Medicaid Asset Preservation with IRAs

 

Spousal Protection Trusts  A very powerful asset preservation tool William M. Gatesman employs with married couples are Wills with Spousal Protection Trusts, a planning tool developed by Mr. Gatesman. With this tool, both spouses prepare a Will in which there is a trust for the benefit of the surviving spouse. Such trust is designed to be funded, not with assets passing through the estate, but with assets passing outside of probate, through pay on death accounts, beneficiary designations, life estate deeds, and by other means.

 

Protecting the Surviving Spouse  By using such a Spousal Protection Trust, spouses can set up their affairs such that, after the first of them dies, all the assets are set aside in the trust, available without restriction to the surviving spouse, but fully protected should the surviving spouse require long term care in a nursing home. Moreover, if such trust is properly implemented, the surviving spouse would be able to qualify for and obtain Medicaid benefits for long term care without delay if and when such spouse falls ill and requires nursing home care. In this way, all of the couple’s assets, to the extent not used by the surviving spouse prior to admission to a nursing home, would be preserved for future generations, and thereafter, all care costs would be covered by Medical Assistance. This is a very powerful planning strategy, but care must be taken to ensure that the plan is properly implemented.

 

Implementing the Plan with Tax Deferred Assets Often, when using this tool, the largest assets passing into such spousal protection trust are IRAs and other tax advantaged retirement plans. When this type of asset passes to a beneficiary – and the Spousal Protection Trust would be the beneficiary – special rules apply to continue the income tax deferral that is the hallmark of such investments. But the traditional method of preserving the tax deferred status of such accounts – by making regular required minimum distributions to the individual beneficiary – can reduce the primary benefit of using a Spousal Protection Trust, which is to protect all of the couple’s wealth if and when the surviving spouse requires long term care in a nursing home, which care could be paid for by the Medicaid program.

 

Asset Preservation with Tax Deferral  With proper guidance, however, a married couple can implement a plan that allows them to get the best of both worlds, that is, to prolong the income tax deferral on IRAs and qualified benefit plans for the longest time possible, on the one hand, and to prevent distributions of income and principal to the surviving spouse if and when such spouse might require long term care in a nursing home, on the other hand, thereby maximizing family wealth preservation.

 

Tax Planning Component of the Spousal Protection Trust  The key to obtaining “the best of both worlds” as discussed above is to structure the spousal protection trust as a retirement plan “accumulation trust.” Typically, estate planners will have clients utilize what is known as a “conduit trust” as the beneficiary of an IRA or other tax deferred retirement plan to ensure continued income tax deferral. However, while a properly drafted conduit trust will ensure continuing income tax deferral because such trust mandates that the retirement plan annual minimum distributions be paid from the trust to the surviving spouse, using a conduit trust for Medicaid asset preservation planning is counterproductive because all such minimum distributions received by the surviving spouse would be required to be paid to the nursing home as part of the surviving spouse’s contribution to her cost of care even after she would qualify for Medicaid benefits. [To be sure, the surviving spouse still could get Medicaid for nursing home care, however, the distribution of the required minimum distribution from the conduit trust to such spouse is a waste of assets because, with proper planning, such payments can be avoided.]

 

Putting it All Together  The way to continue the income tax deferral and to maximize income and asset preservation is to employ an accumulation trust in the Spousal Protection Trust. With an accumulation trust, the required minimum distribution from the retirement plan is distributed to the Trustee, but the Trustee is not required to pay such amount to the surviving spouse. Nevertheless because of the nature of the trust, the income tax deferral will continue to be allowed. This is easier said than done, however, because the tax law governing accumulation trusts for IRAs and other tax deferred retirement plans is intricate and complex.

 

Choosing the Right Advisor  Is it important, therefore, that the advocate you choose to assist you with your asset preservation estate planning be well versed in all aspects of law that would affect your situation, including estate planning, income tax planning, IRA planning, Medicaid planning, and other areas.

 

Qualifications  Before he studied law, William M. Gatesman obtained a Masters Degree in Accountancy with a focus on tax planning, and before becoming a lawyer, Mr. Gatesman worked as a tax consultant with a major CPA firm, and as a tax accountant in a major corporation. Mr. Gatesman has spent his career as a lawyer working in the area of estate planning and Medicaid planning, and related areas. Mr. Gatesman has the education, knowledge, and experience in all the areas of law that must be considered when doing asset preservation planning, and Mr. Gatesman relies on this background when he assist clients in employing Spousal Protection Trusts that include accumulation trusts as recipients of IRA and other retirement plan assets.

