drafting income-only trusts for medicaid eligibility and...
TRANSCRIPT
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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
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, OCTOBER 28, 2015
Judith D. Grimaldi, Partner, Grimaldi & Yeung, New York
Kyla G. Kelim, Esq., Aging in Alabama, Fairhope, Ala.
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Income Only Trusts in
Medicaid Planning
Kyla G. Kelim, Esq.
AGING IN ALABAMA
Fairhope, AL
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
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Objectives of Income-Only Trusts
• Control
• Flexibility
• Protection
• Tax Savings
7
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
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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
Common Types of IIOT Assets
• Income producing assets
- stocks, rental property, cds
• Non-income producing assets
- residence
10
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
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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)
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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
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
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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
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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
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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 2011. She falls, hits her head, and enters
a nursing home for long term care in July 2015. She
spends her savings and is under $2000 and eligible in
October, 2015. 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 $5800.00 in Alabama
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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
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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 2011. She falls, hits her head, and enters
a nursing home for long term care in July 2015. She
spends her savings and is under $2000 and eligible in
October, 2015. 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
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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
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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
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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
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
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Kyla G. Kelim, Esq.
AGING IN ALABAMA P.O. Box 109
Fairhope, AL 36532
(855) ELD-RLAW
www.elderconsults.com
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Income Only Trusts in
Medicaid Planning
Judith D .Grimaldi, Esq.
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)
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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
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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
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
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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
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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
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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
2036- Retained Life Estate ,2037, 2038-
Revocable Transfers)
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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
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
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
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
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.
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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
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
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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
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
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
GRIMALDI & YEUNG LLP
9201 Fourth Avenue, 6th Floor
Brooklyn, New York 11209
546 Fifth Avenue, 6th Floor
New York, New York 10036
(718) 238-6960
www.gylawny.com
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