAPT as part of the crisis plan Designing the MAPT properly is crucial 38 Dealing With Problem Children in Crisis Planning Children who cannot manage money Children who are in danger of being sued Previously absent children who now think they should be involved in every decision The child who trusts no one 39

15 Dealing With the Children Who Can t Manage Money Rather than outright transfers in a crisis plan, consider transfers to a MAPT You can design the MAPT in a variety of ways that will allow the trustee discretion regarding who to distribute to and under what circumstances 40 Lifetime Beneficiary Issues 41 Lifetime Beneficiaries A crucial part of the MAPT design Parents normally want the children in this role Responsible for helping the grantor financially, if necessary Unwritten responsibility Issues Bankruptcy/Creditor Problems Divorce Undue Influence of Spouse Alcoholism/Gambling 42

16 Lifetime Beneficiaries The bad seed child Potential Demand for Principal/Income What distribution standard is in MAPT? Court Proceeding Trust Loses Ideally, none of above problems exist! Solutions - Independent trustee with discretion Do not include bad child as Lifetime Bene Some parents my have problem doing so 43 Lifetime Beneficiaries Do not have to be the same as residuary beneficiaries Consider staggered Lifetime Beneficiaries 44 Lifetime Beneficiaries Equal vs. Unequal Distributions According to Needs Equal distributions means if more than one lifetime beneficiary, when one takes, they all take Unequal according to needs allows the Trustee more flexibility 45

17 Lifetime Beneficiaries When only child scenario presents Work with client to find another LB, if possible If not, consider naming child s RLT as contingent remainder beneficiary of MAPT Make parents beneficiary of child s RLT 46 Upcoming Education Events September 27 Medicaid Planning for the Institutionalized Spouse's IRA: "Name-on-the-Check" Rule September 28 Designing the Lucrative Maintenance Plan (Member Benefit Webinar) September 29 Final Friday Update: 30 Days in 30 Minutes October 3-6 Symposium 2017 (Hollywood, CA) October 25 Advanced VA Pension Planning Webinar November 07 Founders Series: Should You Get Plugged In? November 8-10 Elder Law Immersion & Practice-Building Camp (Tampa, FL or live webcast) Learn more and register online at 47 Questions? 48

18 Thank You! Should you have any questions, please don t hesitate to reach out to our team. We want you to be successful and have the information you need to do so. info@eldercounsel.com

19 Irrevocable Trusts: Not Just for the Rich ElderCounsel Principal: Howard S. Krooks, J.D., CELA, CAP Welcome to our webinar! To ensure you see our webcams, click webcam in the upper left, select a position. If there isn t a position, click show webcam Please note your lines are muted To ask a question, click on the questions button on your GoToWebinar control panel and type your question Materials can be downloaded from the handouts section If you have audio problems, education@eldercounsel.com After the webinar ends and GoToWebinar is closed, please complete the short survey 2

20 Our Presenter Howard S. Krooks, J.D., CELA, CAP Certified Elder Law Attorney and member of the NAELA Council of Advanced Practitioners (CAP) Past President of NAELA and served on the NAELA Board of Directors from Co-Chair of the Special Needs Committee of the Florida Bar Elder Law Section Executive Council of the Elder Law Section of the Florida Bar as the NAELA Liaison and is a Past Chair of the Elder Law Section of the New York State Bar Member of the Joint Public Policy Task Force of The Florida Bar Elder Law Section and the Academy of Florida Elder Law Attorneys Founding Principal of ElderCounsel, LLC 3 Agenda Benefits of Irrevocable Trust Planning Talking to clients about Irrevocable Trusts IRAs What to do with IRAs Homes Avoiding estate recovery on the home Crisis Planning Utility How to get a crisis plan done with no proper donees 4

21 Benefits of Irrevocable Trust Planning 5 Benefits of Doing an Irrevocable Trust Even If You Are Not Rich 1. Parents who cannot manage money 2. Parents who are in danger of being sued 3. Parents who are spendthrifts 4. Parents who are vulnerable to scam artists 6

22 A Typical Client Harold, age 75, comes in to revise his estate plan as he wants to include specific gifts to his grandchildren. He was referred by his financial advisor, a good referral source of yours Harold appears to be in good health he reports playing golf a few times a month, he has several social groups he participates in, and he lives alone without assistance in the home he and his late wife owned His home is worth $300,000 and he has liquid assets and retirement funds total $425,000 As an elder law/estate planning attorney, what would you do for Harold? What would you charge? 7 What You Could Do Explain to Harold why his home and assets are at risk Determine which assets he wants to protect Design an asset protection plan using an irrevocable trust designed solely for this purpose ( Medicaid Asset Protection Trust ) 8

