NYSBA CLE Estate Planning and Will Drafting April 20, 2016, Rochester, NY Lifetime Giving, Minors and Incapacitated Beneficiaries Supplemental Outline, Rochester, NY Prepared by: Albert B. Kukol Levene Gouldin & Thompson, LLP 450 Plaza Drive, Vestal, NY 13850 Phone: 607-763-9200 Email: akukol@lgtlegal.com Website: www.lgtlegal.com 1. Inter Vivos Gifts Donor s Issues a. Taxes i. Gift Tax (1) Annual Exclusion, $14,000 per donee, for gifts of a present interest, not of a future interest. (IRC 2503) (2) Split Gift with spouse s consent yields $28,000. Election requires filing a gift tax return. (3) Gift tax return required for gifts not qualifying for the annual exclusion. It establishes value of gift if IRS does not object within 3 years. Provides tax basis for carryover basis to donee. Penalty for not filing is tax that would have been due. (4) NY has a claw back gift tax whereby gifts within 3 years of death and made between April 1, 2014 and January 1, 2019 are included in the decedent s taxable estate. (5) Exceptions to $14,000 Annual Exclusion, IRC 2503(e) Tuition directly paid to the educational institution Unreimbursed medical payments paid to the medical provider. Page 1 of 11
(c) IRC 529 Plan allows 5 year acceleration of annual exclusion gifts (5 x $14,000 = $70,000 front loaded in first year). Donor remains the owner, who can name a successor owner and who can change beneficiaries, within a broad definition of family members. There is a 10% penalty on earnings withdrawn for a non-educational purpose. Income Tax b. Non-Taxes (1) For lifetime gifts, the donee must use the donor s basis, aka carryover basis (2) For testamentary gifts, the donee must use the fair market value on the date of the donor s death, aka stepped up basis. (3) Usually favors gifts, for example, of cash rather that appreciated stocks with low tax basis, in order to capture the step up in basis upon death. i. Lack capacity to make a gift? (1) A power of attorney with a Statutory Gift Rider that permits self-gifting (if the agent is a beneficiary of the principal s estate plan). i A gift may be a fraudulent conveyance under Debtor Creditor Law 273, if one is rendered insolvent from a transfer without fair consideration. A gift may render one ineligible for government benefits, especially Supplemental Security Income and chronic long term care (nursing home) Medicaid. Page 2 of 11
2. Inter-Vivos Gifts Donee s Issues a. Income Taxes i. See tax basis above. Donees prefer gifts that do not create taxable events in the future. Consider the tax brackets of the donor and donee. Who is in the lower bracket? b. Non-Taxes Age and Capacity i. Minors (1) Custodianship via Uniform Transfers to Minors Act EPTL 7-6.1, et. seq. (c) Simple way for assets to be managed until minor reaches age 21. Custodian can be changed and can include a successor. See Sample Clause for Custodian Under UTMA with Successor in Deed, page A. (2) How extend management passed age 21? IRC 2503( c) trust as long as it permits access at the time donee/beneficiary reaches age 21 (at least for a period of time), and the trustee has the power to distribute all income and principal to the donee, and if the donee dies, the trust is paid to the donee s estate or per the donee s exercise of a power of appointment. Trusts with Crummey power with a window for the beneficiary to withdraw, making the gift a present interest eligible for the annual exclusion. (3) Guardians of the Person and/or Property rather cumbersome and not a planning technique, but a fallback position. Page 3 of 11
An appointment of an SCPA Article 17 Guardian of the Property, until age 18, is required for sums due a minor from an estate over $10,000. Lesser amounts can be paid to the parent for the use and benefit of the minor. (SCPA 2220) An appointment of an SCPA Article 17A Guardian of the Person and Property, for those with developmental or mental disability before 18. This is usually driven by a need for a guardian of the person, with the limited resources of the ward falling into the guardianship of the property. (i) (iii) (iv) Petition requests one or both parents be named together with a stand-by guardian to serve upon the death of the surviving parent/guardian. Two medical certifications as to permanency of condition which arose before age 22 and resulted in inability to manage self or his/her affairs. Results in complete power over person AND/OR property; Exception: limited guardianship of the property in excess of wages for working child Usually non-adversarial and "easier", less costly than an Article 81 proceeding. (c) MHL Article 81 Guardian (i) Multi-purpose or single purpose (transactional) Adversarial, time-consuming and costly; requires evidence of functioning of the individual because of more concern with loss of an individual's legal rights. Must show individual is making decisions without appreciation of the resulting harm. Page 4 of 11