 

Maximizing Wealth Preservation  All of this knowledge and expertise enables William M. Gatesman to utilize sophisticated legal tools, such as the Spousal Protection Trust, which trust allows clients to maximize wealth preservation if a surviving spouse should require nursing home care in the future while still allowing such spouse to prolong the income tax deferral afforded by the inherited IRA or other retirement plan for as long as possible.

Sheltering Assets to Maintain Housing Benefits

Various articles on this website address ways in which aged or disabled persons may protect their assets and still get government benefits such as Medicaid for long term care in a nursing home, or Medicaid for health care in the community.  By retaining accumulated assets or protecting assets one is about to inherit, an individual can ensure for herself a better quality of life, especially when the only other alternative is to fully impoverish oneself to retain government benefits.

One tool lawyers utilize to enable clients to shelter assets is a trust.  There are various types of trusts that can be employed depending on the individual’s circumstances, and each type of trust has its advantages and disadvantages.

For example, the law will allow a disabled person to keep his or her accumulated wealth to allow for a higher quality of life and to still obtain Medicaid benefits.  [Such opportunity is separate and distinct from the benefit under the Affordable Care Act which allows non-disabled people with low incomes to obtain Medicaid health insurance.  Moreover, this long-standing opportunity afforded to disabled persons likely will persist even if the President and Congress were to repeal the Affordable Care Act as they have threatened to do.] Continue reading “Sheltering Assets to Maintain Housing Benefits”

New Procedure to Obtain Estate Tax Return Closing Letter

The Internal Revenue Service will no longer routinely issue estate tax closing letters when it finishes satisfactorily processing an estate tax return. In an online Notice published -HERE-, the IRS states that “estate tax closing letters will be issued only upon request by the taxpayer.” That Notice sets forth the procedure whereby a taxpayer or tax preparer may obtain a Transcript in lieu of a closing letter to ascertain that an estate tax return has been accepted by the IRS.

Protecting Property After Death

Mother dies with a will leaving all of her assets to her three children in equal shares. One of her adult daughters receives Medicaid benefits because her assets are less than $2,000 and she has a very low income due to a disability. Such daughter is expected to receive a distribution of $25,000 from mother’s estate. This will cause daughter to lose her public benefits, which will be disastrous for daughter given the very high costs of her medications.

While daughter could petition a court to create a special type of Supplemental Needs Trust, known as a “d4a trust” and once she receives the distribution from the estate, deposit the funds into such trust, there are significant costs to establishing such a d4a trust, and there are administrative burdens associated with such trust, including annual reporting to the State Medicaid authority. Moreover, a d4a trust requires payback to the state for any Medicaid benefits if there are funds remaining in the trust when the trust beneficiary dies. Given the amount to be distributed, one must weigh whether it is worth the cost of setting up a d4a trust if there are other less costly alternatives.

Fortunately, Maryland law provides an opportunity for a trust to be created in a simpler way. Under the Maryland Discretionary Trust Act, a trust may be established for a beneficiary, and the assets in the trust will not be considered to be available resources for Medicaid purposes. Moreover, unlike a d4a trust, there is no requirement to pay back Medicaid for benefits received during lifetime after the beneficiary dies.

While Mother in her will could have provided for a Maryland Discretionary Act trust for daughter, she failed to do so. Nevertheless, the Maryland Discretionary Trust Act provides that “any person having a right to transfer property to another person may create a trust as a transferor under [the Maryland Discretionary Trust Act].” Under this law, the term “person” includes any legal entity, and a probate estate is a legal entity.

William M. Gatesman presently is working with clients to come up with creative solutions to allow estate beneficiaries to retain their essential public benefits where the decedent’s will did not provide for asset protection in light of those public benefits. Establishing a Maryland Discretionary Trust Act trust is one of the tools in Mr. Gatesman’s tool kit to achieve the objective of protecting a beneficiary’s eligibility for public benefits.