23 The Secret to Success Helping Harold understand the need to protect his assets now Helpful symbols 1. A ceramic piggy bank 2. Draw box: with solid lines with intermittent lines 9 What Harold s Resulting Plan May Look Like An irrevocable Medicaid Asset Protection Trust (MAPT) Trust summary and funding letter Asset Protection Letter explaining the plan A revocable living trust (for all assets that that don t go into the MAPT ) A letter to tax professionals and trustee instruction letter An enhanced durable power of attorney Must include enhanced gifting and planning powers Ability to create and fund irrevocable trusts What would you charge for this plan? 10

24 One Additional Way to Give Harold Total Protection A MAPT combined with a long term care policy can provide Harold complete protection Must decide the length of the policy Five years will provide complete protection Can client afford? 11 Single Individuals One important question is how much to fund into the MAPT Consider preparing a revocable trust to hold non-mapt assets 12

25 Married Couples The only question becomes how much to fund into the MAPT When one spouse applies for Medicaid the other spouse is entitled to a Community Spouse Resource Allowance (CSRA) This amount may be kept out of the MAPT 13 MAPT General Characteristics No principal to the grantor or spouse. Ever. Under no circumstances. Income may be paid but if you can avoid paying it to the grantor, that is always better Lifetime beneficiaries can receive income and/or principal. They would have the ability to take a distribution if mom or dad needed something 14

26 What Are We Trying to Accomplish? Removing the assets from the reach of health care creditors for possible Medicaid applicant and spouse Providing more protection for family assets than an outright gift Taking advantage of tax breaks available with certain types of irrevocable trusts 15 Primary Tax-Related Goals Achieve a step-up in basis of trust assets at the death of the grantor Income and Capital Gains taxed at grantor s individual tax rates Preserve real property tax exemptions Preserve IRC 121 capital gains exclusion in case the home is sold 16

27 Another Irrevocable Trust Planning Option Medicaid Family Protection Trust Same features as the Medicaid Asset Protection Trust, plus: Creditor protection for the beneficiaries Allows clients to focus on something other than Medicaid eligibility 17 Your Next Step 1. Get the word out to your existing clients that you d like them to come in for an estate plan review Letter offering a free consult, open house, etc. 2. Once in, if appropriate, explain the need to upgrade their plan to protect their home and other assets from long term care costs 3. Get hired, and design the asset protection plan 18

28 Talking to Clients About Irrevocable Trusts 19 Talking to Clients About Irrevocable Trusts Before You Are Hired You are not talking about irrevocable trusts You are only talking about asset protection Depending on the reason client came to see you, you may have to change the conversation to focus on what could happen if his/her health declines Use easy to understand terms to describe how you can protect their assets 20

29 Talking to Clients About Irrevocable Trusts After You Are Hired You begin discussing how to design the trust The client s fear of losing control is only an issue if you make it one Remind client that his/her lifestyle will not change We are leaving enough assets outside the trust for client to live on 21 Talking to Clients About Irrevocable Trusts When planning early (proactive planning) It is as much about asset protection as it is about making sure our clients have choices if a health care crisis strikes 22

30 IRAs 23 General Rules Regarding Countability of IRA Funds Periodic Payment Status In some states - IRA funds exempt RMDs = income for Medicaid budgeting purposes Possible Issue less than 70 1/2 Only Traditional IRAs w/rmds Some States Require Medicaid-compliant Annuity (tax-qualified) Roth IRAs No RMDs - may be countable resource some states exempt anyway 24

31 Strategies for Preserving IRA Funds Leave IRA As Is Avoids Income Tax Liability issue Principal Reduced Over Time RMDs budgeted as income for Medicaid purposes Taxes paid anyway as RMDs paid Requires Prediction of life expectancy of applicant May result in nearly complete loss of asset 25 Strategies for Preserving IRA Funds Surrender Followed by Transfer to Spouse/Disabled Child or MAPT Income tax liability issue Make sure proper withholding at time of surrender CS can engage in post-eligibility planning Disability Rule for pre-59 1/2 withdrawals avoids 10% penalty 26

32 Strategies for Preserving IRA Funds Partial Surrender Followed by Transfer to Spouse/Disabled Child or MAPT Addresses Income Tax Liability issue Transfer portion surrendered Leave remaining balance in IRA 27 Strategies for Preserving IRA Funds IRA of Community Spouse Consider separate from ill spouse s IRA Not countable asset of ill spouse Will Count as Asset Towards CSRA Payout Status May Convert to Income Beware Must Change Beneficiary Designation Away from IS 28

33 Strategies for Preserving IRA Funds Petition for Support Unrelated to Divorce Possible avoidance of income tax acceleration Results in non-taxable transfer of IRA to well spouse Depends on state law Need separate maintenance agreement and court order 29 Strategies to Avoid Estate Recovery on the Home 30

34 Estate Recovery Rules General Concepts States required to seek recovery against Medicaid recipient estates OBRA 1993 Limited to amounts paid on or after age 55 Includes all property constituting estate as defined under state law. 42 U.S.C. 1396p(b)(4)(A) Expanded definition of estate permissible. 42 U.S.C. 1396p(b)(4)(B) Special Issues Joint Tenancy Tenancy in Common Life Estate Trust, Other 31 Estate Recovery Rules General Concepts Recovery must be postponed until after death of recipient s surviving spouse AND Only if not survived by - Minor Child (under age 21) Blind Child Disabled Child 32

35 Strategies to Avoid Estate Recovery on the Home Place Home into MAPT 5 Year Lookback Period Step-up in basis on death (estate tax inclusion) Beware - Some states can still recover 121 Exclusion Preserved Grantor Trust Sale during lifetime net proceeds remain in MAPT Considered best overall option! 33 Strategies to Avoid Estate Recovery on the Home Create Life Estate 5 Year Lookback Period reduced penalty period Step-up in basis on death (estate tax inclusion) Some states can still recover 121 Exclusion Preserved Sale during lifetime partial capital gains exclusion partial allocation of net proceeds to recipient 34

36 Strategies to Avoid Estate Recovery on the Home Lady Bird Deed (some states) Enhanced Life Estate Deed = Fee Simple Interest Retained Functions as a Transfer on Death Deed Avoids Estate Recovery No Penalty Period 121 Exemption Preserved Step-up of Basis Preserved Sale During Lifetime - Allocation of Proceeds if Property is Sold During Life Tenant s Lifetime 35 Strategies to Avoid Estate Recovery on the Home Outright Transfer to Children/Relatives 5 Year Lookback Period No right to use and occupy for senior No Step-up in basis on death Loss of 121 Exclusion (unless donee entitled) Sale during lifetime No allocation of net proceeds to recipient 36

37 Getting a Crisis Plan Done When There Are No Proper Donees 37 Getting a Crisis Plan Done When There are No Proper Donees No proper donees could mean we are dealing with problem children We want to avoid outright gifts for fear the money will disappear Rather than an outright transfer Transfer assets to a MAPT as part of the crisis plan Designing the MAPT properly is crucial 38

38 Dealing With Problem Children in Crisis Planning Children who cannot manage money Children who are in danger of being sued Previously absent children who now think they should be involved in every decision The child who trusts no one 39 Dealing With the Children Who Can t Manage Money Rather than outright transfers in a crisis plan, consider transfers to a MAPT You can design the MAPT in a variety of ways that will allow the trustee discretion regarding who to distribute to and under what circumstances 40

39 Lifetime Beneficiary Issues 41 Lifetime Beneficiaries A crucial part of the MAPT design Parents normally want the children in this role Responsible for helping the grantor financially, if necessary Unwritten responsibility Issues Bankruptcy/Creditor Problems Divorce Undue Influence of Spouse Alcoholism/Gambling 42

40 Lifetime Beneficiaries The bad seed child Potential Demand for Principal/Income What distribution standard is in MAPT? Court Proceeding Trust Loses Ideally, none of above problems exist! Solutions - Independent trustee with discretion Do not include bad child as Lifetime Bene Some parents my have problem doing so 43 Lifetime Beneficiaries Do not have to be the same as residuary beneficiaries Consider staggered Lifetime Beneficiaries 44

41 Lifetime Beneficiaries Equal vs. Unequal Distributions According to Needs Equal distributions means if more than one lifetime beneficiary, when one takes, they all take Unequal according to needs allows the Trustee more flexibility 45 Lifetime Beneficiaries When only child scenario presents Work with client to find another LB, if possible If not, consider naming child s RLT as contingent remainder beneficiary of MAPT Make parents beneficiary of child s RLT 46

42 Upcoming Education Events September 27 Medicaid Planning for the Institutionalized Spouse's IRA: "Name-on-the-Check" Rule September 28 Designing the Lucrative Maintenance Plan (Member Benefit Webinar) September 29 Final Friday Update: 30 Days in 30 Minutes October 3-6 Symposium 2017 (Hollywood, CA) October 25 Advanced VA Pension Planning Webinar November 07 Founders Series: Should You Get Plugged In? November 8-10 Elder Law Immersion & Practice-Building Camp (Tampa, FL or live webcast) Learn more and register online at 47 Questions? 48

43 Thank You! Should you have any questions, please don t hesitate to reach out to our team. We want you to be successful and have the information you need to do so. info@eldercounsel.com