Friday, July 15, 2011

Passing on wealth to your children – should you wait until you die?

The enactment of the Tax Relief Act of 2010 last December was big news for my clients who have acquired some wealth. The Act significantly, but temporarily, increases the federal estate, gift, and generation skipping tax thresholds. At least for the next 17 months (until December 2012) it presents my clients with the opportunity to pass on a substantial amount of their wealth tax free to their children and grandchildren.

For the last decade planning to limit federal estate taxes has been compared to buying a carton of eggs – you want to be sure to carefully note the expiration date. The Tax Reform Act continues the approach of setting an expiration date on the estate tax rules. Instead of a “buy by” date, it contains a “die by date.”

Here are the rules that apply for the next 17 months:

The estate tax threshold has been raised to $5 million dollars and the tax rate lowered to 35%.  The maximum gift tax rate is also set at 35% (for total gifts that exceed a greatly increased lifetime exclusion amount of $5 million).  The generation skipping tax (GST) exemption is also $5 million with a tax rate equal of 35%. This increase in the gift and GST tax exclusion amounts at least temporarily provides a wonderful opportunity to transfer significant amounts of wealth to future generations free of estate and gift taxes.

Unfortunately, the generous estate, gift and (GST) provisions of the Tax Relief Act of 2010 expire on December 31, 2012. If Congress and the President fail to agree, the tax regime will then return to the $1 million applicable exclusion amount and 55% maximum tax rate that existed in 2001.  

The current debt ceiling rancor in the nation's capital may portend a particularly contentious debate over estate tax rules next year. When evaluating the “political risk” involved in delaying planning beyond the current two-year window, we need to acknowledge the possibility of an estate tax stalemate. 

Simply letting the Bush tax cuts expire at the end of 2012 would increase government revenues by approximately $4 trillion dollars over the next decade and go a long way to resolving the deficit problem during that period. Stalemate might be an attractive "automatic" alternative to those who want to attack the deficit through both spending cuts and tax increases, which currently appears to be a majority of Americans.

A stalemate at the end of 2012 would boomerang us back to the 2001 tax thresholds of $1 million and rates up to 55 percent beginning on Jan. 1, 2013. Even a compromise could reduce the exemption to well below the current $5 million (portable to $10 million) amounts. 

The potential for future political gridlock over estate taxes has some important planning implications. Planning based on transfers that will occur at some undetermined time in the future when the client dies bears a significant tax uncertainty risk.
We know what the rules are today but not what they will be in 18 months. Unfortunately, in creating wills and other planning for transfers that occur at your death, you need to plan for the estate tax law that will be in effect when you die not when you sign their will or trust or beneficiary designation. And we just cannot accurately predict what the estate and gift tax laws will look like in 2013 and beyond. 

The bottom line conclusion
For individuals and couples who have acquired some wealth that they want to protect and pass on to later generations, it is not safe to assume that exemption amounts will stay the same or increase in the future. There is relative tax certainty in the present but the future is filled with doubt and risk.

If you have acquired sufficient wealth to provide yourself with adequate personal financial security during your life, you might want to consider implementing immediately effective estate planning, such as through lifetime gifts, that will be more certain to limit taxes, provide for your family, and protect your wealth over the long term.

Saturday, July 9, 2011

4 Strategies to Protect Your Assets From Nursing Home Costs

Are you worried that your life savings will be lost if you ever need care in a nursing home. This article discusses some ways you can protect your assets from nursing home costs by planning in advance. 

Nursing homes are so expensive (about $8,000 a month on average in Pennsylvania) that most nursing home residents qualify for Medicaid to help pay for the cost of their care. Before they qualify for Medicaid the nursing home resident must “spend down” their financial resources to the low levels required by the Medicaid program rules ($2,000 or $8,000 in Pennsylvania for an unmarried nursing home resident).   

Seniors have various reasons for wanting to preserve some of their assets. Some don’t ever want to be left in the position of being dependent on the government and having only $2,000 in savings, and $45 a month in income to meet their needs. Others want to pass along at least some modest inheritance to children or other family. Whatever the reason, the senior may want to transfer financial and other resources to family members so that those assets are protected from nursing home costs.  

Medicaid Places Restrictions on Gifts

Medicaid law has long sought to limit the ability of an individual to divest assets in order to meet the resource level required for Medicaid nursing home eligibility. States are required to withhold Medicaid payment for various long-term care services for individuals who dispose of assets for less than fair market value within five years of applying for benefits.  

The asset transfer penalties apply if you give away income or assets and then need to apply for Medicaid long-term care benefits either in a nursing home or in your own home. The penalties apply if the transfer was made by you, your spouse, or by someone else acting on your behalf. There are some exceptions to the transfer penalties that may apply depending on your particular situation.