(iii) Guardian's powers are specifically tailored and limited to the needs of the individual; may be limited to property or person or any facet(s) of property and/or person. Spendthrifts or Anticipating a Beneficiary s Creditors (1) Trust with trustee s discretion to distribute principal or not. (2) See Sample Clause for Testamentary Spendthrift Trust for Lifetime of Beneficiary. i Disability and Government Benefits (1) IRC 529A ABLE Accounts (POMS SI 01130.740) Eligibillity: SSI or SSD, disabled before age 26. (c) (d) (e) (f) (g) (h) Amount: Total of $14,000 deposited annually into the Account from any source. Income is not taxable. NY Lifetime Limit: $375,000. But, it balance is over $100,000 then SSI payments are suspended until account is under. Medicaid is not affected. At death, burial expenses have priority, then payback to Medicaid for all benefits paid while Account was open. The beneficiary determines distributions. The beneficiary is considered the owner by SSI. If the beneficiary is a minor or incapable of managing the Account, the Account is managed and controlled by someone with signature authority. This person may be the parent, legal guardian or agent under power of attorney. Page 5 of 11
(i) (j) Distributions can be made for Qualified Disability Expenses, or the beneficiary s education, housing, transportation, employment training and support, health, legal, transportation, assistive technology. Notice the absence of food and entertainment. Major benefit is control by the disabled individual and the ability to save more money than the maximum resources of $2000 and its use for burial expenses. Housing appears to be tricky to manage. If money is withdrawn and not spent for housing in the month of withdrawal, it is a resource on the first of the following month, even if used for housing in that month. Thus, if not spent in the month withdrawn, it looks like the money intended for housing could put one over the $2,000 resource limit, making one ineligible for SSI in that month. (2) Supplemental Needs Trusts, see below. 3. Funding Testamentary Trusts by Beneficiary Designation a. See Sample Clause for Retirement Account Beneficiary Designation and Sample Clause for Life Insurance Beneficiary Designation, page C. 4. Testamentary Supplemental Needs Trusts ( SNT ) a. See Sample Clause for Testamentary Supplemental Needs Trust, page D. b. See Sample Clauses for a Springing or Trigger SNT, page E. c. What government benefits need protecting, ie, will be lost by the disabled persons receipt of a gift or inheritance? Page 6 of 11
i. Income Programs (1) Social Security Retirement Income ( SS ) Child disabled prior to age 22 qualifies for benefits under the account of the deceased/retired parent or grandparent who is supporting the child, provided the child is dependent upon the parent or grandparent. Not means tested, unless start to work; transitional programs exist (Still disabled?) (2) Supplemental Security Income ( SSI ) Resources < $2,000 Income < $733 federally monthly plus $87 NYS, including: (i) Any cash earned by or given to the child In-kind food and shelter (but limited to a 1/3 maximum deduction (about $275) if shelter is paid for. Ruppert v. Bowen, 871 F.2d 1172 (1989) (c) Generally, disabled person is eligible at age 18. One can be eligible under age 18 provided child is disabled and parents resources and income are limited. Medical Benefit Programs (1) Medicare: Eligible 2 years after SS begins and there is no financial means testing. (2) Medicaid Resources < $14,850 plus house, car, retirement accounts in payout status. Page 7 of 11
Income (i) Medicaid benefits are reduced if any cash is transferred to the child (OK to make transfers to child in-kind, but not for food or shelter if child is on SSI). Spend down provisions (where uncovered medical expenses reduce excess income to eligibility levels) d. Supplemental Needs Trust What Is It? i. Irrevocable trust, almost always -- due to tax issues. i iv. A discretionary trust that can be either inter vivos or testamentary Beneficiary is disabled per Social Security definition. Beneficiary is a recipient of Supplemental Security Income ( SSI ) and/or Medicaid. v. Trustee has discretion to distribute trust income and principal for the beneficiary s benefit. It is intended to supplement governmental benefits that are intended to meet basic needs. vi. v Grantor can be the beneficiary (self-funded payback SNT), but then the State must be the primary remainderman to the extent of Medicaid paid out over lifetime, excluding any lien settlement prior to funding the SNT. Arkansas Dep t. of Health v Ahlborn, 547 U.S. 268,126 S. Ct. 1752, 164 L. Ed. 2d 459 (2006), Matter of Ruben N. v. Dep t of Social Services of the City of New York, 71 A.D.3d 897, 898 N.Y.S.2d 459, App. Div. 2d Dep t. 2010). Bipartisan Budget Act of 2013 Section 202 effective October 1, 2016 reversed Ahlborn by expanding the ability for Medicaid to recover its lien against all settlement proceeds, not just those proceeds allocated to medical expenses. Grantor can be a third party, who may then name any remainderman and not the State, hence Third Party SNT. Page 8 of 11
vi Safe Harbors: a. Statute: EPTL 7-1.12. b. Common Law: Matter of Escher, 52 N.Y. 2d 1006, 438 N.Y.S. 2d 293, 420 N.E. 2d 91 (1981). e. When is an SNT Used? i. Gift or bequest of money to a disabled person. (1) Someone, usually a parent, wants to either make a lifetime gift or leave a bequest to her disabled child (or any disabled person) who is a Medicaid recipient, or could be in the future. The receipt of the gift or bequest will make the disabled person ineligible for Medicaid. It will have to be spent down until gone, providing little value to someone who needs it the most. (2) Testamentary SNTs are by far the most common, but there can be Inter Vivos Third Party SNTs. f. Pitfalls for Third Party SNTs i. Third party Testamentary SNT (1) If you are naming a spouse as beneficiary of an SNT, it must be a testamentary trust and not intervivos. EPTL 7-1.12(5)(iv) (2) If you are funding the SNT with a qualified retirement account, such as an IRA or 401(k): To lower income taxes on the required minimum distributions, the objective is to spread them over the lifetime of the (disabled) beneficiary. How can this be achieved when the SNT is the beneficiary? IRC 401(9)(E) requires a designated beneficiary, namely, a real person or a lookthrough trust. An SNT can be a look- through trust (IRC Reg. 1.401(9)-4, Q&A-5 and Q &A- 5(c); Reg. 1.401(9)-5, Q&A-5(c)) if it is: Page 9 of 11
(i) (iii) (iv) Valid under state law, irrevocable, and the qualified plan administrator is given certain documentation by October 31 after the year of the participant s death. So far, so good! Here is the trap: Beneficiary must be identifiable and must be an individual because only real individual people have life expectancies. Safe Harbor: How do you make the testamentary SNT a look-through trust? Do not name a charity or an estate as the remainderman. What happens if the testamentary SNT names a charity or estate as remainderman? It is NOT a look-through trust. Instead of required minimum distributions ( RMD ) being spread over the oldest beneficiary s lifetime, they are spread either under the 5- Year Rule or, if the deceased owner died after reaching his required beginning date (70 ½), the retirement plan must be distributed over the deceased owner s remaining single life expectancy. IRC Reg. 1.401(9)-5, Q&A-5(2). Other factors to consider when naming the SNT as beneficiary of a qualified retirement plan: (i) (iii) Use non-ira assets to fund the SNT, such as life insurance or proceeds from sale of homestead, etc. After all, the IRA is for retirement and may be used up! Or, use a Roth IRA to fund the SNT. Distributions are required, but there are no taxes. Weigh the size of the SNT with tax implications -- is it small enough to ignore the taxes? Based upon the beneficiary s situation, how much money is needed in the SNT? Page 10 of 11
(c) In Summary: If a qualified plan names the SNT or minority trust (or any accumulation type trust) as remaindermen, avoid naming the estate or a charity as contingent remainderman. However, if a charity or estate is a remainderman, the worst result would be the 5-Year Rule. Third Party Inter Vivos SNT (1) NY has the provision in its SNT law that a third party SNT cannot be funded, directly or indirectly... "by someone with a legal obligation of support to the beneficiary..." EPTL 7-1.12(c)(1). (2) Trustee of an SNT with a duty of support to the SNT beneficiary, who uses monies from the SNT to satisfy that duty, will be taxed on such monies so used. (3) Thus, although parents may create a third party SNT for a minor child, but they must not fund the third party trust, to avoid pitfall #1 above. While parents may create either a payback or third party trust, it is better if parents are not trustees of a minor s SNT, to avoid pitfall #2 above. (4) Remember to file a gift tax return upon any funding of a third party trust. It is not a gift of a present interest that is eligible for the annual exclusion. It could be an incomplete gift if the donor to the trust is the trustee. i Self-Funded Payback SNT (1) A payback trust is a trust containing the assets of such a disabled individual which was established for the benefit of the disabled individual while such individual was under 65 years of age by a parent, grandparent, legal guardian, or court... SSL 366(2)(iii)(A) (2) Upon the disabled beneficiary s death, the primary remainderman is Medicaid, to the extent the decedent s received benefits over his lifetime. Page 11 of 11