Legislature Tinkers With Power of Attorney Law

The Maryland legislature once again has tinkered with the law governing powers of attorney in Maryland. That law includes Power of Attorney Forms, which if used, or if one’s power of attorney is “in substantially the same form” as one of the form documents, then the law bestows certain rights on the holder of the power of attorney, namely, the right to obtain payment of one’s legal fees from the person or institution who refuses to honor the power of attorney where a legal action is taken to compel acceptance. This right to legal fees differs from the general “American rule” of jurisprudence which holds that each litigant in a legal action must pay his own legal fees.

Unfortunately, the forms in the statute are generally not sufficiently comprehensive and lack certain important provisions.

Continue reading “Legislature Tinkers With Power of Attorney Law”

New Power of Attorney Law

As of October 1, 2010, there is a new law governing Powers of Attorney in Maryland. In order to be effective, any power of attorney executed in Maryland after October 1, 2010, must be signed by two witnesses and notarized. The notary may be one of the witnesses.

Moreover, if one uses one of the form powers of attorney set forth in the statute and a financial institution refuses to accept the power of attorney, one could sue the bank and, contrary to the usual rules of court, get a court order commanding the bank to pay your legal fees.

However, the form documents provided by the statute are woefully inadequate for some purposes, particularly for those people who wish to ensure that appropriate asset protection planning can be accomplished should they ever require long term care in a nursing home.

While the statute allows for powers of attorney with added provisions to be considered statutory forms with the same benefits as the bare-bones form set forth in the law, Maryland estate planning lawyers have been struggling for months with how to devise powers of attorney with significant additional provisions that nevertheless comply with the new law.

The Gatesman Law Office has developed just such a Power of Attorney. For a limited time, we will offer to our existing clients a special discount to obtain the new power of attorney plus get a complimentary review of their estate plan in light of their current situations.

I am pleased to offer the same discount to readers of this website who contact us by October 31, 2010. Be sure to mention this offer when you call or email us. To reach us, simply click Contact Us for further instructions.

More Than One Way to Skin a Cat

You’ve heard the old saw: “There is more than one way to skin a cat.” Such folk wisdom can inspire estate planners to dream up creative solutions to thorny legal problems.

Recently, the Gatesman Law Office had been assisting a family in revising the distribution pattern under their estate plan. Husband and wife each had a revocable trust, which trusts held property in further trust for one of their children after both husband and wife died. The share for their other child was to be given to him outright, free of trust.

However, as time passed, the conditions that prompted the desire to hold property in trust for the couple’s now adult child no longer existed and they were in the process of revising their revocable trusts to eliminate the trust for such adult child.

Then, suddenly and unexpectedly, husband died. As a consequence, husband could no longer amend his revocable trust. While wife, who survived her husband, was now the trustee and beneficiary of husband’s trust, she did not have the power to amend the trust to change how trust assets would be distributed after her death.

Continue reading “More Than One Way to Skin a Cat”

Estate Plan Checkup

For our younger readers, this time of year is heralded by the hustle-bustle of back to school activities.  It is the time for parents of young children to double check that the kids have shoes that fit for gym class, warm clothes for the winter months, and pens, pencils, and rulers to stock the kids’ backpacks for the first day of school.

For all adults, now is a good time to review your estate plan to make sure that your plan is in order to meet your changing needs.  Have you executed a Power of Attorney to ensure that a trusted agent can manage your financial affairs should you become incapacitated?  Do you have an advance health care directive to ensure that appropriate medical choices are made even if you cannot communicate those choices to your health care providers?

Are the individuals you have chosen to serve as your agents in those documents still the best choices, or have your or their circumstances changed significantly so that choosing other agents is appropriate?

Do you have a Will?  Does your will impose limits because your children were minors when you wrote it, limits that are no longer appropriate?

By asking yourself these and other questions, you will discover whether it is time to review your estate plan with your legal counsel.  This type of periodic review of your estate plan will ensure that your plan continues to meet your needs even as your needs change over the years.

Happy autumn from the Gatesman Law Office.

Estate Plan Check Up

Many people are in the habit of visiting their doctors for an annual physical or other regular check-up.  Still more visit their accountants each year to assist them with their income taxes.  And most people regularly visit their auto mechanics to change the oil in their cars every three months or so.

The practice with lawyers is different, however, and people may put themselves in peril if they do not periodically review their affairs with their attorney.

Continue reading “Estate Plan Check Up”