The transfer penalty law has a five-year look-back and penalty start date rules that encourage individuals to plan long in advance of incapacity. To best protect their assets, individuals need to plan a full five years in advance of application for Medicaid long term care benefits.  When you plan well in advance of the need for care, you have lots of options available to you. 

Some Planning Options you can Consider

Many seniors plan to give away their interest in the asset(s) they want to preserve to children or other family and then wait out the five-year look-back period. For this type of planning to work best, the senior must retain sufficient assets, or have other payment sources available, to pay privately for care through the five-year look-back period. There are many variations on this strategy. Here are some illustrations.

Example 1: Retaining enough assets.
John owns his home (worth $300,000) and $500,000 in investments. He feels strongly that he has worked hard all his life and paid his taxes and now he wants to be sure that his two children will receive an inheritance from him. After thorough review and discussion with his lawyer, tax adviser, investment adviser, and children, he decides to give the home and $100,000 in investments outright to his children. “I’m giving them an early inheritance,” John says. John will keep the remaining $400,000. That amount plus his income should be more than enough to allow him to pay privately for long-term care for a full five years.

Example 2: Leveraging Long-term care insurance.
John owns his home (worth $300,000) and $500,000 in investments. He feels that he worked hard all his life and he wants to be sure that his two children receive an inheritance from him. After thorough review and discussion with his lawyer, tax adviser, investment adviser, and children, he decides to give the home and $400,000 in investments outright to his children. “I’m giving them an early inheritance,” John says. “Now is the time they need money the most.” John will keep the remaining $100,000. That amount, plus his income, would not be sufficient to allow him to pay privately for long-term care for a full five years. So, John purchases a long-term care insurance policy. The policy benefits, plus the $100,000 and his income, will allow John to pay privately through the full five-year look-back period if necessary.

Example 3: Relying on the children.
John owns his home (worth $300,000) and $500,000 in investments. He feels that he worked hard all his life and he wants to be sure that his assets pass to his two children. He feels he has adequate income from his pension and Social Security to provide for his needs for the rest of his life, unless he needs expensive long-term care. After thorough review and discussion with his lawyer, tax adviser, investment adviser, and children, he decides to give the home and $450,000 in investments outright to his children. “I’m giving them an early inheritance,” John says. John will keep only the remaining $50,000.
“If I need expensive care, I’m sure the kids will pay for it,” says John. “After all, my lawyer says they could be liable anyway under Pennsylvania’s family (filial) support laws. And my accountant says that if the kids end up paying for my nursing home care, they may be able to get some tax deductions.”

Example 4: Transfer to an Asset Protection trust.
John owns his home (worth $300,000) and $500,000 in investments. He feels that he worked hard all his life and he wants to be sure that his assets pass to his two children. After thorough review and discussion with his lawyer, tax adviser, investment adviser, and children, he decides to transfer the home and $200,000 in investments to a Medicaid irrevocable grantor trust to protect them from nursing home costs. John will keep the remaining $300,000. He will feel most comfortable having $300,000 in savings readily available to him. And his retained savings ($300,000) plus his Social Security and pension income should be more than enough to pay for any long-term care costs that he may incur over the next five years.

Don't Try to do this without Expert Help

These are just a few examples of kinds of advance planning that people use to protect their home and investments from nursing home costs.  Other planning options may be better for you. An experienced elder law attorney will be able to help you find the option that is best for you and your family.    

Here is one critically important piece of advice. Don’t try any of these strategies without the assistance of a lawyer who really knows what he or she is doing.  Recognize that few lawyers understand this area of law. Seek out the assistance of a Certified Elder Law Attorney. If you are in Pennsylvania you can get help through one of the offices of my law firm,  Marshall, Parker and Associates, which has 3 Certified Elder Law Attorneys on its staff.  If you are not in Pennsylvania a list of all Certified Elder Law Attorneys in the United States is available on the website of the National Elder Law Foundation You can find one with an office in your geographic area.  

The author of this article, Jeffrey A. Marshall, has been Certified as an Elder Law Attorney by the National Elder Law Foundation under authority of the Pennsylvania Supreme Court. 

Saturday, July 2, 2011

Hello Big Brother: Welfare Secretary given power to change rules without normal oversight

Pennsylvania’s new Act 22, (House Bill 960 - passed by the House and Senate and signed by the Governor on June 30th) appears to give new Welfare Secretary designate Gary Alexander new power to change welfare rules and issue new regulations without following normal administrative procedures. The Secretary’s actions are exempted from regulatory review. Note the highlighted portions of Section 2 of the Act:

Section 2.  The act is amended by adding sections to read:
Section 403.1.  Administration of Assistance Programs.‑‑(a)  The department is authorized to establish rules, regulations, procedures and standards consistent with law as to the administration of programs providing assistance, including regulations promulgated under subsection (d), that do any of the following:
(1)  Establish standards for determining eligibility and the nature and extent of assistance.
(2)  Authorize providers to condition the delivery of care or services on the payment of applicable copayments.
(3)  Modify existing benefits, establish benefit limits and exceptions to those limits, establish various benefit packages and offer different packages to different recipients, to meet the needs of the recipients.
(4)  Establish or revise provider payment rates or fee schedules, reimbursement models or payment methodologies for particular services.
(5)  Restrict or eliminate presumptive eligibility.
(6)  Establish provider qualifications.
(b)  The department is authorized to develop and submit State plans, waivers or other proposals to the Federal Government, and to take such other measures as may be necessary to render the Commonwealth eligible for available Federal funds or other assistance.
(c)  Notwithstanding any other provision of law, the department shall take any action specified in subsection (a) as may be necessary to ensure that expenditures for State fiscal year 2011-2012 for assistance programs administered by the department do not exceed the aggregate amount appropriated for such programs by the act of    (P.L.  , No.  ), known as the General Appropriation Act of 2011. The department shall seek such waivers or Federal approvals as may be necessary to ensure that actions taken pursuant to this section comply with applicable Federal law. During State fiscal year 2011-2012, the department shall not enter into a new contract for consulting or professional services unless the department determines that:
(1)  it does not have sufficient staff to perform the services and it would be more cost effective to contract for the services than to hire new staff to provide the services; or
(2)  it does not have staff with the expertise required to perform the services.
(d)  For purposes of implementing subsection (c), and notwithstanding any other provision of law, including section 814-A, the secretary shall promulgate regulations pursuant to section 204(1)(iv) of the act of July 31, 1968 (P.L.769, No.240), referred to as the "Commonwealth Documents Law," which shall be exempt from the following:
(1)  Section 205 of the "Commonwealth Documents Law."
(2)  Section 204(b) of the act of October 15, 1980 (P.L.950, No.164), known as the "Commonwealth Attorneys Act."
(3)  The act of June 25, 1982 (P.L.633, No.181), known as the "Regulatory Review Act."
(e)  The regulations promulgated under subsection (d) may be retroactive to July 1, 2011, and shall be promulgated no later than June 30, 2012.

Apparently, DPW has agreed to provide a 30 day period during which the public or legislators can comment on its regulatory changes. 

Representative Mauree Gingerich R-Cleona, who sponsored the code overhaul, is quoted in the Harrisburg Patriot News as saying: “We’re giving an opportunity for the secretary and the good people in his department to get some work done.” 

Read more:

Welfare advocates object to new rule allowing DPW to re-write welfare code

 Not too many cheers in Philly for on-time Pa. budget

Pa. lawmakers give gov. more power in welfare law

Friday, July 1, 2011

Planning for a Special Needs Grandchild

    The existence of a child, grandchild, or other potential beneficiary with a disability (often referred to as “special needs”) complicates the estate planning of a parent or grandparent.  Proper planning of your will, trusts, and beneficiary designations becomes even more crucial to protecting your heirs.

    With wise advance planning you can provide for all of your family members without jeopardizing a special needs individual’s current (or potential) eligibility for important government benefits such as Supplemental Security Income (“SSI”) and Medicaid.  These “needs based” government programs can provide substantial support for your special needs beneficiary but only if you set things up so that the beneficiary will be able to meet the programs’ financial standards.

    The rules are complicated and it’s easy to make a mistake.  Here are some of the common mistakes I see retirees making when planning for a special needs beneficiary:

    (1) having distributions that will go directly to a special needs child from a will, trust, insurance policy, annuity, or retirement plan.  The receipt of an outright inheritance will likely make the beneficiary ineligible for continued SSI and Medicaid benefits;

     (2) disinheriting the special needs person - this will leave an already vulnerable beneficiary even more dependent upon the uncertain future generosity of the government.

    (3) leaving property to another family member with an “understanding” that they will use the funds to take care of the special needs individual is fraught with danger and complexity.  What if the other family member dies, runs into medical or financial or marital difficulty, or becomes estranged from the special needs person?

    (4) establishing a “support trust” for a special needs beneficiary may force the trust’s funds to be spent down before public benefits become available.

    There are much better ways to plan. The most common estate planning tool is the “Special Needs Trust” which can be created to take effect either during your lifetime or upon your death.  A Special Needs Trust can provide for the beneficiary’s continuing eligibility for government benefits, protect the inheritance from claims for government reimbursement, and protect the inheritance from loss to third parties, including siblings, grandparents, aunts, uncles and friends who may have the best of intentions.  

    The Special Needs Trust must be carefully drafted by a lawyer who is familiar with this area of law.  A wrong word can make all the difference between creating a fund that will enhance the beneficiary’s life by supplementing public benefits, and a fund that will quickly and unnecessarily be exhausted replacing those government benefits.

    More information regarding the use of trusts in planning for special needs beneficiaries is available on the Marshall, Parker & Associates website at the following link: